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Treat Social Security as Insurance Against One of Life’s Most Expensive Accidents: Failing to Die on Time

Lonely Planet Images You should take your Social Security benefits with the expectation that you could live a very long time, and therefore, want them to be as high as possible. Photo courtesy of John Elk/Lonely Planet Images.

Larry Kotlikoff’s Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we now feature “Ask Larry” every Monday. We are determined to continue it until the queries stop or we run through the particular problems of all 78 million Baby Boomers, whichever comes first. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version

Kent — Medford, Ore.: I am 62. My spouse is 68 and can’t collect on her own Social Security. Social Security told us to wait until I’ve reached my full retirement age (FRA) and then she can get half of my FRA benefit and I can suspend its collection. This was their final answer after giving us several different answers. Please give us a definitive answer on our best choice assuming we both live to 85. Thank you.

Larry Kotlikoff: Your own life expectancy may be 85, but that’s not necessarily relevant. What matters is the maximum age of life to which you could live. Social Security benefits are an insurance policy against one of life’s most expensive accidents — failing to die on time. So unless you or your partner has a terminal condition, you probably should figure on living to 100 for the simple reason that you might.

Now, you say your spouse can’t collect on her own. I’ll assume that means she has fewer than the requisite 40 quarters of Social Security-covered earnings. So one option is for you to collect your own early retirement benefit, and therefore reduced retirement benefit, starting now, letting her get a full spousal benefit starting immediately, which would be equal to half of your full (not your reduced) retirement benefit.

Then, when you hit full retirement age, you suspend your retirement benefit and start it up again at 70, at a 32 percent larger value (adjusted for inflation) than when you suspended it.

But, there is a caveat to that option. If you are still working and apply for your retirement benefits and earn enough, you will lose those benefits as well as all your wife’s spousal benefit via the earnings test.

Social Security will make up for the loss in your own retirement benefits when you hit full retirement age by permanently increasing your benefits via what’s called the “adjustment of the reduction factor.” But it won’t make up for the loss of your spouse’s benefits due to the earnings test. In this case, applying early for your retirement benefits will do no good. It’s possible this is why the Social Security office gave you the advice it did. It’s also possible the Social Security office just gave you partial advice, which is often the case.

Your spouse should qualify for Medicare based on your earnings record and can apply regardless of what you’re earning. Medicare Part A is free, so even if you have good health insurance through your employer, it may be good secondary coverage. And it’s important to know that the premium for Part B will become permanently higher for your wife the longer she waits to sign up, unless she has health insurance coverage through an employer group health plan.

Since the Social Security Administration has no software to calculate which collection strategies would maximize your lifetime benefits, it’s not in a position to say that the above option is worse than their proposed strategy of having you wait until 66 to file for your retirement benefit, suspend its collection, and then wait until 70 to go for your retirement benefit. If you do that, you will, four years from now, permit your then 72-year-old spouse to start collecting a full spousal benefit.

For very little money you can run your situation through commercially available software programs, or check out this free version of my ESPlanner program available here, to find out what’s going to maximize your joint lifetime Social Security benefits. My guess is that the first strategy I outlined beats what Social Security is advising (even though they aren’t supposed to advise anything), but only a meticulously programmed computer knows for sure.

Reta — Annandale, Va.: My husband is 75, retired from the Arlington Police Department and now has lung cancer. I will turn 65 in November but am still working and will not reach retirement age until 66. Should I claim spousal benefits now? I am making more money than he did when he retired.

Larry Kotlikoff: Paul and I are, of course, terribly sorry to hear this news about your husband.

Yours is a difficult question and the answer depends on your Social Security-covered earnings history compared to that of your husband’s and also on when he started taking his benefit, which will impact your survivor benefit.

If your earnings were higher than his or pretty close, you will, by taking your spousal benefit before 66, be “deemed” by the Social Security Administration to be filing for your retirement benefit. Because you are filing for your spousal benefit before full retirement age, this will turn your spousal benefit into a reduced excess spousal benefit — equal to half his full retirement benefit less all of your full retirement benefit.

So by taking your spousal benefit early, you may end up just with a reduced retirement benefit. This is a very nasty Social Security gotcha, but one that hits people every day. If you wait until full retirement age, this “deeming” doesn’t occur, and you can take just your spousal benefit.

On the other hand, if your husband was the higher earner and didn’t take his own retirement benefit too early, or even if he did and your survivor benefit will still exceed your own retirement benefit, it would then be best to take your spousal benefit and your retirement benefit right away. The reason is that once your husband passes, you’ll get either the larger of your own retirement benefit or the survivor benefit.

My guess is that this latter move is optimal: apply for your spousal and retirement benefit now and then apply for your survivor benefit when your husband passes away. But to say for sure, you’d need to run your case through commercially available software.

Susan O. — Birmingham, Ala.: My husband died when he was 58. Should I start collecting his death benefits at age 60 or wait until 66? He made a lot more money than I have or ever will.

Larry Kotlikoff: Your best strategy is probably to wait until 62 to take your reduced retirement benefit and then at 66 (full retirement age), take your survivor benefit. If you take your survivor benefit at 60, it will be permanently reduced, in inflation-adjusted terms, by close to 30 percent.

As I discussed in a previous column on the general rules for maximizing your lifetime Social Security benefits, one key strategy is to take one benefit while letting the other grow.

In this case, taking just your retirement benefit at 62 lets your survivor benefit grow through age 66, at which point you switch to collecting that one.

Or rather, you apply for your survivor benefit, and Social Security gives you the larger of either that survivor benefit or your own reduced retirement benefit. But note that Social Security will describe this as your receiving your reduced retirement benefit plus your excess survivor benefit, measured as your survivor benefit less your own reduced retirement benefit. In other words, Social Security will try to perpetuate the myth that you are getting your own retirement benefit even after you start collecting your survivor benefit (even though your total check would remain the same were your own retirement benefit zero).

Catherine — Silver Spring, Md.: My parents were married for over 10 years before divorcing. After the divorce, my mother remarried. Since then, both my mother and her second husband have passed away. My father never remarried. Is my father eligible to collect any spousal benefit based on my mother’s Social Security earnings? My father has his own Social Security benefit, but it is minimal.

Larry Kotlikoff: For your father to collect a divorcée spousal benefit based on your mom’s earnings record, she would need to be living. He can collect a survivor benefit, which is higher than the spousal benefit (before any reduction for taking it early). If your father hasn’t informed Social Security that he is an eligible divorced survivor of your mom’s, he should do so right away. Depending on his age, he will be able to get the larger of either his survivor benefit or his own retirement benefit if he is already collecting his retirement benefit.

If he is already collecting his own retirement benefit and is between full retirement age and age 70, and his survivor benefit exceeds his current retirement benefit, he could suspend his retirement benefit and just take his survivor benefit through 70 and then restart his retirement benefit at a higher level at 70 (after it’s been incremented by the delayed retirement credits for every month he didn’t collect benefits between full retirement age and age 70). But it’s highly unlikely that this would be worth it because he won’t get his full survivor benefit between his current age and 70. Instead, he’ll get his excess survivor benefit, which is equal to the difference between his survivor benefit and the retirement benefit he is now collecting.

Carolyn — Saint Peters, Mo.: I collect Social Security now, and have for several years. In this article I have just read, are you saying that I can stop my Social Security for any reason I want, as long as I pay for my Medicare myself, and then I can restart my Social Security at the full amount? If so, how long of a gap do you need? Or is this only if you go back to work?

Larry Kotlikoff: If you are between full retirement age and age 70, you can suspend your retirement benefit, that you may have started as early as 62, and reactivate it at age 70 when it will be credited with the delayed retirement credit for every month you didn’t collect benefits between full retirement age and age 70.

Nicholas — New York, N.Y.: I am 65 years old and won’t retire before at least 70, even though my full retirement age is 66. I was married for more than 10 years and divorced nine years ago. My ex is 64, and I don’t know if she is collecting Social Security, but I was the higher wage earner. I would rather not try to guess which is the best move for me without your specific input since the rules seem so complicated.

Larry Kotlikoff: What your wife is up to, in your case, doesn’t matter one iota with respect to collecting a divorcée spousal benefit. To collect such a benefit, you need to have been married at least 10 years and satisfy either of these requirements: your ex is 62 or older and you have been divorced for at least two years, or your ex is collecting a retirement benefit. You satisfy the first two requirements, so you’re golden.

In your case, the best move is surely to wait until 70 to collect your own retirement benefit, but at full retirement age and no earlier, apply for just your spousal benefit. You’ll get a full spousal benefit equal to half of your ex’s full retirement benefit between 66 and 70 and then collect your largest possible own retirement benefit starting at 70.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions

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