Saturday, April 12, 2008

Deferred Benefit strategies

Facts: Husband age 63, born 1945.
Wife age 61, born 1947. Husband will wait till full retirement age of 66 to collect S.S.
Husband and wife have stopped working, drawing on IRA money for now.
Husband and wife have worked since the 60’s, both qualify for S.S. benefits. Wife's S.S. earnings and S.S. taxes equal about 80% of husband’s.

In order to NOT leave any S.S. benefits on the table, so to speak, what would the best scenario be for wife to start receiving benefits, at what age? We are looking to maximize combined benefits as a couple.

If wife collects at age 62 at a reduced level, (husband would be 64 and has chosen to wait to 66) and then qualify for spouse benefits (one half of husband’s) when husband is 66, would this maximize our combined benefits? However, wife's OWN record benefits would probably be around 80% of husband's, thus greater than spouse benefits of one half. Husband and wife both assume to live at least to break-even age of around 80, thus it may make sense for both (if taken individually) to wait to age 66 to collect 100%, unless there is a scenario to start wife's benefits between 62 and 66?

Thank you for your help; I hope to hear from you.
Norm from Mass.

The only sure way to not “leave any ss benefits” on the table, as you put it, is to collect them before you die. If you do not need the income, then you can bank the benefits and earn interest. If you die before collecting, those benefits are gone for good.

When you consider the idea of not taking a reduced benefit to wait and get the unreduced benefit, a "deferred benefit strategy", you must calculate the costs, i.e. the loss of the benefits you defer to collect a higher amount later, and then figure out how long it will take at the higher rate to recover the loss up front.

Please note that your idea of your wife taking her own reduced benefits and then switching to a reduced wife’s benefit when you turn 66 won’t work, because the regulations don’t allow that. Because your wife’s benefit is 80% of yours, she will not qualify as a wife when you decide to become entitled, because her primary insurance amount is greater than 50% of yours. The only time a spouse can elect between her own benefit or her husband’s is if she is of full retirement age. Same holds true for husbands.

You can elect to take spouse’s benefits instead of your own only when you are at full retirement age (66 for you), not before.

However, if you are not planning to collect till age 66, you have an option that will reduce the break-even age for you. You could take a spouse’s benefit on your wife’s account then, defer entitlement on your account till age 70, drop the spouse benefits, then get your own benefit with the Delayed Retirement Credit, which would add another 32% to your benefit amount.

Of course you still run the always present risk of dying before you reach 70, and the further risk of dying before you recover back the deferred benefits. That's why I would never reccomend this type of strategy.

With that warning, let’s look at an example. If your benefit is $2,000 unreduced, and your wife’s unreduced is $1,600, you could collect $800/month at age 66. That would be $1,200/mo. less than if you took your own benefit. For the 48 months between 66-70, that’s $57,600. If you then take your own benefit at 70, the Delayed Retirement Credit would add $640 per month. Of course, these are just sample figures and don’t take into account any COLA’s that would occur, nor any interest you may have earned if you banked the money instead of deferring it. Anyway, just using these straight-line figures, it would take you till age 77.5 to make back the deferred benefits (57,600 divided by 640 = 90 months = 7.5 years after age 70).

In my opinion, life is so fleeting that any strategy of deferred benefits is risky. Although the risk is somewhat lessened in your case because you can elect the unreduced spouse benefit at 66, so you are not deferring the entire amount of your benefit. But still, $57,600 is a lot of money, and 7.5 years after age 70 is a long way off. And that's just to get the money back. You only get the advantage (at $640/mo.) for as long as you live (or your wife if she survives you via the widow's benefit which will be what you were receiving). Who can predict these things?

Remember the old saying: a bird in hand is worth two in the bush! And the famous Wimpy (of Popeye fame) plea: "I will gladly pay you Tuesday for a hamburger today!"

If you take the higher benefits now, you will pay later - much later - by reason of a benefit not being as high as it might otherwise be. If later doesn't come for you (or your widow), you never pay.

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