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When should you claim Social Security Benefits?
Here's a
surprising split answer for
married couples. More than half of Americans claim Social
Security retirement benefits at age 62,
the earliest allowed. This has long been a
source of consternation to financial and
policy pundits, who contend that, given
Americans' lengthening life expectancies,
they should work longer and wait longer--
until 66 or, better yet, 70--to start
collecting. The longer you wait, the bigger
your monthly Social Security check.
But now two sets of researchers have
suggested in separate papers a novel
strategy that should benefit many married
couples: One spouse (usually the wife)
claims at 62 to 66, while the other waits
until 69 or 70 to collect. This pays off
because of obscure Social Security rules
and some facts about life expectancy that
aren't obvious if you don't make your
living as an actuary.
For the boomers turning 62 next year
(and anyone born from 1943 through
1954) the Social Security "full retirement
age" is 66. If they claim benefits at 62,
they get just 75% of their full retirement
age benefits. For each year they wait
past 66, they get 8% more (plus an
inflation adjustment), for a maximum
benefit at 70 equal to 132% of the full
retirement age payout.
These adjustments are supposed to be
actuarially neutral--meaning if you live to
the average age, you get about the same
whether you start collecting smaller
checks early or bigger checks later. But
they're not. One reason is that married
couples get a special deal: When one
dies, the survivor can take the dead
spouse's benefits (if they're higher) and drop his or her own.
"Whoever the higher earner is should plan to delay taking Social
Security, because the higher benefit will always live on," says James
Mahaney, vice president of Prudential Retirement and coauthor of one
of the papers. "The key message is keep your husband in the workforce
as long as you can,'' quips Alicia H. Munnell, director of the Center for
Retirement Research at Boston College and coauthor of the other
paper. (She notes that a wife might continue to work, too, while
collecting Social Security. Although early retirees can lose a portion of
their benefits if they earn too much, once you reach 66 you don't incur
any penalty for working.)
Part of why the 62/70 solution works is something known as joint
mortality. Consider a husband and wife, both born on Jan. 1, 1950.
When they become eligible for Social Security at 62, the wife will have a
projected life expectancy of 84 years and 8 months. That roughly
means there's a 50% chance she'll live that long (roughly, because the
median life span is not necessarily the average life span). The husband's life expectancy will be 81 years and 10 months. But there's a
50% chance one spouse will die before 78 and a 50% chance the
second will hold on until almost 89, the Government Accountability
Office calculates. So, in effect, a woman who takes Social Security at
62 isn't necessarily accepting a smaller payout until 84, but only (on
average) until her husband (or she) kicks off shy of 78. And that bigger
check that the husband waited until 70 to get? Half the time it will keep
coming to one of them for 19 years or more.
The table shows the total Social Security payout a high-earning
husband and his wife would get in net present dollars, assuming
average life expectancies. In all cases, it pays for the husband to wait
and the wife to collect earlier. The numbers shown actually understate
the advantages of the split-age strategy for many couples, since the
husband and wife in this table are both now 62. If the wife is younger,
as is common, the benefits of this split strategy are even bigger.
Note that a wife who hasn't worked outside the home can collect
"spousal" benefits, but not until her husband either draws his own Social
Security check or reaches full retirement age. Spousal benefits are
reduced if taken at 62. But unlike worker benefits, they don't grow if
they're delayed beyond 66. That used to be a disincentive for a husband
in a one-earner family to delay claiming Social Security. But in 2000
Congress added a provision allowing a worker to file for Social Security
at 66, so his spouse could collect, and then "suspend" his own benefits,
thereby earning a bigger delayed retirement check for himself and, very
likely, his widow.
What if a couple of high earners decides to go with the 62/70 approach
and then he keels over from a heart attack at 64? Incredibly, the wife
can undo her early retirement by paying back, without interest, the
Social Security benefits she has received and then wait until 70 to claim
bigger retirement checks for herself.
The split-age strategy works even if both husband and wife have earned
the Social Security tax base maximum ($97,500 for 2007 and $102,000
for 2008) their whole careers. Still, this strategy isn't for everybody. If
both spouses have Methuselah genes, it probably pays for both to wait
until 69 or 70 to collect. If they're in poor health, they may both want to
collect at 62.
Source - Forbes.com by Janet Novack
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