Social Security is so complex that a cottage industry has emerged to help figure out when to claim Social Security. Software companies sell their Social Security optimization tools to financial advisors for several hundred dollars a year. Guess where the money ultimately comes from? The end customers of course.
If when and how to claim Social Security is all you want to know, you don’t have to go through a financial advisor. You can buy a book for $10 and learn yourself. Or you can try one of the online calculators.
Social Security Administration
Before you use any online calculator, you should first figure out what your benefits are at full retirement age. Social Security Administration offers an online calculator, where you enter your earnings history for each year. You get those from the paper benefits statements you used to receive or by creating an online account with Social Security Administration.
The displayed result is the early retirement benefit at age 62. You will have to gross up to the full retirement age. First look up your reduction factor. Then divide your early retirement benefit by 1 minus the reduction factor.
For example for someone born between 1943 and 1954, the full retirement age is 66, with a reduction factor of 25% at age 62. If the online calculator shows the benefits at age 62 is $1,800 per month, then the benefits at full retirement age is
$1,800 / (1 – 0.25) = $2,400
If you are married, do it for each person. With this number in hand, you are ready for the claiming strategy calculators.
AARP offers a Social Security Calculator online. It’s free. You enter whether you are single, married, or divorced, your birth date(s), and your estimated benefits at full retirement age. Then it tells you how and when you should claim.
For a hypothetical couple, it said one of them file and suspend until age 70 and let the other claim the spousal benefits for three years.
As far as I can tell, the AARP calculator doesn’t take into account any children’s benefits or the contingency when one spouse dies first. It also doesn’t include the survivor’s benefit for someone already widowed.
T. Rowe Price
Mutual fund company T. Rowe Price offers a Social Security Benefits Evaluator. It’s also free. You don’t have to be a T. Rowe Price customer to use it.
This tool lets you choose your own goal, such as to maximize benefits over both life times or to minimize the drop in income for the surviving spouse. However, it can’t handle a married couple with age difference of more than six years.
It takes into account the survivor benefit after one dies. You can swap the life expectancy and model which spouse dies first. It doesn’t take into account children’s benefits. It can’t handle survivor’s benefits for a widow or widower or benefits based on an ex-spouse’s earnings history.
For the same hypothetical couple, the T. Rowe Price tool identified the same strategy as AARP’s when I chose the goal as maximizing total benefits over both lifetimes.
Social Security Solutions
This is a paid service. It costs $20 for the recommendation and a report, or $50 for more analysis and interactive tools. If that’s not enough, you can pay $125 or $250 to have a session with an expert.
I’ve never used it but I read good feedback about this service. If your situation is out of the ordinary or you want to be absolutely sure, the one-time cost isn’t that high.
Maximize My Social Security
Maximize My Social Security is another paid service set up by Boston University Professor Larry Kotlikoff who frequently writes about Social Security. It costs $40 to use the online tool for 12 months.
Maximize My Social Security describes what it does with a video demo, a sample report, and a detailed document. $40 is a reasonable price if you have situations not covered by a free tool, such as ex-spouse(s), survivor’s benefits, benefits reduction due to WEP or GPO, etc.
Between free calculators and relatively inexpensive online tools, you will be able to figure out when and how to claim your Social Security benefits.
[Photo credit: Flickr user SalFalko]