Be wary of applications on the Internet and elsewhere that purport to calculate how you can maximize your lifetime Social Security benefits. They can do no such thing, and are apt to lead you in a dangerously wrong direction.
Calculating how to maximize benefits can be accomplished only retrospectively after you (and if you are married, you and your spouse) are dead. That’s because the single most important variable in the equation is longevity.
While an application or program can’t effectively calculate how to maximize your benefits, you can strategize for optimization. So, how does one go about identifying the optimal strategy for collecting Social Security retirement benefits? Let’s take a look at the issues to be considered within the strategy one-by-one:
Need for current income: Delaying benefits increases the amount of your benefit by approximately eight-percent for each year you delay. So, delay sounds like a no-brainer. But is it? What if you need your benefit now? How much should you sacrifice today to increase benefits later? Remember, future benefits are not guaranteed. You must still be alive to collect them.
Current health and expected longevity: Delaying benefits becomes more attractive as your life expectancy extends. If both spouses live into their 90’s, that higher income from having delayed is mighty attractive. If they died young, or one is not in great health, the odds of recouping the lost benefits between their normal retirement age and the age to which they delay them begins to shrink.
Risk of life exceeding expected longevity: Here we need to view delaying benefits as a form of insurance against unexpected longevity. Suppose you expect to live to age eighty, but hang in there until you are ninety-five. Will other resources carry you those extra fifteen years? Or, will you exhaust your savings and be forced to cut back painfully on your standard of living during the last ten or fifteen years of your life?
Disparity between spousal benefits at normal retirement: Here, again, we think of Old Age Retirement Benefits as a form of insurance. Upon the first spousal death, the surviving spouse receives the greater of the two spouse’s benefits. If there is a significant difference between the benefits of the two spouses, delaying the lower benefit becomes less valuable. Even if both spouses have earned similar benefits at normal retirement age, letting the higher of the two delay while initiating benefits upon normal retirement age for the other has the benefit of covering both bases. If one of the two spouses dies younger than expected, the two will have reaped the benefits received between normal retirement age and the maximum delay to age 70 (under current law).
In summary: Any analysis intended to identify the optimal filing strategy needs to take into account all of the above considerations. This requires much more complex software than the Social Security maximization applications found on the Internet and in many financial advisory offices; along with the insight of a seasoned financial planning professional. Don’t be led astray by what appears to be a quick and easy fix, especially if it’s accompanied by a free dinner.