Sunday, February 24, 2008

Dual Entitlement-- Spouse Benefit & Retirement Benefit


Mr. Tomkiel,
I bought your book. Thanks for writing it. I'm nearing retirement and trying to figure out SS planning. Excepting your book, I cannot believe how little clear and accurate info there is about how SS works. Especially from SSA.
I have one question:
In Sec 302 you say: "The general rules are: 1) you must file on your own account if you have enough quarters ..; and 2) you must file on your spouses account as a wife or husband if your spouse is then entitled to benefits and. " This appears to say you must do both. My question is: is it really correct that you cannot file for spousal benefits without filing on you own work record at the same time?
My wife will file for her benefits at 66/FRA, I plan to wait until age 70. Can I file for and receive spousal benefits on her account starting at my FRA, while I wait until age 70 to file on mine to get the maximum monthly amount? Any downside to this?
I have seen on a couple of SS discussion boards that people are doing exactly that. Are they really? There must be a catch.
Bill from California

While the general rule is that a spouse filing for benefits is "deemed" to file on his or her own account as well, an exception exists where the claimant is over FRA (Full Retirement Age). As long as the benefits are not reduced for age, you may file on your spouse's account and defer entitlement on your own account by restricting the application. Thank you Bill for bringing this to my attention. I have included this exception in my Social Security Benefits Handbook, Online Edition in Section 302.

Your plan will work because you won't apply until you are at FRA. However, you may want to re-think this strategy. The only reason to defer benefits on your own account would be to get the Delayed Retirement Credits (DRC's) which would add 32% to your primary insurance amount if you waited to age 70 to file on your own account. But if your own benefit at FRA is greater than the husband's benefit, which is most likely, then you are paying for this advantage by losing the differntial for 48 months. You must calculate how long it will take to recover those benefits with the DRC credit.

Let's run an example. For the sake of discussion let's say your wife's PIA (primary insurance amount) is $1,500. You would collect an unreduced husband's benefit of $750 for 48 months ($36,000). Your own PIA is $2,000. So you forego your own benefit. You lose the difference: $1,250 a month ($60,000). This is a high price to pay. So what is the DRC advantage? 32% of your PIA, or $640 a month more beginning at age 70. So you paid $60,000 to get $640 a month. It will take 94 months to make it back, or 7 years, 10 months after age 70. So if you are pretty sure you will live past 78, your plan will show an advantage, not considering the interest you lose on the $60,000. And if you should die before reaching 70, you lose all the benefits that would have been paid on your own account.

An alternate plan might be to take your own benefit, but bank the difference if you have the discipline. If you die your estate will get what was received (if you deferred your own benefit your estate would lose out). If you live to 70, you could invest the $60,000 in an annuity that may pay more than $640 month to make up for the loss of the full DRC.

Each couple must consider the specifics of their situation. What are their respective PIA's, what is the state of health and life expectancy of each, how risk-averse or tolerant they are, how disciplined to save, how much would an annuity pay, and what their retirement needs are.

No comments: