Opinions Investor's Corner The BIG Social Security decision
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Investor’s Corner
By John Gudritz CFA
Principal
Front Street Investment Management LLC
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Most people in retirement depend on their monthly Social Security payment to fund most if not all of their life expenses. Therefore, it is very important that people who are over 60 years of age begin to figure out the optimum age that they and their spouses should start to receive their Social Security retirement benefits. My business partner, Jason Tank, has done an extensive analysis on this subject and I wanted to pass on some of the information he found.
The main purpose of this article is to examine the right way to think through the decision of when to start collecting Social Security. It can be complicated, but starting off with the basics is safest. For a more detailed discussion that includes more complex calculations as well as examples of common mistakes, visit www.frontstreet.com/socialsecurity.com
As most know, you can start to collect a reduced Social Security benefit as early as age 62. For most people making retirement decisions today, Social Security’s definition of a normal retirement age is 66. However, if you wait to collect, you are entitled to receive “delayed retirement credits” up to age 70.
The system basically works like this. If you apply at age 66, you will get your full benefit as stated on your annual statement. If you start collecting at the earliest age of 62, you’ll get 25 percent less. If you wait to collect until age 70, you will get a 32 percent boost to your monthly check. For all ages between 62 and 70, the adjustments will fit into this continuum of minus 25 percent to plus 32 percent. Obviously, deciding when to collect is an important financial decision.
The determination of when to start collecting the benefits forces you to make a wager with the government on how long you will actually live. For married couples, this bet is more complex. All spouses are entitled to either 50 percent of their living spouse’s age 66 benefit or their own benefit, whichever is greater. After their spouse dies, the surviving spouse get 100 percent of their deceased spouse’s then current benefit or their own benefit, again, whichever is greater. If you are married, you are essentially betting on your joint lifespan, not just your own.
Imagine a case of a 62-year-old woman who is married to a 66-year-old man. Let’s assume the wife’s own Social Security benefit is $200 per month because she did not work much outside the home. Let’s also assume the husband’s benefit at age 66 is $1,800 per month.
In this case, if she waited until age 66, the wife’s benefit check would normally be 50 percent of her husband’s full benefit when he reached 66 years old. She would get the full $900 per month, but she would need to wait four more years to collect it. If she collected right away at age 62, it would be reduced by 25 percent and she would only receive $675 per month. Remember, this still beats her own $200 monthly benefit. In the meantime, the husband gets his $1,800 per month. However, if he waited until age 70, he would get 32 percent more or about $2,375 per month.
Our website expands on the full set of choices and calculations for this couple, but for simplicity’s sake, the two primary questions for this article are; 1) should the husband wait to collect and 2) at what point does the couple win the bet with the government if he chooses to wait?
The answer is, if you can afford to wait and at least one of you is in good health, you will win the bet if one of you makes it into your early 80s. An important caveat for a decision this big is to do a detailed calculation for your particular case, but this is a good rule of thumb.
Now, waiting to collect can be thought of another way. Building on our above example, if the husband forgoes his $1,800 benefit from age 66 to age 70, he is essentially choosing not to receive $86,400 in benefits over those four years. In exchange for leaving $86,400 on the table, starting at age 70, the couple will receive about $7,000 more per year plus mandated inflation hikes for the rest of their joint life.
This trade-off is identical to deciding to purchase a government-backed, joint-life, inflation-protected annuity. Buying this government-issued annuity (with no commision) pays about 8 percent right out of the gate! Nothing like it can be found in the private sector.
Additionally, what is less known is even if you have already started collecting Social Security, you are allowed to simply pay back the benefits you have received so far, get a refund for the taxes you may have paid on them and then immediately re-apply to start collecting your larger benefits for life. For those in good financial and physical health, this move is very much worth a look.