By: John Manganaro

ThinkAdvisor published the latest in an ongoing series of Social Security claiming case studies earlier this month, finding the optimal claiming scenario for the sample married couple at hand would be to draw their benefits earlier than the maximum claiming age of 70.

That result, based mainly on the fact that the couple had a highly uneven earnings history and a small but meaningful gap in longevity expectations, surprised some readers, and it sparked a number of insightful discussions with both readers and retirement experts that continued into this week.

Most recently, one Scott D. wrote in to point out the fundamental importance of the longevity expectations that go into such claiming calculations, arguing the conclusions in the case study, while accurate, could also potentially mislead. Social Security projections are only as good as the assumptions fed in, he emphasized, especially the accuracy of longevity projections.

The Case of the High-Earning Husband

The case study in question involves a married couple, Bruce and Debbie, both born in 1962 but with very different work histories. Namely, Bruce is a high lifetime earner, while Debbie did not earn enough credits to be eligible for Social Security benefits from her own work record.

Both spouses have a full retirement age of 67, and given the particulars of their situation, Debbie cannot begin collecting spousal benefits until Bruce files. Finally, Bruce’s assumed longevity is 85, while Debbie’s is 87.

Under such a set of conditions, the case study shows, Bruce’s and Debbie’s optimal claiming approach is not to wait for Bruce to turn 70 before claiming, despite the fact that this approach would deliver the highest monthly benefit for each member of the couple — including after Debbie becomes a widow.

Rather, the optimum claiming strategy would instead involve Bruce filing at age 67 for his full worker benefit of $2,302. Debbie could file at the same time for her full spousal benefit of $1,151, and she would eventually become eligible for a full survivor benefit of $2,302.

Though their monthly checks would be smaller, this approach would result in $788,435 in total lifetime benefits going to the couple, with $499,534 paid to Bruce and $288,901 going to Debbie — adding a projected $15,000 to the age-70 claiming total.

A Misleading Result?

As Scott admitted, the calculator indeed “does not lie,” and in this fairly unique situation, it calculates that this couple would have overall earned $15,000 more for claiming at age 67.

“However,” Scott wrote, “I believe the analysis misses a few very important items that are relevant to the discussion and which lessen the likelihood that pre-70 usage of Social Security is actually advantageous.”

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First off, the math on longevity is changing, and that matters a lot for optimal claiming. The example assumes the fact that the couple dies at 85 and 87, he noted.

“However, per data from the Academy of Actuaries, this couple has a more accurate average life expectancy of age 87 for the man and age 89 for the woman,” Scott argued. “Even more important is the fact that, beyond these two higher numbers, there is also a 50% chance of at least one member of the couple being alive at age 92.”

The bottom line is that, if one were to add only 27 more months to the age of the second death (or 2 years plus 3 months), the total paid out using the same calculator would show a higher cumulative payout if they both waited till age 70 to obtain benefits.

“When I discuss this planning with clients, I always say the problem is not if both of you died young,” Scott warned in a follow-up phone call. “If that happens, you don’t have any money issues to worry about. The actual problem is if either or both of you live long and face excess longevity.”

Always Be Cautious With Calculators

As Scott rightly warned, Social Security calculators can easily come up with situations where taking the funds earlier than 70 adds up to more funds overall, but such results tend to come from assuming lower life expectancies. In a world of rapidly advancing longevity among the top income earners, this could be a big mistake for financial advisors and clients.

“It’s especially problematic for couples when they are not considering the possibility of living to actual survivor life expectancy or beyond,” he added. “Without this context, even the best calculators may not be truly helpful in providing the most effective outcome.”

Another consideration is that Social Security functions in some important ways like a life annuity, and consideration needs to be given to the value of a life annuity when one lives longer — potentially much longer — than expected.

“Lastly, I think it is more and more unlikely that the generations born after 1960 actually live an ‘Ozzie and Harriet lifestyle’ where one does not have much of any earnings history,” Scott concluded. “While this still occurs, it is a fairly low probability situation and that fact alone should be noted in your presentation.”

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