Social Security includes a spousal benefit, in which the lower earner is able to take the greater of their own SS income or up to 50% of their spouses’.

Upon death of the higher earner, the lower earner assumes the higher earner’s benefit (replacing their own.) A survivor benefit.

Because of these spousal and survivor benefits many choose to delay collecting Social Security until age 70 in order to secure the largest monthly income, which will help to provide their younger / greater longevity spouse financial security throughout their twilight years.

I will do the opposite, and my wife will be better off for it.

Why Early Social Security Provides the Greatest Spousal Benefit

I previously outlined Why I Plan to Collect Social Security as Early as Possible. More money later is no match for less money early just dumped into an index fund, no matter how long I live.

But it isn’t just me that is affected by this decision, as many pointed out in the comments of that post. The odds are good that you have heard people say, “I’m glad my spouse and I delayed collecting social security. Since their death I have been collecting BIGGER NUMBER which is better than collecting SMALLER NUMBER.”

But the question is NOT, “Do you want a smaller or larger income after my death?”

It is, “Do you want a larger income or a smaller income and a GIANT PILE OF CASH?!”

“We know you love him. But if he happens to die, we give you 2 Mercedes and a summer home. Wouldn’t that be nice too?” – Crazy People, 1990

Investing Early Social Security

Where does the pile of cash come from? Via investing the social security income received during the 8 year period between age 62 and 70.
(That cash pile can be even bigger with a term life insurance policy.)

By definition, if you can choose to delay Social Security you can choose to invest it rather than spend it. (We are doing this for the good of our spouse after all!)

After 8 years of such investment we would have accumulated ~$100k+/- based on typical inflation and investment returns with a PIA of $1,000 for easy math (My PIA is ~$3,000 so we would have accumulated ~$300k.)

Now the larger/delayed Social Security income starts to turn the curve around and at some point breaks even*. Of course, that happens after 25 YEARS!!!! (+/-)

Inflation 3% / Investment returns – various (delta is real return)

If inflation is really low it takes a little longer to break even (curves shift to right due to low COLA). If high, a little less (curves shift to left with high COLA.) Even with a 0% investment return (cash just sitting under a mattress) the breakeven period is 17 years, and (a fun data point) there is no historical 20-year period during which the SP500 return was negative (chart.) By delaying SS, the 20-year return is virtually guaranteed to be negative.

Assuming this is all for the benefit of our spouse… 9% of women and 15% of men who are alive at age 62 are expected to pass before age 70, a fairly small number. “My spouse will still be alive in 8 years… seems reasonable to delay.”

But that number increases to 60% deceased for women and 71% for men at age 87 when waiting for the SS delay to break even (based on 2020 SS period life table single life expectancy.)

Maybe all of this is OK… we delay SS for a greater spousal benefit so in cases where we die, inflation is high, our spouse outlives the longevity tables, that they will be secure.

But wait?! Just because an investment turns positive after 25+ years doesn’t meant it was a good investment or the better choice. And what is that curve in the lower right part of the graph where delay never breaks even?!

Investing for Long-Term Spousal Benefit

In the most likely scenario, my wife will substantially outlive me. She is 5 years younger, has good genes, and has an optimistic and joyful demeanor. Securing her financial future is a strong priority.

To do that I need to understand what our joint SS income looks like prior to my death and what her individual SS income looks like. Fortunately, that is easy to do, and I have plotted that combined scenario in the following chart (assuming a delay in my benefits from age 62 to 70.)

If this chart looks the same as that shown in the post Why I Plan to Collect Social Security as Early as Possible, that’s because it is.

We can think of the spousal survival benefit as just the higher earning spouse living longer. Upon my death she takes over my benefits (replacing her own.)

The ROI of delay increases over time but asymptotically approaches some maximum (~6.5%+/- real.) If both spouses live forever (2 SS incomes), then there is a ~0.6% increase in the maximum. The ROI calculations here are the same for everyone as they are fixed by the SS delay rates – same for me, same for you, same for a spouse, same for a couple with a large age delta.

If we can get a greater return on investment elsewhere, then delay never comes out ahead (which is why the 3%/10% curve (7% real) in the previous chart breaks away from the trend.)

A 3% plus real rate of return with no volatility is a nice thing… to get it we just need to have a guaranteed loss for 25 years +/-. And when (if?) we get there, it isn’t really a great rate of return… I waiting 25+ years for 3%? (Over the past 40 years the SP500 annual return is ~11% nominal (~8% real.))

Summary

I want my spouse to have a solid financial foundation in her twilight years after I am gone.

Therefore I plan to collect social security as early as possible and dump that income into an index fund. This will help avoid the virtually guaranteed loss that delayed Social Security offers for the first 25+/- years.

Upon my death, she will have a giant pile of cash and a monthly social security income stream that together are worth more than if I delayed collecting Social Security, providing the greatest spousal survivor benefit.