AssetBuilder - Registered Investment Advisor :: Simple Investing Smart Future

 Dear Scott,

You have written about how a  husband and wife can maximize Social Security benefits by having the wife begin taking benefits at age 62 while the husband waits until 70. Here is a way that the husband can do a little better. I found this on the internet at http://finance.yahoo.com/focus-retirement/article/104500/Bewildering-Benefits;_ylt=AsP35SBRic_2_HuGSB6ttZS7YWsA?mod=retirement-preparation

Dave

Q: How can a wife and husband maximize their Social Security benefits over their lifetimes?

A: Recent studies indicate that a couple can maximize their payouts over time if the lower-earning spouse begins collecting Social Security as early as possible (age 62) and the higher-earning spouse waits until age 68 or beyond to start benefits. (You get your largest possible benefit by waiting until 70.)

Indeed, a peculiarity in Social Security's rules allows for some creative strategies in this area. Consider the following example, provided by Steve Potter, a retired public-affairs specialist at Social Security:

Let's say Ted and Alice are the same age. He's eligible for a $2,000 benefit at his full retirement age; she's eligible for $1,000 at hers. Alice claims benefits based on her earnings at age 62 and gets $750; Ted, meanwhile, is considering waiting until age 70, to try to maximize their benefits. The problem is that 70 is a long time to wait to start receiving benefits.

At full retirement age, though, Social Security gives a person two choices: You can take your own benefit, or -- if eligible -- you can collect just a spousal benefit, and then claim your own benefit at a later date. Thus, if Ted (at full retirement age) takes his spousal benefit based on Alice's earnings, Social Security would award him $500, or half of Alice's projected benefit at her full retirement age. Then, at some future date, Ted can ask Social Security for benefits based on his earnings. (At age 70, Ted would qualify for about $2,640 a month.)

That option -- of taking just a spousal benefit at full retirement age -- takes some of the sting out of Ted's desire to get the largest benefit possible at age 70. Rather than going three or four years without any money from Social Security, Ted can claim a spousal benefit -- and get $500 a month, in this example -- and still be able to claim his own benefit at age 70.

There are many interesting variations on this theme. Kotlikoff and I cover several of them in "Spend Til' the End", our book on consumption smoothing that will be published by Simon &Schuster in June.

The even broader theme is that most Americans can do a lot more for themselves and their security by paying attention to decisons about Social Security, housing, etc. than they can by fussing over investment returns.

One indication is the table of contents of the book. It's 315 pages long but we don't even start to talk about portfolios and investment returns until page 237. Before that, we addressing Social Security, Roth vs. IRA, mortgage vs. no mortgage, being single, living together, or married, how children effect your standard of living, etc.

The financial services industry wants us to live in its financial-assets-centric world but the rude reality is that most people have more of their lifetime security tied up in "virtual wealth" than in financial assets.

Let me give you an example. This morning I spent two hours with a couple that most people would consider very well off. They have nearly $1.4 million in financial assets and $400k equity in a $700,000 house, or a net worth of about $1.8 million.

That, however, is the same or less than the value of their virtual wealth in future Social Security and Medicare benefits and a moderate size corporate pension. One consequence: how and when they choose to drawn down both the financial assets and their Social Security benefits is a major lever on their long term sustainable income.

Scott

Scott

Scott,

I read about another "technique" from another source and would like your opinion.  The author stated that the higher wage earner should apply for benefits at his/her full retirement age which would allow the spouse to receive the highest possible spousal benefit (50%, assuming the spouse is the full retirement age).  After the spousal benefits begin, the wage earner could then withdraw his application, but this action would not stop the spousal benefit.  Is this a valid strategy?  Thanks.

J.R.

Yes, it's a good strategy. You can read the basic study on optimizing Social Security benefits for married couples by going to this link at the Center for Retirement Research at Boston College. I used it as the basis for a column in early 2006.

Center for Retirement Research:

http://www.bc.edu/centers/crr/publications/soc_sec_b.shtml

Here's a link to the related column:

http://assetbuilder.com/blogs/scott_burns/archive/2006/01/29/Fine_2D00_Tuning-the-Social-Security-Benefits-Decision.aspx

Scott

I took social security benefits at my full retirement age (65 and four months) because of health reasons. My wife will be 62 next year and will retire. Her salary has been high so her social security benefit will be her own and not spousal benefit from my benefit. In a magazine(NARFE) it said it would be beneficial to take benefits early (at 62) the higher her benefit and the larger the difference in ages. My wife is 7 years younger than me. In most of the discussions about maximizing social security there was not much discussion about age difference. What is optimal for me and what is optimal if there is a large age difference and considerations of survival benefits is more important than spousal benefits.

Hi Scott,

Can you comment on the following:

"The reason: the wife is starting with a smaller "base" (her reduced benefit) than if she had waited to file for Social Security at her full retirement age."

 based on:

 BobFromPlymouth:
  Hello from The Wall Street Journal. Thanks for the note.
  I'm sorry to tell you that the person you spoke with was wrong. (And I'm also sorry to tell you that getting incorrect information from Social Security is not an uncommon occurrence.)
  I double-checked all my examples and numbers with Social Security's staff at the agency's HQ in Baltimore. Again, my article is correct.
  If a wife (in this case) -- before reaching her full retirement age -- files for a reduced benefit based on her own earnings, she will NOT receive the full 50% of her husband's payout when he eventually claims Social Security. That's the rule. The reason: the wife is starting with a smaller "base" (her reduced benefit) than if she had waited to file for Social Security at her full retirement age.
  A wife might get CLOSE to 50% -- depending on each spouse's earnings and the various points in time at which each spouse claims Social Security -- but, again, she won't get the full 50%.
  That said...I'm not sure if I would stop taking benefits and resume collecting Social Security at age 66. Have you "run the numbers"? Have you calculated whether that move would make sense? Most people won't "break even" until they reach their early 80s (when collecting at age 62 vs. age 66 or later). You might discover that collecting benefits at age 62 works just fine.
  Anyhow...I hope this information helps. Please let me know if you have any additional questions. If it helps, I can walk you through some numbers on the phone. (By the way, as difficult as this may be, you usually get better information by visiting a Social Security office, rather than calling the agency.)
  Regards,
  Glenn Ruffenach
  Editor -- Encore/The Wall Street Journal
 

The Munnell article mentioned above, with a link for download, shows optimal ages for a husband and wife to take benefits as conditioned by their (1) age difference and (2) income difference. So scroll back on this thread and download the Center for Retirement Research paper.

Scott

Bob,

I'm not sure what the original question was.

The issue of delaying benefits is a pretty clear winner unless you expect to die young. While the break-even is far away, it is generally well under life expectancy. Payback in real dollars, for instance, is about 12.5 years. But the life expectancy of the average male at 66 is 16.1 years while the life expectancy of the average woman at 66 is 18.9 years.

Scott