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Spouse A is in their mid-sixties and was the lower earner by far. Spouse B is five years younger. They recently became unemployed. Is there a rule of thumb or some other method, that will help them figure out which spouse should "retire" and start taking Social Security benefits first, and at what age? The alternative to taking Social Security payments would be to draw down faster from their Roth IRAs.

(Background for those who aren't familiar with the Social Security system in the US: you can retire starting at age 62, at a lower monthly payment rate, or you can postpone filing for benefits, and receive a higher payment for the rest of your life. The payment rate maxes out at age 70.)

The total value of their retirement investments is approximately $100K (front load mutual funds in Roth IRAs, and TIAA investments).

I found a paper that puts into words my vague intuitive idea that it would be less desirable to draw down the retirement investment:

[We predicted that] if the rate of return on alternative investments is high, claiming should be early so that high-yield money does not have to be used to finance consumption. Source: "The Effects of Subjective Survival on Retirement and Social Security Claiming"

  • This doesn't answer the question, but is slightly morbid food for thought : how healthy are the two spouses? Based on my work and salary history... if I live until age 80, then the optimal total (not monthly) amount of money received from SS peak at ages 65-67 (they're all within a percent). However, if I die at age 75, then I get the most money by retiring at age 62. – RonJohn Dec 24 '19 at 5:24
  • @RonJohn - Can you help me understand how that works? How do you get that peak that you mentioned? Are you just adding up all the monthly payments in each scenario and then comparing, or what? Is there an online tool for that? // Health so far is okay, but who knows what the future will hold. I would like to be optimistic and assume that they will live a long time. Because otherwise, they are setting themselves up for possible disaster, no? – aparente001 Dec 24 '19 at 5:45
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    I went to ssa.gov/myaccount. One of the features is to tell you how much you receive per month based upon your current age, estimated future earnings and retirement age. I ran that tool for every retirement age from 62-67 and then plugged the numbers into a spreadsheet. From there, you just multiply by 12 (months per year, of course) and then by number of years of expected lifespan. – RonJohn Dec 24 '19 at 6:08
  • The break even age for me is 78 (I think that one of my SS documents spelled this out). If I die before 78, I'm better off having taken the lower SS benefit beginning at 62. If I delay receiving SS until 66, by 78 I catch up and if I live longer than 78, I'm better off having waited until 66. Better off means total dollars received. In keeping with RonJohn's morbidity theme (g), here's something that hopefully will not be needed: Make the Most of a Survivor Benefit – Bob Baerker Dec 24 '19 at 13:38
  • Another factor that should be taken into account in the general case (though I don't think it applies here) is that only a portion of Social Security benefits are taxable, while all of an IRA withdrawal is subject to income tax. – jamesqf Jan 1 at 4:46
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Depending on their life's income history, and their life expectancy, there is a large number of different possibilities which combination would be optimal. There is unfortunately no easy way to find the best option; that's why many companies have complex software that can calculate it for you (basically by brute-forcing through all options).

A good plan to consider is that the person with the significantly lower expected pension starts as early as possible (62), and draws this - rather low - pension until the other person reaches the max age (70), then switches to half the other's pension. The other's pension is rather high (because of the late starting age), and half of it is probably more than the first takers low pension.
This is not always optimal; if the expected pensions are not different enough, or the ages are too different, other options become better; but as said above, there are many options, and there is no quick way to find the best.

Whatever pension starting date combination you chose, you then need to backfill the missing years with the 401k/IRA. If that won't work out, you'll need to pick other options...

  • Thanks. I'm trying to understand what you wrote. For example, I'm having trouble with "then switches to half the other's pension." How do you do half? How do you switch? I thought that once you start, you continue until you die. – aparente001 Dec 24 '19 at 5:44
  • One spouse can chose to take half the other spouse's pension, instead of the own. So if A gets 500 a month, and B gets 1200 a month, A can chose to take 1200/2=600 instead of their own 500. – Aganju Dec 24 '19 at 15:57
  • If I understand one of the ssa columnists/consultants correctly, A will still get their benefit but will get a 'top-up' to reach 50% of spouse B's benefit. – mkennedy Dec 24 '19 at 19:28
  • @mkennedy - Yes, that is correct. When it is on, You will need to know what form to fill and what exactly to apply for; but for the overall planning, it is good enough to know you can opt for 'half of the spouse's pension'. – Aganju Dec 24 '19 at 20:30
  • @mkennedy and Aganju - But what about the age difference? Can Spouse A get the top-up before Spouse B gets to the minimum age? I would guess no. And then, when Spouse B gets to the minimum age, can they wait, while Spouse A goes ahead and starts receiving benefits? – aparente001 Dec 25 '19 at 1:47
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There are a lot of articles out there with of course, differing opinions. A common theme of many (HERE'S ONE) is that because Social Security grows at something near 8% a year from 62 to 70 (plus an occasional COLA bump) then you're better off withdrawing money from your IRA. By doing so, you'll get a much larger check from SS when you claim benefits. That's a guaranteed growth of 8% a year for 8 years whereas future IRA growth is a question mark.

The drawback to waiting to take benefits at 70 is that if you die before claiming benefits, you've received nothing.

I'd suggest that you try compare each withdrawal method. Obtain SS determinations of yearly benefits for different starting years and compare that to projections of spending down your IRA alternative. It's no easy task.

  • There is a certain irrational hesitation to draw down from the Roth IRAs because there was a front load. I guess it wouldn't hurt to draw down from the TIAA investments. Of course anxiety makes decision making more difficult. – aparente001 Dec 24 '19 at 17:29

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