July 26, 2014

Three Reasons Husbands Should Delay Taking Social Security Until Age 69 or 70

Claiming Social Security benefits prematurely can mean up to a $250,000 loss of total lifetime benefits. Most married men claim Social Security at age 62 or 63, which leaves their future income well shy of what research indicates is optimal. Beyond maximizing their own lifetime income, delaying their Social Security can be the best gift they can leave a widow. Gentlemen, it’s time to wise up.

Mistakes are often made when men link the decision to retire and the decision to start Social Security. In fact, you can retire on or before age 60 and wait as late as 70 to begin collecting benefits.

Too many widows are barely scraping by because their husbands rushed to claim a monthly check from Uncle Sam. Husbands who are the primary earners in a family need to pay particular attention to the reasons for delaying.

Be Kind to Your Future Self

Actuaries designed Social Security to offer similar benefits to those who claim early and others who delay. But this decision neutrality only applies to an unmarried recipient who dies at age 83. Those who survive beyond their life expectancy can reap a larger benefit by delaying.

If you have a family history of Methuselah genes, you should delay. Waiting to claim benefits until age 70 increases them by 76%. In addition to these actuarial benefits, you may also decide to earn additional income by following passions you put aside while pursuing your career.

Will you be leading historical tours or teaching a community college class? Whatever you choose, continuing to earn income can help raise the average benefit that is calculated by averaging your 35 highest consecutive years of salary. Some who retire early have zeros added into this calculation for each year of unearned income. Remember the Golden Rule when thinking about your future self.

Be Kind to Your Future Widow

Some men do not expect a long life. Maybe their own parents died at an early age or maybe they are in poor health. They may believe living past age 83 to be unlikely. These husbands claim early benefits to try and get as much as they can out of Social Security. However, they often fail to consider the impact of their choice on their surviving spouse.

The longevity of women relative to men is no secret. My own grandmother has already lived 33 years longer than her husband. A surviving spouse can inherit the highest benefit attained by the primary income earner. Each year you delay your benefits beyond age 66 increases the survivor benefit you will pass on to your spouse by 8%. Waiting until age 70 offers a 32% increase in benefits.

For example, assume my grandfather, Daddy Jack, had an age 66 benefit of $1,000 a month. Waiting until age 70 would increase this monthly benefit to $1,320. This difference becomes amplified over time by inflation adjustments.

Assuming an average 3% inflation adjustment over 30 years, Daddy Jack’s payment would become about $2,427 if he began benefits at age 66 and $3,203 if he waited until age 70. The additional $776 a month is a welcome gift a husband can leave his spouse.

Consider Longevity Insurance

Many retirees consider using part of their nest egg to buy an annuity. Eager salespeople push these high-commission products as a way to guarantee financial security. However, Uncle Sam is offering the most affordable annuity on the market and it’s inflation-protected .

Most privately advertised annuities are not sold with an inflation rider. Insurance companies prefer to avoid taking on this inflation risk and those that do charge a hefty price which lowers the monthly benefit amount significantly.

Instead of purchasing an annuity, consider delaying your Social Security benefit. You’ll have to give up several years of lower payments. But this is far less than the lump sum you would be required to pay an insurance company in return for a promise of future payments backed by their own financial stability.

This future income stream is typically omitted when considering Social Security break-even calculations. A true break-even calculation includes not only the benefits paid each year but also the value of future promised payments.

Consider the financial security of two widows in good health, both age 83. Both have just spent their last cent of savings, and both now have to live on their Social Security income. However, one has a monthly payment of $2,000 and the other $3,500.

Assuming that this is the eve of their death, neither will receive any additional benefits. However, we can safely assume one widow feels much more secure than the other. When calculating a break-even value, we also need to put a value on the security provided by this higher future payment. You can estimate this value by pricing the lump-sum cost of an annuity benefit that would be required to bridge the gap between these two Social Security payments.

In this example, the additional benefit could be estimated with an immediate annuity to cover the $1,500 monthly benefit difference. An online annuity calculator at www.immediateannuities.com shows it costs a female $151,699 to purchase an annuity at age 83 which doesn’t even include an inflation adjustment. At minimum, this $151,699 needs to be included in robust break-even calculations.

However, some husbands will hit a limit on their Social Security paycheck before age 70. Husbands with younger wives and young children should heed the lessons of Henry VIII and beware of the Maximum Family Benefit.

The implications of husbands taking early Social Security benefits are so severe that some researchers are recommending that their spouse be required to sign off before early payments begin. Make sure you’ve considered all your options before applying for Social Security. Those who do not have access to a financial advisor who specializes in Social Security income optimization should consider paying for a recommended strategy from Social Security Solutions.

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About Matthew Illian

Matthew Illian is on the Investment Committee at Marotta Wealth Management, Inc., specializing in small business consulting and retirement plans. He loves spending time outdoors, the less pavement the better, with his wife and three energetic boys. Favorite trails: Forest Hill Park

Comments

  1. Chris Forsyth says:

    Was this written as “husband” and “wife” under the assumption that husband had more income? Or perhaps that husband has shorter life expectancy? I am married and my wife earns more than me, should I reverse the words “husband” and “wife” when reading this?

    Thanks!

    Chris

    • I’m specifically referring to husbands who earn more than their wives. It’s not as simple to flip the math when wives earn more because they also have longer life expectancies. However, the general rule applies that you want the larger benefit to be as large as possible. Since Social Security represents a net present value of over $1 million for the typically couple, it’s worth paying for an optimization recommendation before filing.

  2. Richard Gregg says:

    Coming into this discussion late, but I am 64 1/2 now and am trying to work untill at least 67 full time. Only time and my body will determine whether I make it or not. My wife is two years younger than I am, so she has 2 1/2 years to go before medicare, I only have six more months to go. She loses my company health plan if I retire earlier than that. I had a pinched nerve (sciatica) last year, but recovered in 2 1/2 weeks. Let’s see if I make it…!

    • Have you priced out an individual policy for your wife? If your wife has significant preexisting conditions, they can be costly. You may want to look into the health exchanges next year which could be a more affordable option for your wife to obtain an individual policy. Would she consider working at Starbucks? I’m only brainstorming because it seems like you may be pushing too hard at work.

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