Your Social Security benefits depend on the specifics

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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. Find a complete list of his columns here. 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. Let us know your Social Security questions. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.

Dear avid readers of my Social Security column,

I’ve been answering your questions each week for almost two years, but have only provided general answers and advice/suggestions. I thought I’d spend the next few weeks using Social Security software that’s available in the market to provide some concrete, yet hypothetical examples of how to optimize your benefits.

This week’s concrete, made-up example involves a widow named Sally who is 60 and started working at 22, earning $20,000 a year. She stopped working last year, at which point her salary was $61,814. (I’m assuming it grew smoothly at 5 percent each year.) Her husband, Ben, died last year at age 67. He started working at 20, earning $5,000. His earnings grew smoothly (at 4 percent) and when he retired last year, he was making $24,965. Let’s assume her husband hadn’t collected his Social Security retirement benefit before he passed away.

Sally figures she should take her retirement benefit first, to make sure she gets it before she dies. And once she reaches full retirement age, she’s going to switch to her survivor benefit. Is Sally maximizing her lifetime benefits?

No. In fact, this strategy will cost her over $200,000 in present value lifetime benefits. The optimal strategy, in this case, is for Sally to collect her survivor benefit immediately and wait till 70 to collect her own retirement benefit. This produces $621,170 in lifetime benefits, compared with $417,162 based on her plan.

What’s Sally’s mistake? She’s placing far too little weight on living to 100, which is her maximum age of life. Yes, the probability of making it that long is very low. But so is the probability of Sally’s house burning down. Yet she still buys homeowners insurance. Social Security provides longevity insurance. When Sally thinks about homeowners insurance, she values it in the worst-case scenario — her house burns down. Here, Sally needs to value her Social Security benefits in the worse-case scenario — she lives to 100. (There will, BTW, be over 600,000 centenarians in the U.S. in 40 years. Just saying!)

Now let’s flip the earnings of Sally and Ben. We’ll have Sally begin work at 25, earning $5,000 and experiencing 4 percent wage growth. And we’ll have Ben start work at 22, earning $10,000 and experiencing 5 percent wage growth. Now Sally’s strategy makes sense. She should take her retirement benefit first — at 62 — and her widow’s benefit at 66. This will produce present value lifetime benefits of $617,209. If she instead takes her survivor benefit at 60 and waits until 70 to collect her retirement benefit, she’ll have $525,391 in lifetime benefits, for a loss of $91,818!

My bottom line? There is no general rule in trying to maximize your Social Security benefits. The precise amounts of what you and your current, ex-, or deceased spouse(s) earned and when you and they earned it makes all the difference in the world to what you should do.

Paul Blaser — Dubuque, Iowa: I’ve read a gazillion Social Security questions, but I don’t think I’ve seen this unusual one: My wife, two years older than me, filed for her SS at age 62 (with FRA of 66). Since I was ineligible for any SS at that time, when I finally file and suspend (for example) at age 66, will she then be able to claim a full spousal add-on, — rather than the excess spousal calculation — only reduced by the 25 percent penalty she incurred on her own benefit claimed at 62?

Larry Kotlikoff: No, she won’t be able to get a full spousal benefit. The minute she filed for her own retirement benefit, she plunged into what I call excess benefit hell. In excess benefit hell you can’t collect one benefit by itself while letting the other one grow. So, yes, she’ll only get an excess spousal benefit, which could well be zero. Sorry to impart this nasty news. This is one of the very many things Social Security doesn’t tell people when they apply for benefits.

Pat: I faithfully read your columns about Social Security, but have yet to find a scenario that exactly matches the one affecting my husband and me. I am 59 and he is 64. A year ago, I became disabled and began collecting SSDI. Can my husband collect a full spousal benefit based on my work record before he reaches full retirement age without being “deemed” to be applying for his own benefit?

Subsequently, when I reach 66.2 and my husband reaches 70, will I be able to halt the conversion of my SSDI to SSI and apply for a full spousal benefit?

Larry Kotlikoff: No, he has to wait till full retirement age and apply just for his spousal benefit. Deeming stops at full retirement age.

You can withdraw your retirement benefit prior to reaching full retirement age. When you do so, this prevents your disability benefit from automatically converting to your retirement benefit. You can then file just for a spousal benefit based on your husband’s work record. He, however, will no longer be able to collect a full spousal benefit based on your work record because you will no longer be viewed as having filed or having effectively filed for your own retirement benefit and doing so is a prerequisite for collect a spousal benefit.

Question: I claimed my worker’s benefit at 62, a few months ago. My husband will be 66 in June, and plans to file a restricted application for spousal benefits only. He will claim his own worker benefit at some later date, when he stops working. My question is, does he need to wait until after his 66th birthday to file the restricted application? Some sources indicate that is the case. Social Security’s own online application appears not to allow a restricted application at this time.

Larry Kotlikoff: He can file the restricted application a couple of months before reaching full retirement age from what I understand. So I suggest he go into the local office now and so file.

Tatty — Costa Rica: I left work at the age of 59 and a half. I will be 61 in September. I currently have $360,000 in a traditional IRA. I was married for 15 years; my ex is eight years younger than me.

Should I start taking my social security at age 62 or live off my IRA? If I take my social security at age 62, can I switch it to my ex’s when I am 70 and he is 62?

Larry Kotlikoff: Hi Tatty, My guess is you’d do better spending down your IRA now and then a) apply just for your spousal benefit when your ex reaches age 62, if you are still under 70 and b) when you reach 70, apply for your own retirement benefit. If your ex dies in the interim, my advice would instantly change, but this is, I believe, the best you can do financially. I don’t know the size of your IRA, but spending it now when your other taxable income is, presumably, small will likely lower your lifetime taxes compared to withdrawing your IRA at the same time as you take SS benefits, since the withdrawals may trigger taxation of your SS benefits. You can use my company’s free ESPlannerBASIC software to help see what’s best. It’s at