Social Security Benefits

[KevinMc]

A client is about to turn 62 with a serious health issue that may or may not be terminal.  Spouse is 5 years younger.  Client has plenty of assets to live off of.  What are the implications of him taking social security at 62 as opposed to waiting?  If he waits will his spouse receive the benefit he would have gotten (if he dies in the next year) when he turns 66 or 67 (or 70 for that matter).  Is there any advantage in this scenario to him starting the benefits at 62?

[CuseFan]

You should go to SS website and research because it has lots of great information. In general, it looks like a surviving spouse can get survivor benefits no earlier than age 60 (50 if disabled) and there is a reduction based on the recipient's (spouse) age. If your client commences at 62, I don't know if his spouse's benefit calculation would be based on his age 62 reduced benefit further reduced based on her age (which I think is punitive) or his full benefit reduced based on her commencement age (which makes more sense). If/when the spouse claims her own benefit, she gets the larger of the two, not both - so either the survivor benefit continues for her life or it goes away and is replaced by her primary benefit.

 

[CuseFan]

Looks like her benefit is a percentage of his basic amount (full benefit) based upon her commencement age, but like I said, delve into SS website as it has lots of great info.

When a husband dies does his wife get his Social Security?
These are examples of the benefits that survivors may receive: Surviving spouse, full retirement age or older — 100% of the deceased worker's benefit amount. Surviving spouse, age 60 — through full retirement age — 71½ to 99% of the deceased worker's basic amount.

 

[fmsinc]

If he is not working then he can start his SS benefits at any age from 62 up to age 70.  The younger he starts the less he receives since his life expectancy will be longer at age 62.  The older he starts the more he receives  since his life expectancy will be shorter at age 70.  Theoretically, the present value of his benefits are the same no matter what age he starts; but PV computations are speculative based on uncertain COLA rates, discount rates, actual life expectancy and other factors.  You can get hit my a bus tomorrow morning and PV computations will be of zero value.   

A personal story will illustrate the issue.  Based on the year of my birth I could begin to receive full unreduced benefits at age 65 and 10 months.  Or I could start at age 65.  At 65 the payments would be $1900/month.  At 65 and 10 months the payments would be $2017/month - and extra $117/month.  If I started at 65 and 10 months I would lose $19,000 in benefits.  The additional $117 a month from waiting until 65 and 10 months would take 162 months to recoup - 13.5 years.  So I started at 65. 

So in addition to looking at how much a spouse will receive, think about how much will be lost if you wait. 

Most people who address this issue spend their time calculation how much more you will receive at age 70 without mentioning how much you will lose by waiting to age 70.  Do the math.     

[Luke Bailey]

If his birthdate is October 1, 1961, say, then his social security full retirement age is 67. There is a 5/9ths of 1% reduction for each of the first (or last, depending on how you want to look at it) 36 months that you claim your benefit before full retirement age. And a 5/12ths of 1% reduction for up to 24 more months (67 being the oldest retirement age). So here, the individual would have a 30% reduction in his regular retirement benefit (36 * 5/9ths + 24 * 5/12ths).

For someone in good health, it may make sense to wait, even to age 70, where this individual would get a 24% enhancement over the age 67 benefit (8% for each year). But for someone who may have a reduced life expectancy or other compelling reasons to take early, you may be leaving cash on the table, e.g. here, assuming out of thin air a $30,000 annual benefit at full retirement age, you'd be forgoing receiving $105,000 between ages 62 and 67 (5 * .7*$30,000). But then if you lived a long life, beginning at age 67 you'd be missing out on $9,000 a year for the rest of your life ($30,000 - $21,000). So it's worth thinking about.

Note that if someone continues to work and earns substantial earnings between the age at which they claim (here, 62) and full retirement age (FRA), then they will have to pay back some of their benefits anyway, so it may not make sense to claim early in that situation. The calculations are explained on the social security website, and you can establish and account and do some what if modeling related to your benefit at certain ages and under certain pre-FRA earnings conditions. However, if you do have substantial earnings and SSA takes some of your benefit back, they add it back to your benefit later when you do reach FRA, as if you had waited to receive that amount. Once you reach FRA, you can earn as much as you want and your benefit is unaffected.

The spousal benefit is unaffected by any of this.

But precisely because the spousal benefit is unaffected, if the individual really believes he has a shortened life expectancy, and will not have substantial earnings (as computed by SSA, so again check the website) the general advice is to take as early as you can, because once you pass, your own benefit just stops, and therefore you may be leaving money on the table.

[CuseFan]

Great explanation Luke. I wasn't 100% sure about the spouse's survivor benefit amount being unaffected by when the retiree claimed, thanks for the clarification. As you both stated so well, then it's a matter of "doing the math" to see where the breakeven point is and then deciding what makes sense for the particular situation. Here, where the retiree may be terminal, it sounds like a no-brained to commence ASAP.

I like it when I continue learn things from this forum or confirm things that I thought but wasn't sure.

Thanks everyone!