Measure Twice – Saw Once

When making a decision that one might have to live with for 30 years or longer and at a cost that might exceed $500,000 it might make sense to explore all the options and consequences of that decision before actually pulling the trigger!  But is amazes me on a weekly basis how many American’s make a decision on when and how to claim Social Security without understanding the long-term consequences of that decision! Many individuals make the decision based upon the ability to claim ASAP which is why almost 40% of American’s claim benefits when reaching age 62.  Some might listen to a friend, family member and many might read an article online without researching to see if it is truly wise information based upon their own unique circumstances.

If you tell me your CHECK OUT DATE – I’ll tell you when to claim Social Security

Since that option is not available all we can do is make an educated guess based upon your current age, spouses age, health issues, family longevity, work and retirement plans, investment assets available, pensions if one is so fortunate, etc.  As you can see there is no clear cut answer and only time will tell if it was indeed the right decision.

Case Study #1 – Spousal Claiming

Tom 67 is waiting until age 70 to claim on his own record estimated to be $3500/mo. at that time.  His financial advisor and firm Social Security expert (?) suggested that his wife Susan (63) claim benefits at age 62 thus allowing Tom the ability to claim spousal benefits (Restricted Claiming Provision) while waiting until age 70 to claim his own.  This was not bad advice except for one MINOR / MAJOR ISSUE,  Susan check at FRA (66 & 6 months) was only $332 per month.  Since she claimed early her actual benefit is only $240/mo. and Tom is receiving $166/mo.

So what’s the major issue I have with this decision?  When Tom files for his own benefits at age 70, Susan will switch to spousal benefits based upon Tom’s 66 check.  Tom’s 66 check was $2550 so Susan would be eligible to receive $1,275/mo. but since she claimed on her own record at 62 she will be subject to a 27.5% reduction in benefits until Tom dies, assuming he predeceases her.  So instead of receiving $1,275 had she waited until FRA she will receive $925/mo. or $350/mo. less.  Tom’s mother is still alive at age 97 so should Tom live to 97, Susan will be under reduced benefits for 27 years!  Cost of that decision is $113,400 assuming no cost of living adjustments!

Conclusion:  In this case I would have recommended that Susan not claim benefits, but to wait until her FRA to claim mostly because her benefits were so low.  Had her check been $2,000 instead of $332/mo. then it might have made sense to claim, because Tom would be getting $1,000 instead of $166.

Case Study #2 – COVID

I read yesterday that upwards of 4,000,000 American’s over age 60 have lost their jobs due to COVID and who are unlikely to ever return to work!  The question then becomes where will their income come from?  Approximately 35% of American’s claimed Social Security benefits at age 62 and this was prior to 2020 and 70% claimed prior to their Full Retirement Age how much will these 2 numbers change due to COVID?  As we’ve spoken in prior newsletters and presentations “Whatever your benefits are at age 62 they are DOUBLE at age 70”!  In the case of Scott who was born in 1959 and has a $2,800 per month benefit at age 66 & 10 months (FRA).  His check at 62 would be $2,012 per month vs $4,200 per month at age 70.

What has to be resolved prior to making any decisions are;

  • What other assets are available?
  • Are their job / career paths / consulting opportunities worth pursuing?
  • What is Scott’s wife’s age and her own Social Security earnings projections?

There is a $2,600 per month difference in monthly checks when Scott is 90 years old between claiming at 62 vs 70 with a cumulative difference in favor of waiting of almost $500,000 so it is absolutely imperative that ALL options are explored and discussed prior to making a knee jerk decision.

Remember Carpenter’s Rule –  Measure TWICE, saw ONCE!

Have a great month,

Dave Zander, CFP®