I’m delaying my Social Security. Here’s why

If you’ve been reading here very long (or pretty much anywhere else for that matter), you’ve probably seen a lot of opinions on Social Security claiming strategies. It’s a very personal choice, because the only way to really be “right” is to know how long you (and perhaps your spouse) will live. In my own case, I’m delaying my Social Security benefits to the latest possible age. This article will show you why.

Delaying my Social Security

I intend on delaying my Social Security filing to age 70. At the same time, we intend for my wife to begin her Social Security at age 62. We’ve chosen this strategy for three primary reasons:

1. By delaying, I am maximizing an income stream that is truly unique – no other stream of income that I know of has these three factors:
   1. has inflation protection (annual cost of living increases) built in;
   2. has no upper limit (no matter how long I or my spouse live, the benefit continues); and
   3. is tax-preferential (at max, 85% is included as taxable income).
2. By delaying and maximizing my benefit, I am also maximizing the survivor benefit that will be available to my wife if I pre-decease her.
3. By starting my wife’s benefit early, we will receive that benefit for the longest possible time.

By using these two strategies, we are maximizing the timeline of receipt of my wife’s benefit, even though it will be reduced. Her benefit amount will be a bit less than mine, but not so low that she will be eligible for a spousal benefit. This way we’ll receive her benefit for 8 years before we begin receiving my benefit. At the same time we’ll maximize the amount of the benefit that potentially will last the longest – assuming one or the other (or both of us!) live past approximately 82 years old. This maximized benefit amount will have the three factors (inflation protection, no upper limit, and tax preferential) built-in to the highest amount we can get.

I have no doubt that the system will be adjusted to deal with the coming trust fund shortfall and have faith that current beneficiaries will continue to be paid. It’s happened before, and will happen again. Nonetheless, the filing strategy that I’ve outlined above does take this factor into account. The possible shortfall of the system is yet another reason to start one benefit earlier, in order to receive it for a longer period of time.

Comparing to other sources

The three factors listed above (why I’m delaying Social Security item #1) are truly unique. Let’s look at other income sources to compare (using the a, b, and c factors from above):

IRA/401k account –
a) has potential inflation protection built in, but only to the extent that the market performs well during the period. By comparison, Social Security’s COLAs are built-in to the system and apply according to economic changes.
b) It could be argued that an IRA/401k, if you only take sustainable withdrawals (using, for example 4% as your rate), that the fund could last for your entire life. But the point is that your 401k or IRA is a finite amount – and it can be drained completely if you had to have the money. Then you’re done. This is not so with Social Security benefits, at least under today’s rules. You’ll have another check coming the following month, as long as you live.
c) IRA/401k funds, if they are completely tax-deferred, are included 100% as taxable income. By comparison, Social Security benefits can be excluded from tax altogether, or included at a 50% rate, or at maximum an 85% rate. This item is eliminated if your IRA or 401k is Roth-type, but the tax being paid up front on contributions offsets some of this benefit.

Pension –
a) some pensions have inflation protection built in, but the majority do not.
b) typically pensions are payable over your entire lifetime, and may also be provide income for your spouse’s lifetime if you’ve chosen that option. But choosing a 100% joint-and-survivor option results in a reduction of your pension benefit in order to provide the spousal lifetime option, unlike Social Security benefits. Your spouse’s survivor benefit does not reduce your own benefit by providing it to him or her. It is true that the spouse’s own benefit will go away if he or she becomes eligible for the survivor benefit.
c) most pensions are 100% included in income. Some pensions include a provision for pro-rata return of your own participation in the plan (contributions you’ve made) tax-free, but this is less common than the 100% variety.

 Annuity –
a) depending on the type of annuity, some inflation protection is built in, but often only to the extent of market returns (as with the IRA/401k).
b) as with pensions, depending on the type of annuity and the payment plan, there may be income for your life and your spouse’s life. These options are not without downsides, as the available income will be reduced to provide your spouse with lifetime benefits as well.
c) like pensions, there may be a provision for tax-free return of contributions (depends on your annuity), but otherwise are generally 100% included as taxable income.

So, you can see, there’s no silver bullet. The factors listed above are enough for me to choose delaying my Social Security benefit to age 70, while starting my wife’s benefit earlier. And as mentioned before, this is a personal decision, bound to be different for everyone. What are the driving factors behind your choice of Social Security filing strategies? Share in the comments, I’m interested in knowing what you’re thinking!