For the past several months, I have been discussing the looming legislation I call the Death of the Stretch IRA. This series of posts turns slightly away from that, discussing the likelihood of a reduction and then increase in federal income tax rates which not only affects inherited IRAs but also your Roth IRA and Social Security planning. For those of you who are currently retired or will be shortly, the elections you make concerning your Social Security benefits, as well as the execution of optimally timed Roth IRA conversions can make the difference between your being financially secure or going broke. This post discusses how your health could affect your Social Security elections.
Social Security at 66 vs 70 – which is better?
In most cases, I tell my clients that it is better if the spouse who has the strongest earnings record holds off applying for Social Security until age 70 in order to get the maximum amount of delayed retirement credits. This is key to your tax and retirement planning as it can increase your benefit by up to 8 percent each year, plus cost of living adjustments! I go into more details in my book, which you can get a free copy of by clicking here. But if you’ve read my book already, then you know the specific reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible.
Reasons to Wait until Age 70 to Apply for Social Security
Read that last sentence one more time. Did you notice that I did NOT say that the reason for waiting until age 70 is so that the primary earner will receive more money? I said the reason for waiting until age 70 to apply is so that the primary earner’s benefit amount is increased to the maximum possible. It’s an important distinction, and I want to tell you what I mean by that.
Recently I met with a couple who were not yet retired. The husband, who was older and the higher earner of the family, had recently been diagnosed with a terminal illness and given a life expectancy of no more than five years. The wife was 55 – ten years younger than her husband. Both of them thought that the husband should apply for Social Security immediately, so that he could at least get some money during the years he still had left.
I asked him, “But what about her?” He looked at me and said, “She’ll get my full benefit after I die, won’t she?”
What happens to Social Security after your spouse dies
Let’s do a quick review of what happens to your income from Social Security after one spouse dies. Suppose the husband is entitled to a monthly benefit of $2,000 at age 66. His wife is entitled to a spousal benefit of 50 percent but, in this case I’m going to say that she has worked all of her life and her benefit based on her own record is higher – $1,200. Their monthly household income from Social Security, therefore, is $3,200.
So what happens when your spouse dies? How much does the survivor get? The answer is the higher of the two benefits. In the above example above, the wife’s benefit would increase to $2000 after her husband’s death. Sound good? It isn’t! The problem is that the monthly household income from Social Security will go down – from $3,200 to $2,000! Think of how critical that is! That’s the reason that, in most cases, the higher earner should wait until age 70 before applying for Social Security.
In the case of the clients I was talking about earlier, it was especially important that the husband wait to apply for benefits. She was ten years younger than he was – 55 years old – and the picture of health. That meant her life expectancy of age 84, or almost 30 years. Her husband may never see a dime of his Social Security money – if he does, he’ll get a higher benefit for the time he does have left. But if his wife survives him, which she probably will, she’ll have more than just an inherited IRA and his savings accounts, she’ll have his higher benefit for the rest of her life too. Remember that, as we discussed before, the timing of your application to Social Security can drastically benefit your retirement planning. especially after the Death of the Stretch IRA. There is a critical lesson to be learned from this example. Poor health is not a good reason for the primary earner to apply for Social Security early, unless the spouse is also in poor health. If both spouses are in poor health and are not likely to enjoy a long retirement, then it could make sense to apply early. The goal is to make it possible for both of you to enjoy as much income as possible, while you are both alive!
Stop back soon for more Social Security talk!
For more information on this topic, please visit our Death of the Stretch IRA resource.
P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.