Rush Limbaugh & Uncertainty

Last week besides the historic cold front that we experienced, Rush Limbaugh passed away at 70 & 1 month.  Had he delayed claiming Social Security until age 70, he wouldn’t even have collected 1 check before passing away!  One might surmise that he should have claimed as early as possible which would have been 66 since he continued working up until his death.  As I’ve always say “if you tell me your check out date, I’ll tell you when to file for benefits.”  Now since we don’t have that luxury or would we even want to know our expiration date, we have to look at actuarial statistics, at personal and family history and then make an educated guess as to one’s longevity!

The Importance of Social Security

In the case of Rush, Social Security benefits were inconsequential part of his income and Net Worth, but for the vast majority of American’s those benefits will be their primary or only source of income in retirement.  50% of all American’s have ZERO saved for retirement, thus their only source of income is Social Security.  Making the matter worse is less than 20% of American’s will have a traditional pension which is down from 85% in 1980.  Social Security accounts for an average of 1/3 of all retirement income, but for 50% of all American’s it accounts for 50% of their total income.  Social Security accounts for 90% of income for 21% of married retirees and 45% for unmarried or widowed.  Thus you can see the impact if Social Security and the importance of claiming wisely.

How Much do I get – IT DEPENDS!

According the SSA the average retirement benefit from Social Security in 2020 was $1,514/mo. or $18,170 per year.  When did people claim their benefits, were they penalized for claiming early or were they rewarded by delaying their benefits?  Now in calculating one’s Social Security benefit SSA takes the highest 35 years of earnings, indexes that number to inflation and then subjects that number to the benefits formula which determines one’s PIA (Primary Insurance Amount) or in layman’s term their check at Full Retirement Age (FRA).

Example:  Someone born in 1959 who would turn 62 this year has an FRA of 66 & 10 months.  Had they maximized their earnings over the working career and paid FICA taxes up to the maximum amount ($142,800 in 2021) their benefit at FRA is $3,262 per month.  Now if they claim at 62 (approximately 35% claim at this age) their check would be $2,324, if they wait until FRA their check would be $3,531 (assuming 2% COLA) if they wait until 70 their check would be $4,790.  Thus the question is, does one claim at 62 (earliest possible claiming date) or delay until 70 to receive maximum benefits amount?  As you can see waiting 8 years DOUBLES the monthly benefit (Only 3% wait until 70 before claiming)!

Breakeven – Or Money Ahead Date

How long does one have to live to be money ahead?   If one waited until FRA before claiming it would take 6 years and 1 month to catch up.  The monthly difference in benefits at 76 is $1,250 more per month by waiting until FRA.  What is the difference in monthly checks at age 90?  $1,650 per month or $20,000 more per year.  The difference in total benefits received at 90 is $224,000 by waiting until FRA before claiming!  At age 100 there is a $1,000,000 difference in benefits received.

Now what if one waits until 70 before claiming?  Their check would be $4,790 vs a COLA adjusted check of $2,723 had they claimed at 62.  The money ahead date would be 78 & 11 months, so let’s say 9 years to breakeven or money ahead.  The difference in the monthly checks at 79 is $2,500 per month or $30,000 per year! At age 90 the difference in the monthly checks is $3,100 or $37,200 more per year!  There is a $370,000 cumulative difference at 90 and $770,000 at 100.

Key point to remember!

If an individual is married the surviving spouse inherits the greater of the two benefits upon the death of either spouse!  There is a 63% probably that either of 2 spouses who are 65 today, that one will live to age 90 and beyond!  And that is the AVERAGE life expectancy, how many of your clients believe that they are average?

Hedging the Bet

Knowing what we know now, there is a HUGE difference in monthly benefits by delaying until FRA or age 70, but what if one dies at 70 and 1 month like Rush Limbaugh?  Have the lower earning spouse claim early, thus taking chips off the table in the event that one spouse dies early or before life expectancy.  In the case of Rush Limbaugh his wife Katherine is only 44 so she wouldn’t have been able to claim, but when she reaches FRA (67) she’ll be able to claim survivorship benefits based upon Rush’s record as long as she does not remarry prior to her 60th birthday!

Have a great month and never hesitate contacting me, if you think I can be of assistance,

Dave Zander, CFP®