In many cases, our parents, grandparents, and great grandparents started collecting their Social Security benefits as late in life as possible. Their generations believed it was a great way to maximize their benefits. As younger generations, we have spent our entire lives listening to their pearls of wisdom. Yet, when it comes to retirement benefits, we need to assess our situation based on what is happening now. Everything changes over time. Social Security and pensions are no exception.
Claiming your benefits sooner—rather than later—may be appropriate. It probably seems counterintuitive when we have been told our whole lives to wait. Yet, there are a few specific scenarios where it makes sense not to wait.
Scenario #1: Social Security Options for Surviving Spouses
Imagining a scenario where our spouse passes away before reaching the age of retirement is not fun. The truth is, it’s always a possibility. It’s important for surviving spouses to know how to handle Social Security benefits if or when unfortunate circumstances come to pass.
When widows or widowers claim survivor benefits at their own full retirement age (FRA), they are entitled to 100 percent of their late spouse’s Social Security benefit if it is higher than their own.
FRA for survivor benefits differs from the age requirements for regular retirement benefits. Survivor FRAs are as follows1:
- Born 1958: Survivor can claim at 66 years and 4 months old
- Born 1959: Survivor can claim at 66 years and 6 months old
- Born 1962 and after: Survivor can claim at 67 years old
Filing earlier than your FRA is an option. At 60, you can collect 71.5% of what your late spouse was receiving each month from Social Security1 (or would have been entitled to get if they died before claiming). The % you receive grows incrementally if you postpone filing. If you can postpone filing till your FRA, you will be eligible for 100% of your deceased spouse’s social security benefits. It’s important to note, any reduction for taking benefits before your FRA is permanent.
If you are disabled, you may file to receive your late spouse’s benefits as early as age 501.
One unique strategy, to help the surviving spouse delay filing, is to claim their own Social Security benefits until their FRA. At their FRA, they may switch to claiming 100% of their deceased spouse’s benefit.
Alternatively, if the surviving spouse has a higher benefit, they can claim the survivor benefit early and delay filing their own until 67, 68, 69, or 70. The survivor benefit is not subject to the “Deemed Filing” rule.
Social Security Benefits for Survivors
To help you understand social security survivor benefits, let’s look at this example:
A surviving spouse does not wait till her FRA to claim her own benefits ($1,000/month) but begins to collect at age 62. Her benefits will be reduced to $700 per month based on retiring before her FRA.2 When age 67 is reached, the widow may switch to collecting 100% of her surviving spouse’s Social Security benefits – which is $3,000/month. She cannot receive both her own and her spouse’s benefits.
At $3,000/month, if this widow lives to be 82, she will receive $540,000 from her deceased spouse’s benefits. (Ages 67 to 82.) Plus, from 62-67 she will get her own benefit of $700/month which equals $42,000. The total being $582,000. (Total from ages 62-82.)
If this widow went straight to collecting her deceased spouse’s retirement at age 60 (before her FRA), she would only receive approximately 71.5% of the $3,000/month. That is $2,145/month.
In this case, if the widow lives to be 82, she will receive $566,280 from her spouse’s benefits. (Ages 60-82.) That is $15,720 less than if she would have waited to start collecting at her FRA. If she lives to be older than 82, then obviously the numbers grow.
If this widow’s benefit is expected to be greater than her deceased spouse’s benefit, she could begin collecting survivor benefits at age 60. Then, to maximize here own benefits, if she waits till after her FRA—to 68, 69, or 70 to start collecting—she increases her monthly take-home significantly—up to 24% more! (See image3.) (This doesn’t apply to survivor benefits. Survivor benefits are capped at 100% at FRA.)
Just to Recap: A surviving spouse has two options:
- Claim the survivor benefit at age 60 and let their own workers benefit grow to FRA or beyond
- Claim their workers benefit at 62 and let the survivor benefit grow to FRA
Claiming benefits now versus later can make sense. It really depends on everyone’s personal situation. Waiting can increase your total benefit package, but only if you feel genetics and other factors predispose you to living a long life.
Scenario #2: Retirement During a Turbulent Market
Let’s pretend you are ready to retire. Your spending for retirement is well-planned. Part of your plan entails waiting before filing for your Social Security benefits—allowing your investments to create an ‘income bridge’—so you can maximize your future monthly payment. This is an ideal scenario for most early retirees. It’s one we often recommend.
But wait. It’s 2025. The market came roaring back after being over 20% down in the first quarter. Luckily, you don’t need to make any changes due to the quick rebound we experienced.
Sometimes life doesn’t go according to plan. What if the market would have dropped 20-40% and not turned around so quickly? The market was built to rebound, which means it might benefit you to look at ways to manage until another market boomerang.
If this scenario were to play out, we might advise you to consider taking Social Security earlier than anticipated. Especially for those clients without a cash buffer, access to home equity, or other means of ‘dry powder’. Selling investments during a bear market is something we advise our clients try to avoid.
Tapping into your Social Security earlier than you anticipated may provide the cash flow you need while allowing your investment portfolio some time to recover. You’ll obviously take a slight hit on your lifetime Social Security benefits, but if that amount is smaller than the potential gain your investments could make over time from the eventual rebound, it’s a smarter play in the long run.
Important Note: If the recovery takes place sooner rather than later, you can actually opt to pay back the Social Security benefits you received and SS will treat it as if you had never claimed. This allows your benefit to continue to grow. There are two restrictions: you can only choose to repay once, and it must be done within 12 months of claiming.
Scenario #3: How to Calculate if You Will You Break Even by Waiting?
When a pre-retiree is looking for advice on when to begin claiming Social Security, one common way to compare strategies is to calculate their “break-even” age. That’s essentially the age they would need to live to in order to make the delay worthwhile.
When waiting until age 70 to begin claiming Social Security, most people would need to live into their late-70s or even their early-80s to hit that break-even point.
If you have good reason to believe that longevity is not on your side, and you have no spouse or children who would depend on your benefit, you might want to consider claiming your Social Security sooner rather than later. While we never want to bet against our lives, it’s important to be realistic with your situation.
(Any individual may claim benefits as early as age 62, but at a reduced rate. View FRAs.2)
What if Social Security Becomes Insolvent?
The Millennial generation surpassed the Baby Boomers in 2020 as the largest generation in America. Baby Boomers still constitute a large group, and as they continue to retire, Social Security payouts keep increasing. When payouts are rising significantly faster than contributions, it’s not surprising Social Security accrued a $22.1 billion deficit in 2022 alone.4
Speculations about Social Security becoming insolvent by 2033 may not be the unwarranted concerns of a bunch of number-crunching codgers after all. One must take the validity of these rumors into consideration when filing for benefits.
Talk to a Financial Advisor
Remember that a retirement income plan is a mixture of both financial and non-financial components unique to you. When considering any of these scenarios, it’s smart to work with a fiduciary advisor who specializes in this area.
Need Help Understanding Your Social Security Options?
Social Security benefits can be complicated. Talk to a qualified financial advisor today to get professional advice. If you need guidance finding a financial advisor in your area, give us a call. We will match you with an advisor who will work to understand your situation and help you gain clarity about your Social Security options.
References:
2. https://www.ssa.gov/benefits/retirement/planner/agereduction.html
3. https://www.schwab.com/learn/story/guide-on-taking-social-security
4. https://www.ml.com/articles/can-social-security-insolvency-be-fixed.html
Michael Gruidel is a non-producing registered associate of Cetera Wealth Services LLC.
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional. The opinions contained in this material are those of the author This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete. The individuals and situations depicted here are hypothetical for illustrative purposes only
8205313.1-0725-C
