Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out maximizemysocialsecurity.com/ask-larry.
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.
In my last two columns (which you can read here and here), I provided some numerical examples of the dollar value of maximizing your Social Security benefits using a extremely accurate commercially available Social Security tool. This week, I want to provide four more numerical examples — two pertaining to single people and two pertaining to married people.
The big takeaway message from all the examples is that what’s best for any given household is critically dependent on its particular circumstances. The circumstances here include all the things I’ve raised in prior columns — birth dates, past and future earnings records, non-covered pensions, presence of qualified children and disability status. And, as you know, if you’re widowed or divorced, the data about your former spouses can also matter. The other key issue is what collection decisions you, your spouse, your ex-spouse, your deceased spouse, and even your deceased ex-spouse made so far with respect to Social Security.
To highlight how the dollar-return to maxing out your Social Security depends on the particulars, I’m going to consider several fictitious households so I can hone in on exactly what I want to illustrate. Let’s start with Joe the Plumber.
Joe the Plumber: Never married and never happier
Joe is one of the happiest people I don’t know. (How can I? He’s imaginary.) From age 16, when he dropped out of high school, Joe’s been able to do what he loves – plumbing. You show Joe a drippy faucet and his day is made.
Joe’s now 62. He started as an apprentice back in 1968 earning $7,500 a year. Last year, when he called it quits (back problems), he was hauling in close to $70,000 thanks to lots of rich clients with radiant-heating leaks.
Joe never married. It’s just Joe and Francy – his lovely Tibetan Terrier. Joe’s been asking Francy when to take Social Security and she just smiles that Tibetan-Terrier-monk-smile that says, “Don’t ask me, I’m not a material girl.”
But after repeated pleading from Joe, she headed to her laptop, spent a few minutes, and said, “Listen, if you take your benefits immediately, we’re talking $472,626 in lifetime benefits. But if you wait till 70, it’s $605,474. That’s a big difference. Wait until 70.”
“How long,” Joe asks, “are you assuming I’m going to live?”
“Age 100 is your assumed maximum age of life.”
“I’m going to make it to 100?”
“If it could be, it would be. Ask Dr. Seuss. Those are his words. And since you might live to 100, you need to plan to live that long for the simple reason that you might.”
“But what if I only make it to 80?”
“You’re missing the point. You could die tomorrow. But right now, you’re alive and kicking, and we’re trying to figure out what your benefits are worth in all situations in which you may collect them – and then add all those values up. The sum is your total lifetime benefits.”
“Ok, but what if my maximum age of life is 80? What do I do then?”
“Give me a half second. Ok, in that case, you should take your benefits at 64, not 70. And your maximum lifetime benefits are no longer $605,474, but $278,029. That’s far lower because you’re saying for sure you won’t live beyond age 80. So we really need to think hard about your maximum age of life.
“My mother lived to 88, but my dad died at 52 – hot water heater explosion.”
“Times have changed. People are living forever. I think we should go with 100. By the middle of this century, we’re going to have over 600,000 centenarians – enough to fill up Boston. You could be one of them.”
“Alright, alright. Age 70 it is. You’re pretty smart for a dog.”
Sally Smarty Pants
Sally Smarty Pants was very smart, except when it came to Social Security. She got divorced one day shy of 10 years after making a New Year’s resolution not to spend a whole decade married to John-Know-It-All. Now she’s 63 and kicking herself not just for marrying that know-it-all, who turned out to know enough to make a lot of money. She also took her retirement benefits 366 days ago and wished she hadn’t. It’s now one day too late for her to repay every dollar she received and start up her benefit from scratch in the future at a much higher level.
What’s Sally to do? She was a modest earner, having worked all her life at the neighborhood bookstore. But that closed down six years ago, costing her $40,000 per year in salary. Now Sally’s living off of her $1,500 monthly retirement benefit check, whose lifetime value is $489,956. But Sally also has some retirement account assets thanks to her messy divorce. She’s got enough to forego receiving Social Security until 70, but she’s given up that option by taking benefits early.
Not entirely! There is another strategy Sally can follow, namely to suspend her retirement benefit at full retirement age and start it up again at 70. Her annual benefit will be $23,760, and her lifetime benefits, as of today, will be $542,608. So optimizing has increased Sally Smarty Pants’ lifetime benefits by 11 percent. That’s not going to pay for a life in the fast lane, but it’s extra money that Sally can use, and it’s hers for free, with no risk, just by becoming a Social Security smarty!
Beatrice and Max avoid deeming
Beatrice just turned 70 and started taking her retirement benefit. Max, her husband, is 65 and just retired. They both earned the taxable maximum throughout their careers, so they were solidly upper middle class. Max has heard he can collect spousal benefit starting right away and then go for his own retirement benefit at 70.
Max has heard right, but he’s also heard wrong. This is what makes Social Security so bedeviling. You can be told you can get something, and you can get that something, but that something can turn out to be nothing.
In Max’s case, if he applies at 65 for his spousal benefit, which he can do because Beatrice has filed for her own retirement benefit, he’ll be deemed to be filing for his own retirement benefit. As a result he’ll just the larger of the two benefits. More precisely, he’ll get his retirement benefit, reduced because he’s taking it before full retirement age, plus his excess spousal benefit, which, in his case, is zero.
So Max can get his spousal benefit, but he not fully. Were Max to wait a year, until he reached full retirement age, and then file just for his spousal benefit, he could get his spousal benefit, and at 70, he would then go for his own retirement benefit.
What’s the dollar value to Beatrice and Max in lifetime Social Security benefits from avoiding deeming? It’s $410,9361!
That’s huge. It reflects three things. First, the couple is older and closer to collecting, so the present value (the value in the present) of their future benefits is larger. Second, if Max files for his spousal benefit and is deemed, his spousal benefit will be zero and his retirement benefit will be $29,599. But if he maximizes, his spousal benefit starting at 66 (his full retirement age) will be $15,611 for four years running and then at 70 he’ll flip onto a $41,862 retirement benefit.
John and Jimmy: A sad story of a gay couple
John, 62, and Jimmy, 68, got married a year ago in Massachusetts. Neither has taken Social Security. Jimmy’s just been diagnosed with a terminal disease and has been told by his doctors that he won’t make it beyond three years. John’s full retirement benefit is $20,000 per year. Jimmy’s is $30,000.
Jimmy’s been told by the lady he spoke with at Social Security to take his retirement benefit immediately. “Get what’s yours before you lose it” was her advice. It was the wrong advice. If Jimmy does what she says, the couple’s lifetime benefits will be $59,089 smaller that under the optimal plan.
John and Jimmy’s optimal plan entails Jimmy waiting until 70, if he lives to 70, to take his retirement benefit. But it also involves Jimmy’s taking his spousal benefit, and just his spousal benefit, immediately. To do so, John has to file immediately for his retirement benefit, which will be reduced since he’s taking it at 62. Hence, that’s part of the optimal plan. And then, when John reaches full retirement age, he takes his widower benefit since Jimmy will have passed away by then.
By the way, this case required comparing 182,649 alternative collection options, which should serve as a word of caution. If your case is pretty complicated, like John’s and Jimmy’s, make sure your own strategy matches up with what highly accurate software recommends.
It’s a terribly sad case that arises all too often. There are so many courageous spouses who call Larry having recently received a terminal diagnosis. They call to check if they should hold off taking benefits in order to raise the survivor benefits of their spouse. In most cases the answer is yes. By waiting to collect until age 70, the survivor benefit goes up by 8 percent for each year of waiting beyond full retirement age. That’s what Jimmy decides to do in this case — wait to collect in order to leave John a significantly higher benefit for up to 40 years up until age 100, which we’re assuming is his maximum age of life.