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Duck Social Security ‘rat holes’

By Jennie L. Phipps · Bankrate.com
Wednesday, January 23, 2013
Posted: 5 pm ET

When to claim Social Security looks simple for people who are single and who have never married, but William Meyer, a principal in Social Security Solutions, a fee-based service that analyzes the best time to claim, says there are even ways single people can maximize their benefits.

Meyer bases this on two key considerations:

  • Based on life expectancy, which benefits starting date will maximize the cumulative amount of benefits that you'll receive if you were to die exactly when the actuaries predict.
  • Based on a more optimistic scenario, which starting date will minimize the possibility of running out of money if the actuaries are wrong and you live longer than they predict.

Generally, if you live to be age 80 and you are single, the cumulative lifetime benefits will be approximately the same whether you take benefits at 62 or any age through 70, but there are some exceptions worth considering and maybe avoiding. Meyer calls them "Social Security rat holes."

These "rat holes" are thanks to built-in bonuses for delayed filing, which are calculated based on percentage increases of the "primary insurance amount" or PIA. Benefits rise at three different ages:

  • From ages 62 to 63, monthly benefits increase by 5/12 (0.42 percent) of PIA per month.
  • From ages 63 to 66, monthly benefits increase by 5/9 (0.56 percent) of PIA per month.
  • From ages 66 to 70, monthly benefits increase 2/3 (0.67 percent) of PIA per month.

Because these increases flatten out at two different levels, Meyer points out that taking benefits during these flat periods -- or "rat holes" -- won't do as much to increase your monthly benefit as does claiming at the start of these periods of increasing benefits. He advises singles, and in some cases others, that to maximize the present value of benefits, never claim benefits between:

  • Ages 62 and 1 month through 63 and 11 months.
  • Ages 65 and 5 months through 66 and 7 months.

It is easier to understand why this is true if you see a table that calculates your personal monthly benefit totals. Lacking that, you'll have to accept it on faith.

Social Security Solutions offers a fee-based service that will give you the tools to analyze your own personal situation and for an additional fee, its advisers will walk you through these and other calculations. There are several competing services that offer similar retirement planning, also for fees. AARP has a free calculator on its website that might answer many of your questions, but it doesn't offer the sophisticated analysis that fee-based services do.

Whatever informational route you take, understanding what Social Security offers and claiming benefits based on that knowledge -- much of it as complex as the calculations above -- can make thousands of dollars difference in your lifetime retirement income. Believe me, it's true.

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13 Comments
Jennie Phipps
February 07, 2013 at 1:06 pm

Eileen,

There are so many more options for married couples than there are for singles that these "rat holes" are mostly irrelevant for them.

Eileen
February 07, 2013 at 12:59 pm

Do I understand correctly from this article that the "Rat Hole" only applies to Singles? Are there similar "Rat Holes" for married persons to be aware of?

Thomas Hopper
January 27, 2013 at 12:16 pm

Barb, get old copies of your filed IRS copies from IRS archives. Tom