When it comes to planning your retirement, the decisions that you make regarding your Social Security application may be the most important numbers game you will ever play. I believe that it is usually a mistake when single people apply for Social Security early, but it is even worse for married couples who do so – especially in cases where the husband was the primary wage earner. The rationale that I often hear from people who want to apply for Social Security at age 62 usually is: “I’ve paid into the system for decades, and I might as well get something out of it before it goes bankrupt.” It might feel like the best option, but down the road, you may find that it was the worst decision.
The financial repercussions of applying for Social Security at age 62 are significant. If you were born prior to 1954, the penalty for applying at 62 is a whopping 30%. If the benefit amount you would be entitled to receive at your Full Retirement Age (FRA) of 66 is $2,000, when you apply at age 62, you only get $1,400. If you wait even longer than your FRA – until you are age 70 – you get an 8% increase for every year you wait – bringing your monthly check up to $2,640. The difference in your monthly check amount almost doubles your income from Social Security, every month for the rest of your life.
If you apply at 62 and die before age 82, you will have missed out on the benefits you could have collected while you were waiting, and you won’t ever get that money back. But if you live long enough, the increases in your monthly benefit will more than make-up for the fact that you waited.
The “break-even” point shows if you live until age 82, you’ll have received the same amount of income from your benefits that you would have if you had applied at age 62. So, if you apply at 62 and then die before age 82, you win, right? It’s not a win because then you will be dead and dead people don’t have financial problems. The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had, but rather that you will outlive your money. Think about waiting to collect Social Security as a form of longevity insurance—for you, but also for your surviving spouse if you are the higher earner.
For married couples, the question about when to apply for Social Security is more important. The Social Security benefit that you receive will be the higher of the benefit to which you’re entitled based on your own earnings record, or the benefit to which you’re entitled based on your spouse’s earnings record. The maximum spousal benefit you can receive while your spouse is living is 50% of his benefit at FRA. If you are receiving a spousal benefit and your spouse dies before you, your smaller spousal benefit will stop, and you’ll begin to receive an amount that is equal to your spouse’s full benefit. That’s why it’s so important that the higher earner waits for as long as possible to apply for Social Security benefits.
Men historically have been the higher earners in most of the households that are weighing their Social Security options now. The life expectancy of females is about five years longer than males of the same age. If you married a man who is older than you, then that number will go up. The higher-earning spouse who waits to apply for Social Security until age 70, guarantees himself a higher benefit and guarantees his surviving spouse a higher benefit for the rest of her life too.
If you wait to apply for Social Security benefits, you also create a perfect window of opportunity to make a series of Roth IRA conversions at a lower tax rate. Let’s assume you are working now but plan to retire when you reach age 66. If you wait until 70 to apply for Social Security, you will have four years when you don’t have taxable income from wages, Social Security or Required Minimum Distributions from your IRAs. Making a series of Roth IRA conversions between the time that you retire and age 70 could make an enormous difference in your retirement plan.
Retirement is complicated. It’s vital to consider the implications of your lifestyle not only while you are both alive, but also after the first spouse dies. This is especially true if you don’t have a lot of savings and will be relying on Social Security to provide a large portion of your income. It may be tempting to just take the money and run at age 62. The higher earner, making that impetuous decision, could easily sentence his wife to a lower standard of living for the rest of her life.
There will always be attenuating circumstances that make everyone’s choice unique. Plan your Social Security decisions so that they make sense for both you and your spouse!
Reprinted with permission by www.forbes.com, an online magazine where Jim is a regular contributor.
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