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.
Editor’s Note: Larry Kotlikoff labors long and hard on his weekly Social Security columns, so we gave him Labor Day off. His column appears here on Tuesday instead.
For some households, it makes sense for a worker to start reduced retirement benefits early in order to permit other family members to immediately start collecting Social Security benefits on the worker’s earnings record. The worker can then suspend his or her retirement benefit at full retirement age and start it up again at 70 at a 32 percent higher value after inflation.
This is the Start-Stop-Start Strategy I discussed in a previous column. Let me share an example of this strategy, which is particularly interesting because it involves the family receiving seven different benefits. It’s a reminder of the need to understand all the benefits to which you may be entitled and the importance of correctly deciding exactly when to take each benefit.
Let’s call the spouses John and Jane. John is 62 and Jane is 44. They have a disabled 5-year-old child. John was earning $38,000 when he retired last year. Jane earned $44,000 last year. But she’s decided to quit work to spend time with John and their son.
John wants to wait until 66 — full retirement age — to collect his retirement benefit. Jane wants to collect her retirement benefit at 62. These are the wrong collection decisions in terms of maximizing the couple’s lifetime benefits. But let me tell you what their selected strategy entails, and then I’ll explain what they should do.
What Are They Doing?
Although they aren’t following the optimal plan, John and Jane’s Social Security benefit collection plan does deliver. In fact, it delivers $1,174,858 in lifetime benefits!
John and Jane are Social Security millionaires?
Yes, indeed. The $1,174,858 is the present value (using a 2 percent real discount rate) of the couple’s benefits right through their maximum ages of life, which are 85 for John and 100 for Jane.
Table 1, generated by my company’s software program — Maximize My Social Security — shows the couple’s annual benefits based on their planned benefit collection dates. All amounts are in today’s dollars.
Have a look at the row for the year 2018. That’s when John hits full retirement age and starts collecting his full retirement benefit of $20,504. That’s big money compared to the $38,000 he was making before he retired.
But total family benefits are even higher — $37,144. That’s because John and Jane’s son, Joe, can now collect a $8,320 child benefit based on John’s work record. And Jane can also collect $8,320 in annual spousal benefits as a spouse with a child in care of a retired worker. The combined child and spousal with child-in-care benefits are, however, subject to Social Security’s maximum family benefit provision. Otherwise Jane and their son, Joe, would each be receiving even larger checks.
When Jane reaches 62 she starts collecting her own retirement benefit, which is $15,804 on an annual basis. The amount at age 62 is smaller than at age 63 because it reflects only 11 months of retirement benefits. Why? Because Social Security requires you to be a full month above age 62 before you are entitled to collect an early retirement benefit.
Jane’s retirement benefit is smaller than John’s because she’s taking her benefit at age 62, not at full retirement age. But, still, $15,804 is a good-sized check and certainly larger than the $8,320 she was collecting as a spouse with child-in-care. On the other hand, it would be roughly 76 percent larger were she to wait until 70 to start collecting her retirement.
But there is a silver lining to Jane’s collecting on her own work record. Joe’s child benefit rises from $8,320 to $11,222 on an annual basis. Why? Because he now can collect a child benefit based on either John’s or Jane’s work records, depending on which of the two have the larger full retirement benefit, also known as the primary insurance amount or PIA.
Jane, despite having a shorter work span, has the higher PIA. Hence, Joe starts collecting on Jane’s work record and receives the full child benefit, namely half of Jane’s PIA (not half of the reduced PIA that Jane is receiving as a early retirement benefit). I say full child benefit because the maximum family benefit associated with Jane’s work record doesn’t come into play due to the fact that only one family member — Joe — is trying to collect on Jane’s work record.
When John reaches age 85, he dies thanks to his assumed age-85 maximum age of life. At this point, Jane receives not just her own reduced retirement benefit, but also her excess widows benefit of $4,700. And Joe stops collecting a $11,222 child benefit based on Jane’s work record. Instead, he collects a child survivor benefit of roughly $15,375 based on John’s work record. The child survivor benefit is 75 percent of the deceased parent’s PIA — and 75 percent of John’s PIA exceeds 50 percent of Jane’s PIA.
To recap, we have John, Jane and Joe receiving seven different benefits: John’s retirement benefit, Joe’s child benefit based on John’s work record, Jane’s child-in-care spousal benefit based on John’s work record, Jane’s retirement benefit, Joe’s child benefit based on Jane’s work record, Jane’s excess widows benefit, and Joe’s child survivor benefit.
That’s a lot of different benefits. So it might seem that John and Jane are doing the right thing. They aren’t. Instead, they are leaving $111,400 on the table.
With Seven Benefits, What Are They Missing?
I wouldn’t kid you. Not about Social Security. It’s too dry a subject to joke about. So where’s the extra $111,400 coming from?
First, it’s from having John start, stop and start his benefit again. Specifically, from the maximized solution, which the software program found by checking 45,327 collection date combinations. It entails John filing for his early retirement benefit immediately (at his current age of 62). This permits Jane and Joe to collect child-in-care spousal benefits and child benefits four years sooner than the couple’s own strategy allowed.
Once John reaches full retirement age, the optimal plan says he should suspend his retirement benefit and start it up again at 70. As table 2, which presents annual benefits based on the optimal strategy, shows, John gets zero benefits between 66 and 70. That’s a big hit. But once he reaches 70, he restarts his retirement benefit at a 32 percent higher level, again, all measured in today’s dollars.
Second, that extra money comes from having Jane take widows benefits at ages 68 and 69, after John dies. During this time, Joe collects a child survivor benefit. And then at 70, Jane collects her largest possible retirement benefit, while Joe continues to collect a child survivor benefit off John’s work record.
As you can see from comparing tables 1 and 2 for, say, the year 2050 when Jane is 80, her total annual benefit under the maximized solution is $27,829 — much larger than the $20,504 she collects under the couple’s own benefit collection strategy.
One More Benefit
The maximized solution also entails the collection of seven benefits: John’s early retirement benefit, John’s restarted age-70 retirement benefit, Jane’s child-in-care spousal benefit, Joe’s child benefit from John’s work record, Joe’s survivor benefit from John’s work record, Jane’s widows benefit, and Jane’s retirement benefit.
Actually, there is an eighth benefit. When Jane passes away at 100, Joe will collect a child survivor benefit based on Jane’s work record.
What’s the moral of this story? Getting Social Security benefit collection right can be diabolically complicated. No one can make 45,327 sets of annual Social Security benefit calculations on his or her own. And no one should be expected to do so. Our government has designed our basic saving system to randomly redistribute money between households depending on whether or not they get expert advice and on whether the “expert” advice is actually correct.