Ask Liz Weston

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Social Security claiming strategies

Q&A: Should I draw down my 401(k) before accepting Social Security?

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Dear Liz: I am a 66-year-old single male working part-time (not by choice, but it’s the best I can get). I earn about $24,000 per year plus another $4,000 in unemployment during the summer. Work provides healthcare, so I don’t have Medicare premiums yet. With fixed expenses at roughly $50,000 per year, I am withdrawing from my 401(k) to cover the gap until I reach full retirement at the age of 70. If they will let me, I hope to continue to work until 75 because I love my job. At this rate, I will have exhausted the 401(k) by age 70, leaving me with a $100,000 CD earning 4%. Am I right to use the 401(k) as a bridge to full Social Security?

Answer: The advantages of delaying Social Security are typically so great that financial planners often recommend tapping other resources, including retirement funds, if that allows you to put off your application. Social Security’s delayed retirement credits boost your payment by 8% each year between your full retirement age and age 70, when benefits max out. A maxed-out payment is a powerful hedge against longevity risk, which is the danger of living so long that you deplete your savings.

However, a financial planner probably would suggest you also look for ways to decrease your living expenses to avoid completely exhausting your retirement accounts. As you’ve discovered, older people can have a harder time staying employed, even when their health cooperates. You may not be able to work as long as you’d like, and the average Social Security check is closer to $2,000 than the $4,000 or more you would need to meet your fixed expenses.

Consider seeking out a fiduciary financial advisor who can review your situation and offer personalized advice. Your employer or 401(k) provider may offer access to such advisors, or you can look for a financial coach or accredited financial counselor affiliated with the Assn. for Financial Counseling & Planning Education at www.afcpe.org.

Q&A: Could spouse’s early start stunt Social Security survivor benefit?

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Dear Liz: My husband and I plan to delay taking Social Security retirement benefits until the higher-earning spouse is 70. This is to ensure the highest possible survivor benefit. However, the lower-earning spouse will be turning 62 at the same time that the higher earning spouse turns 70. We are concerned that the lower-earning spouse’s future survivor benefit will be reduced if the lower earner starts benefits early. When would be the best time for the lower-earning spouse to take retirement benefits and ensure that the survivor’s benefit remains the same?

Answer: The lower earner won’t reduce the survivor benefit by starting early, but they will permanently reduce their own benefit or any spousal benefit they’re owed. Most people are better off waiting at least until their full retirement age to start Social Security benefits so they can avoid this reduction.

Q&A: Should a spouse start Social Security now or later?

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Dear Liz: I waited until age 70 to start collecting Social Security. My wife turns 65 this year so her full retirement age is 67. Can she start collecting Social Security benefits now based on my benefit or should we wait until her full retirement age?

Answer: If she applies for Social Security now, she would be “deemed” to be applying for both her own benefit and her spousal benefit and given the larger of the two. She would not be allowed to switch to the other benefit later.

Most people are better off waiting at least until their full retirement age to apply, and many will maximize their lifetime benefits by delaying until age 70. Her mileage may vary, of course, so it’s worth using a Social Security claiming calculator and consider getting advice from an objective source, such as a fee-only financial advisor.

Q&A: Timing a Social Security application

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Dear Liz: I know you work to maximize people’s money. I had a thought about the quality of life with Social Security. I took it at 65, which was then full retirement age. I was fully employed and did not need it to live. However, the extra money allowed us the opportunity to travel to all seven continents, help our kids with debts and down payments, and generally enjoy things with the extra cash. Now the full retirement age is 67, so there are fewer years between full retirement age and when benefits max out at 70. But the difference could still be enough for that motor home or world cruise.

Answer: All financial planning requires a balance between current and future spending. If you spend too much in the early years, you may not have enough to make it through the later ones. Retirement planning is further complicated by the fact that we don’t know how long we’ll live or how our health will hold up. We can delay spending so long that we’re no longer able to do the things we want to do, such as travel.

Still, the fact remains that when one spouse dies, one Social Security check goes away. That can lead to a devastating drop in income for the survivor. Because the survivor receives the larger of the two benefits, and may have to live on that amount for years, it almost always makes sense for the higher earner to delay filing as long as possible.