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Not Everyone Thinks You Should Wait Until 70 to Take Social Security

By Larry Kotlikoff

Elderly Workers With seniors retiring later and living longer, there are many advantages to waiting until age 70 to collect maximum Social Security benefits. Photo courtesy of Joanne Rathe/The Boston Globe via Getty 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

Heidi Doolittle — Birnamwood, Wis.: If two people were married for 12 years, then got divorced and married other people, can the exes each collect Social Security benefits on their first spouses, even though they are married to other people now?

Larry Kotlikoff: No. You can’t collect a spousal benefit on an ex if you are married. But the answer changes to “yes” if you get divorced. Then you can both potentially collect spousal benefits on your first spouse’s earnings records.

This raises the possibility, which I’ve mentioned before: It might actually pay to get divorced, even if you don’t want to, and then live together “in sin.” Social Security doesn’t care about such things. I’m not suggesting this, you understand, just pointing out the sometimes perverse incentives in the Social Security rules and regulations.

John Notch — Wilmette, Ill.: I am a little perplexed about all the recommendations to delay receiving Social Security (SS) benefits as long as possible. If one were to just look at the net present value of the SS benefits stream, it suggests to me that starting to receive the benefits at 62 seems the prudent thing to do.

In my own example (I currently am 61), I’ve compared receiving $1,723 per month starting at age 62 versus receiving $2,285 per month at age 66. To be conservative, I’ve assumed that the benefits do not escalate at all. At a zero percent internal rate of return (IRR), the two present value streams are equal at age 78.5.

At a 3 percent IRR, the cross-over point is age 83, while at 6 percent IRR, the crossover point is around age 88. I currently am semi-retired and able to live off of my current accumulated assets without needing the SS benefits. I would view the SS benefits starting at age 62 as “found money” and cannot see any benefit to waiting until age 66 or 70 just to increase the monthly benefit. If I am able to receive a return on my current assets at even 5 percent, I would have to live to my mid-eighties to not break even. Why not take a smaller amount earlier and spend the money on enjoyable activities while one still has their health?

Larry Kotlikoff: These prior columns bear on your question: “Why You Should Never Wait Until After 70 to Take Social Security” and “Waiting Until 70 for Social Security: How Long Must You Live to Make it Worth the Wait?”

But let me respond directly to the points you raise. If waiting to collect leads to higher benefits, which is often, but not always, the case, you’ll be thanking yourself when you are 100 for having done so. You don’t want to outlive your savings. And with increasing longevity, that’s becoming more and more of a possibility. Yes, you may die young and not even break even — but that’s the good news. Because if you die young, you won’t have to worry about running out of money.

Social Security provides longevity insurance because when the really bad thing happens — you refuse to die — Social Security keeps paying out. We don’t normally think about breaking even when it comes to buying insurance polices. We don’t say, “Gee, I’m not going to buy homeowners insurance because I don’t expect to break even on the policy.” Instead, we say, “I don’t care if, on average, my house won’t burn down very often. I need to protect myself against the worst case scenario and am going to buy the policy.”

In a story in Sunday’s New York Times, “For Retirees, a Million-Dollar Illusion,” my friend Alicia Munnell, director of the Center for Retirement Research at Boston College, is quoted as saying, “Most people haven’t saved nearly enough, not even people who have put away $1 million.”

“The average 65-year-old woman today can be expected to live to 86,” wrote Jeff Sommer in The Times article, “a man to 84. One out of 10 people who are 65 today will live past 95, according to projections from the Social Security Administration.”

Therefore, wrote Sommer, citing data from the Bernstein Global Wealth Management group, conservative investors drawing down their retirement portfolios as required by law and spending what they withdraw would have a 38 percent chance of running out before dying.

I’d add an observation. You cannot guarantee that you will receive a decent return after inflation on your investments. Remember, for every extra increment of reward you get in your return on an investment, you’re taking an extra increment of risk.

Many people think that stocks are safe, or at least safer, in the long run. But as my Boston University colleague Zvi Bodie has long pointed out, if you’re invested in stocks, and stocks crash just when you retire, you may run out of money before the long run ever arrives.

Remember that the Dow Jones Industrial Average lost 90 percent of its value between 1929 and 1933, and that its Japanese equivalent, the Nikkei average, is still down by two-thirds from its peak 23 years ago. Or consider what happened to stocks in the Dot Com and 2008 stock market crashes.

You seem to suggest that you can earn 3 percent or more, after inflation, for sure. Well, if you really have the Midas Touch, you should borrow every penny you can, invest it, and make a killing. There are plenty of people out there who would love to have you invest their money at a 3 percent real return with no risk.

Finally, you write that you are “able to live off…current accumulated assets without needing the SS benefits.” But whether you are going to spend an asset doesn’t necessarily change how you should value that asset. By analogy, you may own a bond that you never intend to spend. But the bond will still have a value based on its prevailing market price.

Norman — Long Beach, Calif.: I am 66; my wife will be 62 in December. Neither of us has applied for Social Security benefits. What, in your opinion, is the best way to maximize benefits for her as the surviving spouse?

Larry Kotlikoff: If you are worried about dying before your wife, the best strategy for maximizing her survivor benefit is to wait as long as possible to collect your own retirement benefit. That’s because, as I intone here with the regularity of a clergyman, a person’s retirement benefit at age 70 is 32 percent higher than at “full retirement age” (66 these days), and because survivor benefits are, generally speaking, based on the deceased’s benefit.

Let me be clear, though: do not delay beyond age 70. There is no further increase in benefits — for anyone — associated with waiting after age 70, as I emphasized in a recent column that drew a slew of readers.

Helen — Weslaco, Texas: I took early Social Security at age 62. For the last two-and-a-half years I have been working again full-time and putting money back into SS. I am 70-years-old and plan to work as long as I can and will continue to pay into SS. I still receive my SS check that I filed for at age 62. When I do retire and stop paying into the system, will my benefits increase or stay the same?

Larry Kotlikoff: When you retire, your benefits will stay fixed except for an annual Cost-Of-Living Adjustment (COLA) to keep your benefits rising with inflation. Were you between your full retirement age and age 70, you could suspend your benefit and start it up again at a higher value (provided you paid your Medicare Part B premiums out of pocket) at age 70. But after age 70, there are no additional credits, known as delayed retirement credits, for waiting to collect.

However, as my February column “How Social Security Pays You to Work Forever” emphasized, if you keep working and earn more than you did in one of the previous 35 years on which Social Security bases your benefit, Social Security’s calculation of your lifetime earnings, known as Average Indexed Monthly Earnings (AIME), will go up. That’s because the AIME is based on your highest 35 years of earnings. Higher lifetime earnings: higher benefits.

There is a complication, though. Earnings through age 60 are adjusted for inflation before Social Security determines which of your past annual earnings are the 35 highest. Hence, you may earn more dollars when you are, say, 73 than you did when you were, say, 43, but after indexing, the earnings at age 43, inflation-adjusted, may exceed the earnings at age 73. Confusing, I realize. But if it weren’t, I guess there would be little need for this column.

Dale — Pahrump, Nev.: Can my ex, to whom I was married for 20 years, still claim on my Social Security, even though she remarried four months after our divorce, which was 17 years ago, and divorced the second husband nine months after marrying him? He had virtually no income and mine is high. I’ll be 62 in two years and she’ll be 61. Thank you.

Larry Kotlikoff: As long you and your ex were married for 10 years, which is your case, the answer is yes. But your ex may do better hitching up – getting married — for a third time. Regardless of how many times one’s been divorced in the past or how long those past marriages lasted, one can get re-married, and after only nine months, be eligible to collect survivor benefits and, after only one year, be eligible to collect spousal benefits on one’s new spouse’s earnings record. This is true regardless of your age. Don’t you just love this system!

Thomas Sloan — Hixson, Tenn.: I am 69 and my wife is 62. I plan to start drawing Social Security at 70 and continue to work until 73, when my wife turns 66. She no longer works, so is it better for her to begin her benefits at 66 or wait until 70? At which point will her spousal benefits be higher? I have been the highest wage earner.

Larry Kotlikoff: It may be best for your wife to apply just for a spousal benefit at 66. It will be a full spousal benefit equal to half of your full retirement benefit (not half the benefit you’ll get at 70, which includes delayed retirement credits). She would, under this strategy, apply for her own retirement benefit at 70. If her own retirement benefit at 70 is larger than half of your full retirement benefit (her full spousal benefit), her Social Security check will rise starting at 70 to reflect her benefit, not the one she gets as your spouse.

This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.

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