As CPAs, we encounter our clients’ life events many times, while each client encounters them just once. This experience allows our team to compare, learn, and develop tools to give expert advice to all our clients. When it comes to transitioning to retirement, Social Security is a big consideration, and clients look for our advice.

Social Security

Each year, the trustees of the Social Security trust funds report on the health of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds. The report issued in August 2021 predicts that, without reform, under “intermediate assumptions,” OASI will run out of trust fund asset reserves in 2033 and then be able to pay only 76% of projected benefits going forward. There will be reform, as there has been repeatedly in the program’s 86-year history. Social Security is received by approximately one-fifth of the United States’ population, so it cannot disappear. Despite those broadly shared policy concerns, decisions about Social Security benefits are necessarily individual.

How to advise clients on when to begin receiving benefits?

Actuarially, it does not matter. At whatever age between 62 and 70 individuals begin to receive benefits, if they live to their current life expectancy, they will receive approximately the same total lifetime benefits. But who is average? Also, for couples, the planning becomes more complex than for a single person.

The chart “Social Security Starting Ages and Total Benefits” (below) compares three starting age choices by a couple whose higher wage earner’s benefit is $2,000 per month. Both spouses are the same age, with a full retirement age (FRA) of 66, and both die in the same year. The lower wage earner’s benefit is the spousal benefit of one-half of that of the primary wage earner, as it is better than his or her own benefit.

If they both die at age 75, starting at age 62 would have given them the best benefit total. If they both die at age 85 (roughly, their current life expectancy), starting at FRA would have given them the best benefit total. If they both live to age 95, it is nearly breakeven between starting benefits at FRA or at age 70, because spousal benefits do not accrue the extra 8% per year from FRA to age 70.

However, planning for couples can be intricate, with many factors to consider. Health, age differential, family history, wealth (or lack of wealth), each person’s work history, and earning potential between age 62 and FRA are only a few of the factors to consider.

Generally, if a couple or individual has a large amount of invested assets, starting benefits at FRA makes sense. Why not receive more funds when you are able to enjoy them by traveling, buying a second home, or visiting children and grandchildren, compared to later years, when the ability or desire to do those activities wanes? Waiting until age 70 to start the Social Security benefits of a couple’s higher wage earner is important when the couple do not have significant assets saved. The higher wage earner or his or her survivor keeps the higher of the two Social Security benefits for the rest of his or her life.

No individual or couple is average. An individual analysis must be undertaken for each of our clients’ lives to offer good Social Security advice. We would also take into account Health Insurance, Roth conversions, and longevity as we make our recommendations, as this original Tax Advisor article details.