NT-Investment Question

[JohnH]

Interesting personal question here for anyone approaching retirement (or perhaps you have a client at som point whom this might impact.) I reach age 66 early next year and just recently applied for Social Security benefits. After completing all the paperwork I began looking at the alternatives. The following ignores tax adjustments, because I think the tax liabilities will be roughly the same at the margins under any possible scenario. Some elements are simplified in order to avoid too many permutations of the basic scheme.

Since my wife is already retired, I can do a two-step process to suspend my application and then apply for a "Free Spousal Benefit", which is half my wife's benefit. In exchange, my SocSec benefit continues to increase in exactly the same way as if I had not applied, which most financial calculators regard as an 8% return on the foregone benefit. But in this case, it's the 8% return PLUS the money I actually receive during the deferral period. Looks like the "Free Spousal Benefit" really is free. Social Security is actuarially sound for the most part, so I have no idea why this benefit is in there - it makes no sense to me. Nevertheless, it is a part of the system as it exists today.

Bottom line is that I receive $450 per month less in benefits, but at the end of each year my SocSec benefit increases by $110 per month. That computes to a 52-month break-even point. After that, I'm ahead by the increased monthly benefit for the rest of my life. From an investment standpoint, I see this as being no different than putting $5,400 per year into an IRA, then buying a single-premium annuity at age 67 which pays $110 per month for the rest of my life with no survivor benefit. And repeating that process for each of the remaining 3 years until age 70, when the increased benefit maxes out.

Now I do realize there's always the possibility of dying before reaching the break-even point and leaving money on the table. But as I see it, that isn't the greatest risk in retirement. I have always viewed the greatest retirement risk as outliving your assets and watching your buying power erode, so this strategy helps hedge somewhat against that outcome.

If anyone cares to comment on this, I'd be interested in hearing your perspective. Maybe I've missed a key element here. And if you have any clients approaching retirement who might be in a similar situation, they should at least consider the financial impact of a strategy like this.

[Roland Slugg]

IMO it's a no-brainer. Go for it!

[FEDUKE404]

Waiting vs taking now

Your logic is sound.

This is a slightly different twist to the more common "Should I take reduced Soc Sec benefits at age 62 or wait until reaching my full retirement age?"

Basically you can NOW let your spouse get 100% of whatever she already receives, and you can also receive 50% of that amount.

Your "own" benefits could then climb past the "100%" amount you could now receive being at full retirement age. There is a substantial increase to benefits for each month you wait (up until age 70?) after not claiming your own benefits at full retirement age.

Of course, from a pure $ standpoint you have to compare Plan A (receive 50% of spouse benefits) versus plan B (receive 100% of your benefits).

The unknown in the room is the unpredictability of life in general, to include overall personal health.

But from a purely dollars/cents standpoint, "if you can pay the bills," letting your personal Soc Sec "annuity" grow past FRA can often be a wise decision.

FE

[JohnH]

Thanks to the both of you for those replies. I was beginning to think I was missing something important. Several Social Security planning websites say that up to 1/3 of couples could potentially benefit substantially from this, but a relatively few actually take advantage of it.

I get the reason SocSec will allow the Full Retirement Benefit to grow if you defer receiving it until age 70, since it all works out exactly to the dollar if you live to your full life expectancy and then die the next day. I also understand that you leave money on the table if you're a poor planner and make the mistake of dying early. That's all sound & simple actuarial computation. If one is in good health at age 66 and can wait, then it's a reasonable risk to take. (Where else can you get 8% guaranteed these days?)

But what I don't understand is the reasoning behind the "Free Spousal Benefit" (FSB). I don't understand why they make it available. I'm sure there's a reason behind the FSB, but it defies logic to me.

BTW, there is another twist to this that I didn't post because I wanted to keep it somewhat simple. The "File and Suspend" option can be chosen at any time in the first year after reaching full retirement age and beginning to receive benefits, but the "FSB" can be claimed only for up to six months of back benefit. So the absolute best way to handle this is to begin drawing benefits at age 66, then notify them just prior to 6 months that you want to suspend. You return those 6 months of benefits to them, simultaneously applying for the FSB, and they send you a lump sum check for the lower amount times the elapsed 6 months. I like this much better because it provides an extra 5 months to make the determination form a financial and health perspective before pulling the trigger. (One never knows when the doctor is going to give you 6 months to live, although I've heard that if you tell him his bill is so high you can't pay all right now, he will usually give you another 6 months).

[mactoolsix]

I reached the FRA (age 65) and have been toying with SS benefits for myself and several friends - some rather well off, some barely making it.
I agree with your analysis on the "Free Spousal Benefits" and have steered several in that direction.

In the end I have always found for the cost of an analysis using Maximize my Social Security by Laurence Kotlikoff to be well worth the $40. There are many other websites that do social security analysis, however I've never one as complete as this. It's worth the $40 today, to save a thousand dollar mistake tomorrow.

http://www.maximizemysocialsecurity.com/

Mike

[Roberts]

But from a purely dollars/cents standpoint, "if you can pay the bills," letting your personal Soc Sec "annuity" grow past FRA can often be a wise decision.

FE

Considering nursing home expenses, it may very well be the only real option.
If someone has very limited assets, they may very well be better off spending all of it and delaying SS until they've achieved the largest check possible.

It's contrary to what seems normal or reasonable to spend everything but financially it could make the most sense.

I'd love a good book / pdf that explained all the options fully. Some of that stuff gets pretty complicated.