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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. Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version.
I thought I’d provide this outrageous tale of William Cooper Caldwell Gigolo to illustrate another peculiarity of our Social Security system.
William Gigolo worked not a day in his life, but instead lived off the relatively high earnings of three lovely wives — Sarah, Sally and Suzie. William is now 62 and has been single for two years. He’s a handsome devil (looks like Paul, actually). He refers to the three “S” gals as “My S exes.”
William’s very happy to have lived off of each S ex and to have helped himself to half their assets when they divorced. In each case, William waited until their 10th anniversary, chose a romantic restaurant, and over dessert, announced he was filing, not for Social Security, but for divorce.
Why wait 10 years? Because William knew that he had to be married 10 years, and not a day less, to qualify for divorcée spousal benefits and, when an S ex died, divorcée survivor benefits, on his spouse du jour (well du decade).
Since your ex has to be at least 62 for you to collect spousal benefits, William was careful to marry at least one S ex older than himself. This wife is Sarah, who is 64 and was the lowest earner. The next highest earner was Sally, who is 60. Suzie is the baby at only 56, but she earned more than the other S exes.
To maximize his lifetime Social Security benefits, William files for a divorced spousal benefit at 62 and starts to collect half of Sarah’s full retirement benefit, but reduced by 30 percent because he takes it early. Then, after two years, when Sally is 62, William files for a divorcée spousal benefit based on Sally’s earnings record.
And why not? Since he’s now eligible to collect on two S exes, he can file for benefits on both. He won’t get two divorcée spousal benefts — just the larger of the two. But Sally’s full retirement benefit is larger than Sarah’s, so he flips to hers. And here’s the lovely thing from William’s perspective: he’ll be able to collect half of Sally’s full retirement benefit, but reduced by only 13.3 percent, not 30 percent! Why? Because the reduction of benefits based on one spouse’s earnings record doesn’t carry over to collecting on another’s.
William’s cash-out plan is working. But there’s a part three. In six years, when Suzie reaches 62 and William is 68, he flips onto Suzie’s earnings record and starts collecting a completely unreduced divorcée spousal benefit since he doesn’t start collecting this particular benefit (which exceeds the other two) before he reaches his full retirement age.
Is William done with his optimization? No. Let’s fast forward to William’s 70th birthday, which is also the day that Sally, who waited until full retirement age to start collecting her benefit, dies. Sally’s full retirement benefit, while lower than Suzie’s, exceeds half of Suzie’s. So now William files for and begins collecting an unreduced spousal benefit on Sally’s record equal to 100 percent of Sally’s full retirement benefit.
Fast forward again. William is now 76 and Suzie dies (of a broken heart) having also waited until full retirement age to collect her retirement benefit. What does William do? He files for an unreduced survivor benefit based on Suzie’s earnings record.
Fast forward one last time. William is now 88. He’s met a very lovely 94-year-old named Sandra, who earned more than any of the S exes and is on her last legs. William realizes that he can marry Sandra and, after nine months, qualify for survivor benefits on Sandra’s earnings record. Presto, he whisks Sandra off to Las Vegas for a quickie marriage and, nine months to the day of their nuptials, Sandra falls, breaks her hip, and heads north by north.
William leaves the funeral early in order to get to the local Social Security office before it closes and file for a full (unreduced) survivor benefit on Sandra’s account.
This appears to be William’s last Social Security play, but he’s still a handsome devil and is on Match.com checking out his options.
Post script: This is no way to run a railroad, let alone our nation’s Social Security system.
Laurence Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specializing in financial planning software, and the Director of the Fiscal Analysis Center. Kotlikoff's columns and blogs have appeared in The New York Times, The Wall Street Journal, The Financial Times, the Boston Globe, Bloomberg, Forbes, Vox, The Economist, Yahoo.com, Huffington Post and other major publications.
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