The Power of Social Security Optimization Finding $120,000 in 2 Minutes Was Just the Start

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Right now your clients may be asking you, “When do I withdraw my Social Security benefits?” Or, “How much can I expect to receive monthly?” Maybe it’s, “Should I take early or delay?” Answering their questions about Social Security benefits and how they fit into retirement is becoming one of the hottest retirement planning topics today, necessitating more familiarity with Social Security Optimization.

Social Security benefit provisions are highly complex, especially when looking at the 2,728-rule Handbook. This is why getting things right from the beginning can make a huge difference to your clients’ lifetime benefits and their future retirements.

Take my friend Glenn Loury, one of the world’s top economists, with a PhD from MIT. Glenn is 65 and teaches at Brown. His wonderful wife, Linda, passed away last year after a long fight with cancer. At dinner a month ago, Glenn told me he was going to wait till 70 to collect Social Security.

I said, “Glenn, do you think you might be able to collect a survivor benefit based on Linda’s earnings history?” “No way,” he said. “I earned more than Linda.” “Glenn,” I said, “You’re paying for dinner.” I then proceeded to make him $120,000 in the course of 2 minutes.

Glenn’s far smarter than me, but I’ve spent years learning Social Security’s rules and embedding them into my company’s software. Our Social Security lifetime benefit maximizer is now a part of a bundle of Social Security training, client acquisition, education, and micro website tools marketed by Smarter Retirement Strategies at The bundle also includes a host of columns I’ve written describing optimal Social Security strategies and answering Social Security questions.

This is a marvelous resource for retaining old customers and generating new business. Plus, the software let’s you give expert advice without learning Social Security’s entire list of often Byzantine provisions.

The list includes:

  • Benefit eligibility rules
  • Benefit entitlement rules
  • Calculation of Average Indexed Monthly Earnings
  • Calculation of Primary Insurance Amount (full retirement benefit)
  • Reduction factors for taking spousal, survivor, and retirement benefits early
  • Deeming provisions
  • Delayed Retirement Credit
  • Re-computation of Benefits based on earnings during retirement
  • Earnings Test
  • Adjustment of Reduction Factor at full retirement due to benefits lost via Earnings Test
  • Family Benefit Maximum
  • Option to start, stop (either immediately or later), and then restart retirement benefits
  • Windfall Elimination Provision (affects those with non-covered pensions)
  • Government Pension Offset (affects those with non-covered pensions)
  • Indexation of benefits for inflation

Three Rules for Maximizing Lifetime Benefits

All planners should know the basics about Social Security. However, they should also know these three general rules for achieving higher lifetime benefits.

A. Wait to collect much higher Social Security benefits over somewhat fewer years.

B. Take spousal, survivor, mother/father, and child benefits, which may be available based on your current or former spouse’s earnings history.

C. Make sure that doing A doesn’t undermine doing B and that doing B doesn’t undermine doing A.

Don’t Count on Dying On Time

Here’s why A – taking much higher benefits over somewhat fewer years — makes sense. Social Security actuarially reduces benefits if taken early and actuarially increases benefits if taken late. Retirement benefits starting at 70 are 76 percent higher than starting at 62. Spousal benefits are 43 percent higher at full retirement age than at 62, and survivor benefits are 40 percent higher at full retirement age than at 60.

“But does waiting to collect make sense? What if I wait and die before I collect? I’ll lose the benefits I would otherwise have collected.”

True. But you’ll be dead. Furthermore, you’ll be in heaven and have no need for money.

The real danger is not dying, which is heavenly. The real danger is living. Indeed, the very worst thing that can happen to you, financially speaking, is living as long as possible because you’ll need to keep paying for all the necessities and pleasures of life.

This unpleasant prospect – living to your maximum age of life – means your planning horizon must run from now to then. When you properly value future Social Security benefits until your maximum age of life, not your expected age of death, waiting to collect is a no brainer. (“Properly value” means forming a simple, not an actuarial present value.)
The obvious caveat here is if you are dead, say before age 80, which then taking benefits early may make sense. However, even in this case, delaying retirement benefit receipt through age 70 has a payoff, namely potentially providing your current and former spouses with much higher survivor benefits.

Don’t Leave Money on the Table

Rule B – availing yourself of other available benefits – is a no brainer. More is more. If you can get extra benefits for yourself or your family members at no cost in terms of your own retirement benefit, go for it.

But it’s remarkable how many people, like Glenn, have no idea they may qualify for auxiliary benefit on a spouse, ex-spouse, or deceased earnings record.

PBS NEWSHOUR’s economic correspondent, Paul Solman, hosts a personal finance section on the NEWSHOUR’s website. I made Paul close to $50,000 while taking a break playing tennis by explaining how he could receive spousal benefits without giving up any retirement benefits. Zvi Bodie, my Boston University colleague and a top financer as well as personal financial economist, was equally unaware of spousal benefits. He and his wife are now about $60,000 richer and, like Glenn and Paul, have helped expand my waistline.

In addition of survivor and spousal benefits, there are also benefits available to children of retired or deceased workers. There is also mother and father benefits available to the parents of children receiving child benefits.

Avoiding Social Security’s Gotchas

Rule C – making sure that following rule A doesn’t violate rule B and vice versa – is where the “fun” begins in figuring out which benefits to take when.

If you take your retirement benefit at the same time you take a spousal benefit, one of the two benefits will zap the other, either in full or in part. The same is true when someone simultaneously takes a retirement and a survivor benefit. The key to double dipping is to take the two benefits at different times and not lose anything because the benefit you take last rises thanks to its actuarial increase.

If you’re a widow or widower (including the widow or widower of an ex to whom you were married for 10 years or more), this means being careful for what you ask for. Depending on the relative size of your own and your deceased spouse’s full retirement benefit, you either want to start your survivor benefit first and then switch to your retirement benefit or vice versa.
If you are or were married and qualify for a spousal benefit as a current or divorced spouse, your options, prior to reaching full retirement age, for taking your spousal benefit without simultaneous taking your retirement benefit, and vice versa, are severely limited by Social Security’s deeming provisions. This is where most of complexity enters into the benefit formula.
Once you hit full retirement age you have more flexibility. If you haven’t already taken your own retirement benefit, you can take your spousal benefit and put off taking your retirement benefit until age 70, when it will start at its highest possible value. Even if you have already started your own retirement benefit, you have the option to suspend it and start it up again at 70 at a 32 percent higher value.

What’s best to do will depend on your individual circumstances? If you are married, what you can do will also depend on what your spouse does, because your eligibility to collect a spousal benefit depends on your spouse either collecting his/her retirement benefit or having suspended its collection. If you are divorced after 10 years of marriage, your ex has to be above 62 for you to collect a spousal benefit on his/her record assuming he’s/she’s collecting a retirement benefit or has suspended its collection. If he/she is over 62, but has done neither of these things, you can still go for your spousal benefit, provided you’ve been divorced for two years.

The bottom line here is this. There is a lot of money to be in making the right lifetime benefit decisions. So, before you head to the local Social Security office, and there are some 10,000 baby boomers doing this every day these days, let me tell you in advance what benefits you do and don’t want to apply for. If you don’t, the good folks at Social Security may do their best for you in terms of raising immediate benefits, but the worst for you in terms of maximizing your lifetime benefits.

Expert Software to the Rescue

The graphic below illustrates the power of Smarter Retirement Strategies’ software to help your clients. It considers Jim and Jane Smith, both of whom are 62 and have January 1 birthdates.








Jim’s been a high earning and Jane a low earner. The couple is thinking of taking their retirement benefits as well as any spousal benefits to which they are entitled starting immediately.

However, the selected collection dates violate rules A and C. Starting benefits early means foregoing the huge actuarial increase in benefits Social Security provides for waiting. Then taking retirement benefits early, triggers Social Security’s deeming provision, which requires Jim and Jane to simultaneously apply for spousal benefits.

In so doing, they both wipe out their spousal benefits, which, in Jane’s case, are calculated as a) 50 percent of Jim’s full retirement benefit less 100 percent of Jane’s full retirement benefit multiplied by b) a reduction factor reflecting you taking spousal benefits prior to full retirement. Jim’s spousal benefit is calculated symmetrically.

This is called the excess spousal benefit, because it’s the excess of one number over another. If the difference is negative, which is the case for Jim and even for Jane, the benefit is set to zero.

Based on their selected benefit dates, Jim and Jane produce lifetime benefits of just north of $1 million. When they follow the program’s advice, their lifetime benefits rise by more than one third – by $338,224!

Under this maximized benefit date strategy, Jim and Jane both wait until 70 to collect their retirement benefit. But a month before reaching full retirement age – 66, Jim is instructed to apply for his retirement benefit and suspend its collection. Jim can then activate his retirement benefit at it highest level (thanks to the system’s Delayed Retirement Credit) at 70.

This permits Jane to apply just for her retirement benefit at 66. Then the deeming provisions don’t apply after full retirement age, and Jane can wait until 70 to get her largest possible retirement benefit. Meanwhile, between 66 and 70, Jane can collect her full spousal benefit equal to half of Jim’s full retirement benefit. Note that the same excess spousal benefit formula is used to calculate Jane’s spousal benefit, but her full retirement benefit is valued at zero until she applies for it (which she won’t due until 70) or is deemed to apply for it (which doesn’t arise once she reaches full retirement age).
Yes, this is a bit much to digest on an empty stomach, but whether or not you, the planner, wants to get into the weeds explaining this to Jim and Jane, the program comes up with the right strategy. And, making Jim and Jane $338,224 will, likely, make them clients for life!

Even Current Recipients May Be Able to Raise Their Lifetime Benefits

The Jim-Jane example is an example of the “start, stop, start” strategy. In Jim’s case, he starts his retirement benefit at full retirement age and then immediately stops it and then starts it again at 70. You need to reach full retirement age before you can stop (suspend) a retirement benefit and it makes no sense to suspend it beyond age 70. However, while it’s being suspending, the retirement benefit will rise thanks to the Delayed Retirement Credit.

This means that a client who is 64 and began collecting at 62, still has an option to follow rule A and increase her lifetime benefits. The method is simply to have the client suspend her benefits upon reaching full retirement age and then start them up again at 70, when there’s a 32 percent higher inflation-adjusted value.

“Start Stop Start” may also make sense for married couples, one of whom is, say, 66 and the other is 62. Having the younger spouse, assume it’s the husband that starts his retirement benefit at 62, and then lets the wife collect a “free” spousal benefit between 66 and 70. When she’s 70, she collects her own retirement benefit, when it’s as large as possible. When the husband reaches 66, he suspends his benefit and starts it up again at 70, at which point it will be 32 percent higher than it was when he suspended it.

One note of caution: Workers that suspend their retirement benefits need to pay their Medicare Part B premiums out of pocket or Social Security will revoke the suspension in order to garner the benefit to pay for the premium. But, and this is truly nasty, the worker won’t know this has happened, forgo benefits for four years and get no bump up in benefits at 70.

Choosing Social Security Software

Sweating Social Security’s minute details is, unfortunately, a must. My favorite example is Social Security’s treatment of those collecting retirement benefits when you hit 62. If you’re born on the first of the month, your treatment is X. If you’re born on the second, it’s Y, and if you’re born on the third through the end of the month, it’s Z!

A careful calculator is also going to require entering entire past covered earnings histories. Without these histories, which are now readily available on the Social Security website, and can be simply copied and pasted into Social Security calculators, it’s impossible to handle the re-computation of benefits or accurately calculate survivor benefits.

Moreover, programs that rely simply on the entry of the Primary Insurance Amount assume this value, also found on Social Security’s website, is an accurate estimate. However, the Social Security’s PIA calculator is intentionally rigged to produce low-ball estimates of the PIA. Specifically, it assumes that our economy will never again experience average real wage growth or inflation even though we’ve seen real wages and the price level rise annually for all of the postwar!

Social Security does this to encourage people to save on their own. You can fiddle with their calculator to have it make PIAs based on the Social Security Trustees Report’s assumptions, which my software uses. If your client is just giving you his/her PIAs, be careful.

The biggest concern, though, with choosing Social Security software is how it deals with lifespan. Many programs appear to focus on life expectancy or breakeven ages. They also appear to be doing actuarial discounting in measuring lifetime benefits. This is entirely inappropriate because it treats the client as if he’s Bill Murray in Ground Hog Day and will die thousands of times. People aren’t insurance companies and don’t have multiple lives over which to pool risk. They will die once and this once can be as late as possible, which requires planning for this worst-case scenario.

Summing Up

Ten thousand baby boomers are retiring every day. They all need expert advice on their basic retirement system – Social Security, which our benevolent government has made well neigh incomprehensible. Starting an informed conversation with these new retirees about Social Security, explaining how much money is at stake, and helping them make the right choices is a path to establishing trust and providing assistance with their other financial planning and product needs.

Dr. Laurence Kotlikoff is a William Fairfield Warren Professor as well as a Professor of Economics at Boston University, a member of the American Academy of Arts and Sciences, and a Research Associate of National Bureau of Economic Research. Professor Kotlikoff’s has teamed up with Smarter Retirement Strategies ( to provide planners with his company’s (Economic Security Planning) state-of-the-art Social Security lifetime benefit maximization tool.

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