If you’re approaching retirement age, one of the most important financial decisions you need to make is when to start collecting your social security benefits. This decision should rest on several factors— your health, whether you need this benefit to meet current expenses, your available resources outside of social security, and coordination with your spouse’s benefit. The rules are complicated, especially for married couples, and a wrong choice can cost you tens of thousands of dollars in future income.
The two most common mistakes that retiring individuals make is starting social security payments too early and failing to coordinate receipt of your own benefit with that of your spouse.
Let’s start with a recap of the basic retirement rules:
“Full retirement age,” or the age at which you can receive benefits without a reduction for early retirement, is 66 for those born between 1943 and 1954. For people born after 1954, the full retirement age gradually goes up, until it reaches age 67 for those born after 1959.
Benefits can be received as early as age 62, with a 25% reduction for those born between 1943 and 1954.
Benefits can be deferred to any age between 67 and 70, with an 8% increase for each year receipt is delayed beyond full retirement age (i.e., a 32% increase at age 70).
A qualified spouse is eligible for a benefit of 50% of the primary recipient’s benefit. Note that the spousal benefit is also reduced (30% reduction at age 62) if receipt begins before full retirement age.
A surviving spouse (i.e., a widow or widower) is entitled to 100% of the deceased spouse’s benefit following his or her death, payable as early as age 60.
For example, Yossi has earned a social security benefit of $2,400 per month commencing at age 66 (his full retirement age), and is thinking about retiring early at age 62, and taking a reduced benefit of $1,800 at that time. His accountant tells him, “You should take it at 62, because you’ll never make up for the four years without benefits if you wait until 66.”
Is this sound advice? Probably not, for several reasons. First of all, Yossi only needs to live until age 78 to “break even” if he takes $2,400 per month at age 66 instead of $1,800 at age 62, and today’s life expectancies go well beyond 78. Also, social security is indexed for inflation, and cost of living increases are worth more if they apply to a larger benefit. Yossi’s surviving spouse will be eligible for 100% of his benefit if he dies first, and it would certainly help her at that stage to receive a larger benefit. Finally, in today’s low interest rate environment, where you either get a miniscule return on your savings or risk them by investing in bonds or equities, it makes sense to use up some of your other savings while letting the social security benefit grow for a few years.
Far more complicated are decisions for married couples, when each spouse has a record of earnings covered under social security. Usually, married couples are better off by coordinating and taking their benefits at different ages. But there are numerous obscure rules that often lead to uninformed and ill-advised decisions.
Let me illustrate this by a simple example: Jonathan and Rachel are celebrating their 66th birthdays in close proximity, retiring together, and looking forward to having more leisure time, traveling, and spending more quality time with their grandchildren. They each earned a monthly social security benefit of $2,500, and go to the social security office in Hackensack where they fill out their benefit applications. They return home excited and looking forward to receiving monthly checks, totaling $30,000 per year for each of them, or $60,000 per year total. When one of them dies, the total benefit will decline to $30,000 per year for the remainder of the survivor’s lifetime.
Jon and Rachel would be shocked to learn that they just missed an opportunity to substantially increase their lifetime income. How so? Well, a much better strategy for them would have been for Rachel to apply for her benefit, and Jon to file what’s called a “restricted application” for spousal benefits based on Rachel’s benefit only, while letting his own benefit increase for late retirement. In this manner, they would collect a total of $45,000 per year for each of the next four years (i.e., $30,000 for Rachel, plus a spousal benefit of $15,000 for Jon). When they reach age 70, Jon will apply for his benefit, which has now increased for late retirement to $39,600 (i.e., a 32% increase on top of his basic $30,000 annual benefit), and they will receive a total of $69,600 in each subsequent year while they are both alive. If Jon dies first, Rachel will then see her benefit increase from $30,000 per year to her surviving spouse benefit of $39,600. If Jon lives to age 83 and Rachel to 86, their approximate life expectancies, they would receive almost $100,000 more in lifetime benefits under the “restricted application” strategy! Factoring in inflation and annual cost of living increases would make this difference even larger (at 3% annual inflation, the differential grows to more than $160,000).
Other strategies are also available to maximize the benefits you and your spouse will receive over your lifetimes. Their use and effectiveness depends on the relative ages, benefit levels, and health of each spouse. The best strategy will depend on your particular circumstances. Also, note that if you’ve already retired under social security and regret that decision, you might still be able to mitigate some of the damage if you have not yet reached age 70.
Our community is heavily taxed by all levels of government (especially in New Jersey), and we certainly get back considerably less than we pay in. Therefore, we should make sure to get full value on any benefits to which we are entitled, such as social security. To that end, you can begin by setting up an account in ssa.gov, the social security website, and review the social security rules and your benefit entitlement. Read up on the strategies associated with social security, and consider what best applies to your situation. Alternatively, due to the complexity and obscurity of the various strategies, you may seek professional advice when retirement approaches. Paying a small fee for a consultation and benefit illustrations may be a wise investment, to the extent that it allows you to effectively maximize benefits that will be payable to you and your spouse over what, hopefully, will be a long, healthy and productive retirement.
Michael Karlin is a Fellow of the Society of Actuaries and an Enrolled Actuary, and recently retired from a 35+ year career as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts. Mr. Karlin can be reached by phone at 201-836-6408, or by email at [email protected].
By Michael Karlin
