As we start a New Year, many Americans will make a life altering financial decisions that they will have to live with for possibly several decades.  The decision as to when to claim Social Security benefits is at the forefront of that decision!  Since this is an irrevocable (1 year mulligan) decision it is wise to practice the carpenter’s rule (Measure 3x – Saw once).

Case Study

Yesterday I met with a couple to discuss Retirement Income Planning, specifically Social Security claiming options and thought it would be a great example of the planning process that I incorporate with all my clients.  I changed the names to protect the innocent.

George just turned 62 and retired from the government.  Helen will be 61 in May and is working part time and makes $30,000 per year and most importantly enjoys her job.  They want to travel extensively in the coming years (Go Go Phase) and were initially wanting to claim Social Security ASAP, as an option to fund their lifestyle choices.  They have a $1.2 million home with a mortgage of $500,000.  George has a $6,000 month pension which will be reduced by 50% should he predecease Helen.  They have approximately $750,000 in IRAs with no other debt.  They currently have a $1,500 per month shortfall and need to take funds from the IRA to make up the difference without funding their travel plans.

Social Security Benefits

• George PIA is $3,379 (check at full retirement age – 67)
• Helen’s PIA is $1,001

Their Initial Thoughts – Claim Early

Claim Social Security ASAP and use those dollars to make up their $1,500 month shortfall and fund their travel plans.  Since George just turned 62 and is retired, he can claim immediately and start receiving $2,370 per month (this is a 30% reduction from his PIA and that penalty will be in place while both George and Helen live.  If Helen claims at 62 she will be claiming spousal benefits, but the 30% reduction due to her claiming early will also be enforced + since she is still working and under her FRA (Full Retirement Age) she is subject to the Earnings Test (lose $1 in benefits for every $2 she earns in excess of $22,320, thus she’d have to payback approximately $4,000 in that year.

Should George die at age 85 she would inherit whatever he was receiving at the time of death which would be approximately $4,400 per month + the fact that his government pension will be reduced by 50%!

My Initial Observation:  Even though they are technically considered MILLIONAIRES I don’t believe they are in a position at this time to retire to a life of leisure and travel.  That $500,000 mortgage is hanging over their heads and I have a motto for those in retirement “No Debt is Good Debt!”  Their $750,000 in IRA’s is great but a safe withdrawal rate of 4% would mean only $30,000 per year or $2,5000 per month.  Yes, the Social Security benefits would also offset their need to draw down on their IRA’s, which is extremely important especially if we get a correction or a Bear Market.

An Alternative Strategy

We plan for George to wait until 70 before claiming his own benefits.  Helen keeps working until age 65 and at that time she claims Social Security on her own record.  If the stock markets are good, they take money from their IRA’s to fund their  European River cruise and African Safari.  If markets don’t cooperate they go to Galveston (no offense) or other not as expensive destinations.

Social Security Advice

• Helen claims at 65 when she totally retires from her job
• George claims at age 70 which allows Helen to switch to spousal benefits
• If George dies at age 85, Helen collects Survivorship Benefits

Synopsis between Claiming Early vs George @ 70 – Helen @ 65

• At age 70 they would have received $297,000 in Social Security benefits, had they claimed EARLY (Age 62). Thus were $297,000 behind!
• Checks at age 70
  • Claim early checks would total $4,140 per month x 12 = $49,680 annual
  • Claim 70 & 65 checks would total $6,735 per month x 12 = 80,820 annual
  • Difference $2,595 per month x 12 = $31,140 per year
• Breakeven between 2 strategies Age 78
• Age 85 George dies – Helen receives $6,606 vs $4,395 = $2,211 difference * Remember George’s pension is cut in half upon his death thus his $6,000 check reduced to $3,000! Also, at age 85 we’re $262,000 ahead of the claiming early strategy.
• George lives to age 90
  • There combined Social Security checks are $120,000 vs $72,000 or $4,000 more per month
  • If George dies Helen receives $7,150/mo. vs $4,852/mo.
  • They are over $500,000 ahead by choosing Alternative Strategy vs claiming Early

Bottom Line

As tempting as it might be to claim benefits early, the most prudent course of action might be to;

• Definitely look and explore all options and to proceed cautiously before making irrevocable decisions – Remember the Carpenter’s Rule
• Drawing down on qualified plans early while postponing Social Security could most definitely mean more dollars available later on for you and your heirs, since you won’t be forced to take as much out of those qualified plans once you turn age 70
• One of my main messages, is to protect the WIDOW, who in many cases earn less and live longer than their spouses. Since George’s pension is reduced by 50% upon his death, I’m protecting Helen by having George delay claiming his Social Security until age 70!
• Finally, as we discussed yesterday with George and Helen, we can always start claiming benefits. When the only certainty in life is Uncertainty is good to know we can change our mind.

Let’s have a great year and never hesitate reaching out, if you think I can be of assistance!