A Few Points about Delaying Social Security, and about Spousal and Ex-Spouse Benefits

This started out as “A Few QUICK Points…” but unfortunately, Social Security is just too complex for almost anything to be “quick” about it.

[For the sake of simplicity, we will assume for the rest of this article that “full retirement age” is 66 — which is actually the case for folks born between 1943 and 1954.  For folks younger than that, “full retirement age” gradually increases to 67 for folks born in 1960 or later.  Some additional computations vary by birth year as well.]

It’s well known that folks (who qualify – by having worked and/or been married to someone working long enough under covered employment) may start collecting Social Security benefits early – at age 62, although if collecting early (before reaching “full retirement age” or FRA) those benefits are severely reduced.  And that if they delay until “full retirement age” they will collect their “full” benefit.  Moreover, if folks delay beyond FRA, up to age 70, while they forgo those payments for the time they delay, when they do start collecting, their monthly benefit will be substantially higher.

Single Person Benefits

The basic rule of thumb is that those early-retirement reductions and delayed-retirement benefits all “break even” around one’s early 80s.  That is to say, if you die after, say, 84, the increased monthly benefits over your long lifetime outweigh the fact that you didn’t collect any benefits for several years at the beginning.

For example: if you were born in 1950, your full retirement age is 66.  If your “full benefit” is going to be, say, $1000/mo at age 66, you may choose to delay until you are 70, at which point, you’ll start collecting $1320/mo instead of $1000/mo.  So by delaying for 4 years, you are giving up 4 years worth of benefits at $1000/mo == $48,000.  In exchange, you collect an extra $320/mo for the rest of your life.  You “break even” after 150 months (150 x $320 = $48,000) – you break even when you reach 82.5.  You “win” if you live beyond that.  (Note that we are ignoring inflation and a few other factors here).

Naturally, this is a gross simplification.  For example, there’s “opportunity cost” – if you don’t have to spend $48,000 of your own money to make up for the $48,000 you are missing out on, you could have invested that $48,000 and hopefully had a return greater than inflation.  But of course, that would have come with some risk.

If, instead, you consider the closest alternative – a guaranteed payout for the rest of your life – meaning, an *annuity* – there’s nothing in the private market which compares.  Suppose you took the $1000/mo at age 66 and, since you already had enough savings to live on at that point, you took the accumulated $48,000 and used it, when you turned 70, to buy an immediate fixed annuity.  Right now, a 70 year old man can get a single-life fixed annuity for $48,000 which pays about $300/mo for the rest of his life.  And unlike the $320 extra that Social Security would have paid, this $300 (a) is not guaranteed by the federal government; (b) does not get adjusted for inflation; and (c) is *single-life* — meaning that if you have a spouse who survives you, your spouse gets *nothing* after you die.

So delaying Social Security may be considered the equivalent of purchasing a fantastic  inflation-adjusted annuity, one better than is available in the private markets.

But what if you don’t want that annuity?  For example, suppose you did delay, but later found out that your life expectancy is much lower than you’d thought, perhaps because of illness.  Or if even if you just had a need for a lump sum of cash rather than a lifetime of higher payments?  You could simply take your benefits when you reach full retirement age — but again, if you don’t need the money when you are 66 and choose, smartly, to delay – can you change your mind?

In fact, you can.  You may “file and suspend” at full retirement age – the “suspend” part means you are not collecting your benefits and your future benefits will increase via that delay.  And then, if at some time before you are 70, you change your mind and want that early cash rather than the “annuity” of higher future payments, you may “undo” that earlier suspension by filing a “Restatement of Voluntary Suspension” <https://secure.ssa.gov/poms.nsf/lnx/0202409130> — with an “effective month” as far back as the day of the original file-and-suspend action. This allows you to back-date your starting date, lock in the monthly benefits you’d have gotten had you started at that earlier date — and get all the cash for all those payments you had missed.  It’s like a “do-over” (or, for golf people, a “mulligan”).  (Note that this is not the same thing as “asking for retroactive benefits” — apparently, this distinction is sometimes missed by the good folks over at Social Security.  The retroactive benefits deal only can go as far back as 6 months, while the “restatement of voluntary suspension” can go all the way back from age 70 to one’s full retirement age.)  But to lock in the ability to do this “undo” – you do need to file-and-suspend when you reach FRA.

Now, there is a potential interaction between file-and-suspend and enrollment in Medicare Part A, and that can interfere with one’s ability to make additional HSA contributions.  If this may be an issue – if you have any questions at all – do make sure to consult a professional.  The interactions between these various programs themselves — and their interaction with taxes and other benefits – can be enormously complex.

Anyway, most of the above is simply about a single, unmarried individual — for whom, as you can see, it’s often a very good idea to delay benefits.

Spousal Benefits

(A) Survivor Benefits:

A very powerful thing to remember is that a spouse *also* may get benefits tied to your delayed original benefits.  When a married couple are both collecting Social Security benefits (regardless of whether they are each taking the benefit based on their own records – or one of them is taking the “spousal” benefit based on his or her spouse’s record) — and one of them dies – the survivor collects a total benefit equal to the *greater* of the two spouse’s respective benefits.  For example, suppose the husband is collecting $2000/mo (based on his own earnings history) and the wife is collecting $1500/mo (based on her own lifetime earnings — had she been collecting the spousal benefit, it would have only been $1000/mo).  Now the husband dies.  The surviving wife continues to collect her own $1500/mo, but she also now collects a spousal benefit of $500/mo — enough to bring her total up to what the husband’s benefit had been.  And that combined benefit continues for the rest of *her* life.

As you can see – this means that whichever spouse has the higher benefit should very likely be delaying until 70.  This maximizes that higher benefit which then gets paid out for the total *joint* life expectancy of the couple.  Whichever spouse dies last collects that higher total for as long as he or she lives.  And the odds of at least *one* out of a couple living into his or her 90s is very much higher than the odds that one person will live that long.  So it’s all the more likely that one of the couple will live well past that “break even” date — even if, unlike the case of the unmarried person, the person who delays benefits dies well before the break-even date.

[As an aside, via the Social Security administration’s own tables, the single individual life expectancy at age 65 for a man is just over 84, and for a woman is almost 87.  The *joint* life expectancy – meaning if there is a couple both of whom are 65, the average age of the second-to-die – is about 90]

So, as powerful as delaying benefits are for a single person, the potential extra lifetime income from delaying is very much greater for the married couple!

(b) Delay and Switch:

And it gets better than that: given a couple, either one or both may take his or her benefit based on his or her own lifetime earnings.  And /one/ of them (but not both) may choose instead to take /spousal/ benefits based on the other spouse’s lifetime earnings (equal to 1/2 of the spouse’s benefit).  So if a couple only has one earner, their combined benefit is still 50% greater than the corresponding benefit of a single person.  Talk about a marriage benefit!

Moreover, even if both spouses have substantial lifetime earnings of their own, it may still make sense for one of the spouses to take a spousal benefit — while delaying his or her benefit based on his or her own earnings — and then *switch* to the now much higher delated benefit.  (Or even vice-versa — take the own-earnings benefit first and then switch to the spousal benefit).  It’s almost like free money.  But you have to be careful because if you start your benefits before your full retirement age you automatically get whichever is higher – your own or your spousal benefit, and that may not be the optimal choice – and if you start earlier than FRA, you don’t get to switch.  If you start at or above your FRA, you may choose whichever of the two benefits you like — and may switch to the other one later, and you may well want to start with the *lower* benefit while the higher one continues to accrue valuable credits for delaying.

There are nearly infinite possible scenarios to play with here, and choosing the optimal strategy and timing is non-trivial.  We use sophisticated software to model this, and even then, we need to make a variety of assumptions to choose a strategy – assumptions such as return on investment, inflation, and most importantly – life expectancy.

Ex-Spousal Benefits

Finally, one more twist.  If you are divorced and your marriage lasted 10 years or longer (sorry – if you were married 9 yrs 11 months, nothing!), and you have not re-married — you may be eligible for benefits based on your ex-spouse’s earning history!

If you remarry, you generally cannot collect benefits on your former spouse’s record unless your later marriage ends (whether by death, divorce or annulment).

If your ex-spouse has not applied for retirement benefits, but can qualify for them, you can receive benefits on his or her record if you have been divorced for at least two years.

And the real trick is that you may not know what the benefit is to which you are entitled based on the ex-spouse’s earning history — until you apply for that benefit (or, if you are still speaking to the ex-spouse, you can simply ask him or her what his or her benefit is — but whether you are on good terms or not, the benefit is there and has no impact on the ex-spouse’s own benefits!). Remember – you’ll need a whole pile of documents to claim these benefits – copies of both the marriage certificate *and* the divorce paperwork, for example.  But it may be very well worth it, so if you’re divorced, get an early start and make sure you have all that paperwork someplace safe.

It is possible to find out what those benefits will be — go to <https://secure.ssa.gov/poms.nsf/lnx/0203316110> for more information.  That’s the SSA’s page regarding “GN 03316.110 Disclosure Without Consent to Auxiliary Claimants/Beneficiaries about a Primary Claimant/Beneficiary or Number Holder (NH)”.

Otherwise, the rules are similar – if you start your benefits before your full retirement age you automatically get whichever is higher – your own or your ex-spousal benefit.  If you start at or above your FRA, you may choose whichever of the two benefits you like — and may switch to the other one later.

Here’s the Social Security Admin’s very helpful page for ex-spouses:  <http://www.ssa.gov/retire2/divspouse.htm>

The Bottom Line

The bottom line is that planning to optimize Social Security benefits can be complex.  We didn’t even talk about how it interacts with pensions like CalSTRs, for example.  And that marriage (and, potentially divorce) add further to the complexity.  And while there’s no simple rule that works and applies to everyone, one simple thing to remember is that it may pay to delay, and it’s often a mistake to take benefits early.  If you are over 62, do NOT simply go down to the Social Security office and file for benefits without truly understanding the implications.  Moreover, do not expect that the well-intentioned folks over at the Social Security office are going to suggest the optimal solution for you, either.  (In our experience, they almost always try to get people to take benefits early!).

Run your benefits through one of the excellent social security planning software systems.  There are several on the market, both free and paid, and several more available only to advisors.

And if you haven’t started collecting — even if you are many years away from it – go to <http://SocialSecurity.gov> and establish your online access and get your most up-to-date Social Security statement.  Take a look at those benefits you’re accruing.  They are very likely to be a substantial part of your retirement plan.  And this applies even to the young folks who may not believe it’ll be there for them.  Make sure you’re getting credited for all the work you’ve done and all those taxes you’ve paid!

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