Q&A: Don’t make this Social Security mistake when planning retirement

Dear Liz: I’m 64, single, and was diagnosed with Type 2 diabetes. I still work full time but due to my health, it’s getting harder to do. I have a 401(k) from this job. I’m just wondering how smart would it be, all things considered, to retire now and collect Social Security since the chances of my living another two to four years don’t seem high. What are your thoughts?

Answer: A large body of research shows most people are better off delaying Social Security. Your situation may be one of the exceptions, or it may not be.

A man age 65 in the U.S. can expect to live, on average, to 84, according to the Social Security Administration. A woman age 65 can expect to live, on average, to nearly 87. That’s beyond the typical “break even” point, where the benefits of larger Social Security checks for life outweigh the cost of missed checks from not claiming earlier.

But most people shouldn’t base their claiming strategy on break-even points alone. Dying too soon and not being able to get the maximum payout from Social Security is certainly a risk. But a much bigger risk is longevity. The longer you live, the higher the odds of running short of money and having to get by on Social Security alone.

Those risks are greater than many people think. A 65-year-old man has a 20% chance of living to age 90, while a 65-year-old woman has a 32% chance, according to the Society of Actuaries.

If the man and woman are married, there’s a 45% chance that one will live to age 90. That’s why it’s so important for the higher earner in a marriage to put off claiming as long as possible, since doing so will generate a bigger check for the survivor to live on. (Single people also are exhorted to delay claiming, since they will be living on just one check, rather than two.)

People with more education and higher incomes tend to live longer than average, while those in poor health obviously can have shorter life expectancies. A terminal diagnosis certainly changes the math. But you didn’t say why you expect to live only two to four more years. Various studies have estimated that Type 2 diabetes could shave five to 10 years off the typical life expectancy, which would still have you living well into your 70s. If you went through your savings as if you were going to live four years but wound up living 14, that last decade could be pretty uncomfortable.

None of this means you can’t retire now, but like everyone else, you should balance the desire to make the most of the time you have left with the risk that you may live longer than you think. A fee-only financial planner could help you think through the options and run various financial scenarios so you can see how your decisions could play out over time.

Q&A: The effects of working after taking Social Security

Dear Liz: I didn’t pay much into Social Security and started drawing it at age 62. As a result my check wasn’t very much. If I start working now, will it increase my monthly benefit over the years?

Answer: Yes, but the effect depends on a lot of factors.

Social Security determines your benefit using your 35 highest-earning years. If you go back to work and earn more than you made in one of those previous years, your benefits will be automatically adjusted.

If you haven’t reached your full retirement age, however, working can temporarily decrease your checks. Full retirement age is currently 66. If you’re younger than full retirement age, Social Security will deduct $1 from your benefits for each $2 you earn above $17,040 in 2018.

That money isn’t gone for good. It will be added back into your benefit once you reach full retirement age.

There’s another way to boost your checks once you reach full retirement age, and that’s to suspend your benefit. Suspending your checks allows your benefit to earn delayed retirement credits. That will increase your benefit by 8% each year between your full retirement age and age 70, when your benefit maxes out. If you can afford to forgo checks for a while, suspending your benefit probably will give you the biggest increase.

Q&A: Deciding when to claim Social Security benefits

Dear Liz: In a recent article you discussed delaying Social Security benefits and wrote that for married couples, only the higher earner needs to wait until age 70 to get the largest possible check. I don’t understand the logic behind that statement.

I have always been told to wait until 70 to collect; however, my husband is the higher wage earner. Wouldn’t I still benefit from waiting until 70? If he is a few years younger than me, does that make a difference? If I don’t have to wait until 70, I am all for collecting at 66.

Answer: As you know, each year you delay boosts the check you get by roughly 7% to 8%. That’s a guaranteed return you can’t match elsewhere and why many financial planners encourage clients to delay claiming if they can. The “break-even” point — where the benefits you pass up are exceeded by the larger checks — can vary depending on the assumptions you make about investment returns, inflation and taxes. Generally speaking, you’ll be better off delaying until at least 66 if you live into your late 70s. If you delay until age 70, when your benefit maxes out, you’ll pass the break-even point in your early 80s.

None of us has a crystal ball, of course, and planners make the argument that Social Security should be viewed as longevity insurance: The longer you live, the more likely you are to spend your other assets and depend on your Social Security for most or all of your income. Given that reality, it makes sense to maximize that check.

That’s true for all individuals claiming Social Security, but married couples have another complication. When one dies, the other will have to get by on a single check — the larger of the two checks the couple was receiving. That’s the check that should be maximized, so it’s more important that the higher earner delay than that both spouses delay.

If you want a more detailed discussion of the issue, read financial planner Michael Kitces’ blog post “Why it rarely pays for both spouses to delay Social Security benefits” at kitces.com.

Q&A: The end of “claim now, claim more later”

Dear Readers: Congress just killed the Social Security strategy known as “claim now, claim more later” that allowed married couples to boost their benefits by tens of thousands of dollars.
The changes, which were part of the budget deal signed into law last week, also eliminated the option of getting a lump-sum payout if you suspended an application for benefits and later changed your mind. Today’s column will focus on those changes.

Dear Liz: My husband is 68 and drawing Social Security. I will be 62 in the spring and plan to retire. May I file for spousal benefits at 62 and delay filing for my benefits until my full retirement age of 66?

Answer: No.

Even before Congress changed the rules, you would have had to wait until age 66 to file for a spousal benefit first if you wanted to switch to your own benefit later (typically when it maxes out at age 70).

When you apply for benefits before full retirement age, you are deemed to be applying for both spousal and your own benefits and essentially given the larger of the two. Only when you reached full retirement age did you have the option of filing a “restricted application” for spousal benefits only.

If you were just a few months older, you would still have that option.

Congress has eliminated restricted applications for people born after 1953.

People who are 62 and older before the end of this year will still be able to file a restricted application at 66 and get spousal benefits, but only if their partners are either receiving benefits or were able to “file and suspend” — to file an application and suspend it before May 1, 2016.

That’s when the law’s grace period ends, eliminating people’s ability to file-and-suspend in order to trigger benefits for a spouse or child.

The potential payouts from using these two techniques, which together were called the “claim now, claim more later” strategy, were so great that advisors typically recommended that people tap their retirement accounts early if that was the only way they could delay their Social Security applications long enough to benefit.

Now that these strategies are off the table, people will need to take another look at their retirement strategies to see what makes sense.

In general, couples should try to maximize the larger of the two benefits they get, since that will be the amount the survivor has to live on.

Dear Liz: I am 65 years old and my wife is 63. We have enough savings so neither of us needs to start taking Social Security.

My plan is to file and suspend when my part-time job ends, which could happen starting a year from now. I believe my wife can file for spousal benefits then. Assuming we don’t need the money but at the same time wish to maximize our benefits, what’s the best way to proceed?

Answer: You may be one of the few couples who can still take advantage of the “claim now, claim more later” strategy, or at least the restricted application part.

If you’ll turn 66 before May 1, you can file and then suspend your application. That will preserve your wife’s ability to claim a spousal benefit when she turns 66 while allowing your own benefit to grow until it maxes out at age 70. Then she can switch to her own benefit at 70, if it’s larger than her spousal benefit.

If you’ll turn 66 after May 1, consider putting off your application until your wife turns 66. Once you start receiving benefits, she’ll be able to file a restricted application for spousal benefits only and then switch to her own benefit at 70.

Another possibility is that you could be the spouse to file a restricted application, but your wife would need to start her benefits early, which could stunt the amount you get overall.

Consider using Social Security claiming strategy software to evaluate your options, but make sure it’s been updated to reflect the recent changes.

At this point, most calculators seem to be using the old rules, although MaximizeMySocialSecurity.com, one of the leading options, promises to be updated by Nov. 16.

Dear Liz: I’m single and was never married long enough to qualify for spousal benefits. This change doesn’t affect me, right?

Answer: Wrong. File-and-suspend also could function as a kind of insurance policy for people, whether they were married or single.

Those who wanted to maximize their benefits could file and suspend their applications at full retirement age. If they later changed their minds, they could get a lump-sum payout back to the date of those applications.

But not for long. That option won’t be available to people who haven’t filed and suspended before May 1.