What is the optimal filing strategy for social security benefits? Well, as you may suspect, it depends on a number of factors including your and (if married) your spouse's eligible benefit amount, how long you plan to work, your savings and retirement assets, pension income (if any) as well as any available "special" social security filing strategies, among others. However, one of the most critical factors to consider is life expectancy. How long you are likely to live will have a significant impact in determining your optimal filing strategy.
Obviously, no one knows exactly how long anyone will live but there are a number of important factors to consider including your own health status and family history. To be clear, the risk in retirement is not that you may die young and not get all your eligible benefits. The real risk is that you may live a long life and outlive your money. Since social security is a pension that you can't outlive, consideration should be given to maximizing this benefit in order to protect your cash flow deep into retirement.
What if you do have longevity in your family? Clearly, if your parents, grandparents and other relatives lived a long life then there's probably a good chance that you may live a long life as well. If your own health status is also good then it probably makes sense to defer the start of your SS benefits in order to maximize the value of your payment amount.
What if you don't have longevity in your family? In that case, it may make sense to take your benefit sooner even though it will be reduced in value. However, what if your spouse has longevity in her family but your benefit amount is higher than hers? In that case, it's typically better to defer the start of your benefit in order to maximize the value of your benefit. By doing so you will maximize the survivor benefit for your spouse.
What if there is a large difference in age between spouses? Generally speaking, the longer you wait to start taking benefits the higher your payment amount will be and the more lifetime benefits you will receive. But that's not always the case when there's an age discrepancy among spouses. For example, I had a married couple client who were both eligible for maximum social security benefits. If they both waited until age 70 to file for benefits they would both max out their payment amounts but, surprisingly, would not maximize their combined "expected" lifetime benefits. The reason was because the wife was 9 years younger than the husband. It turns out that they could actually get more in lifetime benefits if he delayed to age 70 but she filed early (at age 62) for a reduced amount. That would allow her to start receiving benefits earlier (albeit a reduced amount) but for more years before she ultimately switched to a higher survivor benefit. Since every situation is different you have to run the numbers in order to determine the optimal filing strategy.
What if you are a widow? If you qualify for widow benefits you are eligible to file as early as age 60 for a reduced survivor benefit amount and can then later switch to your own benefit, assuming it's higher, in order to maximize your lifetime benefits. Once again, examining what your likely life expectancy will be is critical when determining the optimal way to coordinate the best way to take survivor benefits and your own benefits.
What if you are divorced and not re-married? Under the "new" social security rules resulting from the recent Bipartisan Budget Act, you will only be eligible for ex-spousal benefits if you are at least age 62 by 12/31/15. If you do qualify then you must analyze the best way to coordinate taking your own benefits with your ex-spousal benefits. In some cases it's better to take ex-spousal benefits first and delay the start of your own benefits to age 70. However, you must take a deeper look at the many factors involved in this decision including your life expectancy. As a single person living on just one social security benefit, it's important to structure your payout plan to maximize lifetime benefits in conjunction with your other retirement assets.
Although estimating life expectancy clearly involves making a "best guess" based on family history and your own health status, it is one of the most critical components in designing an optimal social security filing strategy. The next critical step is to properly integrate social security benefits with your other retirement assets in order to maximize not only your social security benefits but also your overall retirement income.
Ash Ahluwalia, NSSA, CCSCA, MBA