BOSTON. Would you be interested if I said there was a way to increase the value of your Social Security benefits by 15 or 20 percent?
Then listen up.
You’ve always known the decision about when, and how, to take Social Security benefits isn’t easy. But Larry Kotlikoff can tell you just how complicated it is. If his name looks familiar, it should be. The Boston University economics professor is often mentioned in my columns because I like his research and we’ve written three books together.
“It seems simple, but it’s really a lot of choices,” he said. “Think about it this way, each person in a couple gets to choose when to take spousal and retirement benefits. That’s two benefits times two people. But they can, in theory, choose to take each of the four benefits in any of nine years. So you have 9 to the 4th power or 6,571 potential choices *. Social Security’s incredibly obscure provisions restrict these choices dramatically, but there are still a huge number to consider and, therefore, a huge number of ways you can choose the wrong dates at which to take benefits; i.e., leave money on the table.”
The question, of course, is how much money. The answer: a lot.
What most of us think about as a life problem is really a math problem in disguise. And it’s a math problem that most of us aren’t likely to solve in our spare time at home. Fortunately, it can be done with a computer and Kotlikoff has done it through his software company, Economic Security Planner, Inc.
To test the software I went to the website www.maximizemysocialsecurity.com, paid $40 to use it for a year online, and created my new best friends, Moola and Monica Now. They are a middle-income couple thinking about when to take Social Security. He’s 60 and earns about $50,000 a year. Monica, 57, has worked for about 15 years part-time, but really prefers to stay at home. When they think about Social Security they want to take it as soon as possible because they’re sure a bird in the hand beats one in the bush.
Once I’ve entered their earnings records and set a maximum age of death for them (95), I press Calculate and the online program calculates the present value of all the benefits they will receive if they retire at 62: $539,305.
But the program also sorts through all the options and spits out the best one. If Monica takes spousal benefits at 66 and later takes benefits on her own work record at 70 and Moola delays taking benefits until he is 70 the benefits they collect will have a present value of $645,313. That’s an increase of $106,008, more than lots of people have in their retirement accounts.
Monica taps my shoulder. “Fat chance I’m gonna make it to 95,” she says, “And look at that lug Moola. No way he’s gonna last that long.”
Monica has a point. Most of us aren’t going to make it to 95.
So I reduce their maximum age at death to 90 and press the Calculate button again. The program says their retirement at 62 is worth $481,367 but if they delay as before it will be worth $552,804.
“You’re creepin’ me out,” Monica suggests. “Who wants to live that long?”
I reduce their age at death to 85 and retirement at 62 is worth $417,580 while the long delay strategy is worth $450,956— so there is still a benefit for maximum delay. Only when I reduce the age at death further does the strategy for maximizing benefits change. At a max age of death of 83, for instance, it’s best for Moola to take his retirement benefit at 66, not 70, and for Monica to take her spousal benefit at 62.
Note, Maximize My Social Security focuses on our maximum, not our expected or average date of death. Kotlikoff says this is the only right way to consider longevity. “We need to plan to live to our maximum age of death for the simple reason that we might. We aren’t insurance companies. We don’t have thousands of lives over which to pool different dates of death. We have one life and we have to worry about the true downside risk – living too long.”
How long we live is a crapshoot. So was figuring out when to take Social Security, until now.
* In an earlier edition of this column the numbers were reveresed as 4 to the 9th power or 264,444 permutations.