Laurence Kotlikoff knows a lot of people who are highly educated about money. But Dr. Kotlikoff, a Boston University economics professor, noticed over the years that many of his academic colleagues were making bad choices about one of their most important retirement benefits: when to claim Social Security.
“This is the most important financial asset for almost all retirees,but it’s so complicated,” he said. “I realized that if these smart people with great educations could make bad decisions about Social Security, it was only natural that everyone else would be doing that, too — and there was a lot of easy money available to people by getting it right.”
That insight prompted Dr. Kotlikoff to develop Maximize My Social Security — an online tool, created in 2012, that helps people make optimal decisions about claiming benefits. Today, the market for Social Security advice includes a variety of software tools that can analyze your circumstances and retirement income needs, and generate recommendations for getting the most out of benefits. A growing number of financial planners use software to advise clients on claiming, and some workplace retirement plans also offer such options.
The Social Security rules are complex. You can file as early as 62, but your annual benefit will be higher for every year you wait, until 70 — and most people claim too early. The most common errors? Many underestimate their longevity and the importance of Social Security’s guaranteed lifetime payments, or have fallen victim to political spin about the long-range imbalance in the program’s finances.
The reserves of the combined Social Security retirement and disability trust funds are projected to be depleted in 2034. Absent action by Congress, that would force an across-the-board benefit cut of about 20 percent. But few experts think Congress will permit that outcome.
“There’s a natural skepticism about whether the government’s really going to make good on its promises,” said Christopher Jones, chief investment officer at Edelman Financial Engines, which provides Social Security claiming guidance. “We have to kind of deprogram people and help them understand that’s not really the way it works.”
Married couples often fail to pay attention to the crucial spousal benefit rules, which can substantially boost a household’s lifetime benefits. There are poorly understood benefits for divorced people and survivors. And for retirees with significant savings, it makes sense to develop a tax-efficient strategy for timing their benefit claim with drawdowns from portfolios.
Getting all this right can make an enormous difference in lifetime retirement income. “We’re finding hundreds of thousands more dollars for people,” said William Meyer, co-founder of Social Security Solutions, which experts often mention, along with Dr. Kotlikoff’s software, as one of the best services on the market.
The value of getting help
For most Americans, the lifetime value of Social Security benefits significantly overshadows other sources of retirement income.
Benefits are adjusted annually for inflation, and they are not affected by the ups and downs of financial markets. Perhaps most important, benefits are guaranteed for life, which makes Social Security an important form of insurance against the risk that you’ll run out of money late in life. That can be especially important for women, who tend to outlive men but also earn less income, generating lower levels of retirement assets.
For many individuals, the best answer is to delay claiming as long as possible, up to age 70.
Your monthly Social Security benefit amount depends on when you file. You can claim the retirement benefit as early as age 62, or wait as late as age 70, but the amount hinges on your full retirement age — the point when you qualify to receive 100 percent of the benefit you have earned. Currently, full retirement age is 66 and a few months for most people. If you claim after full retirement, you’ll receive credits for delayed filing; claim earlier and there will be early-claiming reductions. Claiming at the full age is worth 33 percent more in monthly income than a claim at 62, and a claim at age 70 is worth 76 percent more.
“Almost everyone takes it far too early,” Dr. Kotlikoff said. “About 6 percent of us wait until age 70, but it should be 85 percent.”
But there is no one-size-fits all answer — especially for married couples, who should have a coordinated filing strategy. “It often makes sense for the spouse with a lower earnings history to file earlier, because that increases the household’s total expected lifetime benefits,” said Mike Piper, a certified public accountant who developed Open Social Security, which is widely viewed as the best free online claiming tool.
Filing early can also be a sensible option for people who retire prematurely because of job loss or poor health.And Social Security claiming should be a part of a broader analysis of expected retirement income from retirement accounts and other annuity-style income — such as a defined-benefit pension. Taxation of retirement income can also be an important factor in the success of your plan.
Begin your analysis with your Social Security statement. This crucial document from the Social Security Administration lists your annual earnings from the time you started contributing to Social Security and tells you how much you can expect to receive at your current age, full retirement age or age 70 — very important numbers for any “what if” claiming scenarios you may want to run. It’s important to establish a free account at the administration’s website, because statements are mailed only to people 60 or older.
The Social Security site also offers an informative section on benefits claiming, and a very basic, free retirement estimator feature that can calculate benefits based on your earnings history. The tool focuses on individual benefits — not spousal or survivor — and does not calculate lifetime cumulative benefits. It also does not permit side-by-side comparisons of claiming options.
Open Social Security is a more sophisticated free option. It can run the numbers for each possible claiming age for an individual or married couples, and it provides a report indicating the strategy expected to provide the most total dollars over your lifetime.
Software that analyzes Social Security in the broader context of your retirement plan is the next step up. For a modest fee, generally ranging from $20 to $50, these tools can generate recommendations for coordination of Social Security with other retirement income sources. Dr. Kotlikoff’s MaxiFi planner does this; Social Security Solutions and NewRetirement.com also offer free and fee-based planning tools.
Social Security Solutions offers a companion service, Income Solver, that can recommend an optimal sequence for claiming Social Security and drawing income from tax-deferred accounts, including individual retirement accounts and 401(k) plans. One of the program’s key premises upends the traditional retirement drawdown recommendation to preserve the tax-saving benefits of tax-sheltered investments as long as possible.
Instead, Income Solver aims to reduce the lifetime tax burden by tapping tax-deferred accounts first to meet living expenses — or by converting those assets to Roth I.R.A. accounts — before claiming Social Security in years when your marginal tax rate is lower than it will be after benefits begin. It can also help retirees avoid or minimize taxation of Social Security benefits and costly surcharges on Medicare premiums levied on high-income beneficiaries, which effectively are taxes.
The combination of a delayed benefit claim and tax savings can extend spending power in retirement significantly, said William Reichenstein, head of research at Social Security Solutions.
“Let’s defer Social Security from 66 to 70 wherever possible,” he said. “You’ll have four years of making Roth conversions at a low marginal tax rate, and later on you can withdraw more of the money you need from those accounts without generating any tax liability.”
A growing number of financial advisers are using some of the same Social Security planning tools that you can explore on your own. “Interest in specialized tools is on the rise,” said Michael Kitces, publisher of Nerd’s Eye View, a website and newsletter focused on financial planning.
Vanguard’s fast-growing Personal Advisor Services includes a Social Security tool that illustrates various claiming strategies for clients. Edelman Financial Engines offers its Social Security tools to individual clients, and through corporate retirement plans.
“The lifetime value of benefits for a typical married couple can easily approach or exceed a million dollars,” Mr. Jones of Edelman said. “That’s much larger than the typical 401(k) balances most people are able to accumulate over their working careers.”
The human touch
Software can point you toward a good answer — but that hasn’t eliminated the need for some hand-holding. Most Social Security advisory services find that their customers need some person-to-person help from a financial planner or coach.
“There’s a part of people who knows that they can figure this out, but there’s also still a lot of self-doubt,” said Nancy Gates, a financial wellness coach at NewRetirement. “People worry that they aren’t doing the right thing, or that they’re missing opportunities.”