Why shouldn’t I take Social Security early so I can enjoy my retirement?

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.

Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) was published in February by Simon & Schuster.

Watch Larry explain how Paul and his wife could collect an extra $50,000 in Social Security benefits:

Neil — Wilmette, Ill.: I am a faithful reader of your online column — always looking for some nuance of Social Security that I might have missed. I don’t have a question but rather a comment. Based on my research on the matter, I have come to a slightly different conclusion than yours on the “File and Suspend” scenario. I would be interested in your comments. As you realize, there is a difference between “maximize” and “optimize.” I have run several spreadsheets comparing lifetime benefits for my wife and me and found that in our case, we can access funds earlier with a very small downside for the long term.


Pose Your Questions to Larry Here

I am nine months younger than my wife. Her family has a history of women living well into their 90s so I need to maximize her long-term benefit. We have decided that we would rather have some funds earlier in life when we can still do things yet still maximize her long-term benefit. My wife (the lower-wage earner) plans on taking her Social Security when she is 66 years and nine months old.

​When I reach full retirement age,​ I will file for spousal benefits. When I turn 70, I will take my enhanced benefit. Assuming she lives to 95 and I to 85, the difference between this optimization scenario and the recommended maximizing scenario is less than 2 percent in total lifetime benefits for the two of us!

The big difference is that we will have four years of significant income to enjoy before I reach 70. By the time we both turn 70, the monthly amount we will realize from this scenario compared to the maximizing scenario is less than a few hundred dollars. We are willing to give up very little later to have much more now. We think this will work very well for our situation.

Larry Kotlikoff: Thanks for writing. In responding, I’m assuming you are both close to full retirement age. If your wife waits until 70 to collect her retirement benefit, it will, as you know, be 32 percent higher, after inflation, every month for as long as she lives. This could be age 100 or higher if there are medical breakthroughs.

There are several things that concern me with your thinking and strategy. First, I think you are focusing on life expectancy, not maximum age of life. Social Security is, in large part, about longevity insurance. When it comes to insurance we properly focus on the worst case outcome — our house burns down, we total someone’s car and injure them for life, we get a very costly disease, etc. In the longevity context, the disaster scenario is that we live to our maximum age of life rather than die on time.

Your wife’s expected age of life has a lot to do with when her relatives died. Her maximum age of life may have very little or even nothing to do with when her relatives died. Someone can have a very low expected age of life and a very high maximum age of life. We need to value Social Security benefits in all the circumstances that we’ll receive them and that means valuing them right up to our maximum ages of life. So your use of 95 and 85 as you valuation horizons rather than, say, 100 for both of you, may be biasing your results.

Second, the optimal strategy for you could well be to have you start your retirement benefit early, and have your wife take just a spousal benefit on your record. You suspend your retirement benefit at 66 and start it up again at 70. She takes her retirement benefit at 70.

If you are doing these calculations on your own, I’d be concerned. And finally, if you can use other assets to finance your spending early on and, thereby, still follow the lifetime benefit maximization strategy, it’s a win-win. There is nothing about maximizing your lifetime Social Security benefits that necessarily compels you to consume the same amount each year. Maximization of lifetime Social Security benefits can be compatible with consuming more when young than when old, which I sense you wish to do.

Anonymous — Rochester, Mich.: I was an account manager in the building supplies industry, but was laid off in 2008. At the same time, my mother fell very ill with multiple sclerosis and required a lot of help. As her only son, and only living relative, I stepped up to the plate. I relocated across country and cared for her for five years. The only income I had was approximately $7,000 per year through a caregiver agreement that allowed my mother to pay me without penalty from Medicaid. She passed over a year ago.

Fast forward. I have not worked in over six years and the gap on my resume is killing my job prospects, but I’m still trying. I’m 52 and I’m sure I’ll be working into my 80s, which I actually don’t mind. I used the limited income to keep up the maximum contribution to my IRA, but as of last year with no income, no more contributions.
Question: Does Social Security take this hardship period into account? Does the book address any of this? I’ve read that the last years of employment determine your Social Security income and I’m wondering what effect this time in my life will have and if there is anything I can do.

Larry Kotlikoff: Sounds like you’ve had a very hard road with parental illness, as so many people, myself and my siblings included, have. Unfortunately, the government makes no direct adjustment for this. The only indirect adjustment is that it doesn’t cut your benefit in proportion to the number of years you work; in other words, those with shorter work histories receive more benefits relative to what they contributed. This is due to the progressivity of the Primary Insurance Amount formula. Workers like you with short work histories also stand to increase their benefits substantially if they work additional years. The reason is that an extra year of work will replace a year of zero earnings in calculating your Average Indexed Monthly Earnings (AIME) amount on which you retirement benefit is based.

Leanne — Yardley, Pa.: I am one of two owners of a C corp. I will retire at the age of 70. Do my partner or I get any Social Security benefit from paying Social Security taxes for the corporation as well as ourselves? We are actually paying once through our individual W2 as well as through the corporation.

Larry Kotlikoff: No, the taxes you “pay” via your C corp are really just transmittances of taxes on your earnings that are divided in two by Social Security, with half called the employee contribution and the other called the employer contribution.

Anonymous — Oakland, Calif.: I would like to begin Social Security benefits next year at my full retirement age of 66, but I want to continue working for my current company for one more year. Can I draw Social Security and still work? Or do I have to actually retire from my current company and work somewhere else? I read that you can work full time after your full retirement age.

Larry Kotlikoff: You can, indeed, work full time or part time after reaching full retirement age with no loss in benefits. The real question you should be asking, however, is whether you should collect your retirement benefit now or at age 70, when it will be 32 percent higher above and beyond any adjustment for inflation (as will your survivor benefit if you die, which your spouse or ex-spouse may be able to collect). Giving up a 32 percent higher benefit for 30 years, were you to live to 100, is a big price to pay for more money in the short term, especially given that you can still work.