In the past month I’ve attended 2 funerals and in both cases the Social Security claiming decisions they made are most definitely worth exploring!
Case #1 – My mother passed away on June 24th at the ripe young age of 97 ½! Mom suffered from dementia and required nursing home assistance over the past half a dozen years. She lived a full and rewarding life and is in a much better place with all her loved ones who predeceased her especially my dad who died 10 years ago at age 87.
Dad hated work and retired and claimed his benefits and spousal benefits (mom did not qualify on her own record since she stayed at home and raised 5 of us) on his 62nd birthday in 1989. As he told me his dad died when he was 14 years old and several of his brothers passed away while still in their 50’s thus he could not phantom living into his late 80’s!
OBSERVATION (See spreadsheet)
- Having claimed at 62 he incurred lifetime penalty which affected his and my mother’s benefits for 35 years! His first check was $760 and her spousal check was $356. Upon dad’s death she switched to his benefit and hers stopped, the last check paid to my mother was $1965 due to COLA’s over the years. Had he waited until 65 (Full Retirement Age) his first check would have been $1,130 and her check would have been $565. The last check would have been $2,525 or 28% more per month. Total benefits received were $692,700 vs $854,300 had he delayed until FRA. Bottom line $161,583 or 23% or 5x more than what was withheld from his paychecks during his working years had he waited 3 years!
- Had he waited until 70 the last check would have been $3,147 or 60% more than it actually was. Total benefits received by mom and dad would have been $921,000 vs what they actually received or 33% more!
- I don’t know if I would have recommend waiting until 70 since the 8% per year delayed credits were not fully implemented unless born after 1942. Up to that point there was a staged increase of 4% increasing by ½ % every other year for those born in 1927 until 1942.
- Employment Taxes paid by both my father and his employer total $62,153 over his working lifetime 1947 – 1989! To put that into perspective an individual who gets to the maximum earnings subject to FICA taxes this year ($168,600) would pay $20,906 in total employment taxes in just 1 year!
- What I found most interesting;
- In less than 3 years Mom & Dad received more in benefits than they paid in over 36 years. Less than 6 years if you include employers contributions as well!
- Mom’s last check was $1965 which means every 31 months they recouped their total lifetime contributions, had Dad claimed at 70 Mom’s last check would have been $3147 and they would recoup all taxes every 19 months
- Over their retirement years they received 11 x their contributions and it would have been 13.7 had he delayed until 65 vs having claimed at 62
I think it’s fair to say that Social Security for The Greatest Generation was a Magnificent Success, but having been brought up during the Great Depression and experiencing WWII, it was well deserved, needed and appreciated! The Key to maximizing Social Security is don’t die! Dad lived to 87 and Mom until 97 ½ thus they truly benefited it!
Case #2 – The Flip Side
Jerry a friend of mine from church lost his battle with cancer and died at 66! After the funeral I reached out to his spouse and offered any assistance in determining when and how to structure her Social Security claiming options. She informed me they both claimed benefits at age 62! Both were high earners and decided to claim as soon as they could!
Since they claimed over 1 year ago, she is unable to WITHDRAW her application, payback what was received and then delay until FRA or 70. There are only 2 options available;
- Continue as is and possibly switch to survivorship benefits if it is greater than her own! See the numbers
- Continue receiving benefits on her own record and then suspend benefits at FRA (66 & 8 months) and earn delayed credits of 8% per year and starting benefits again at age 70! See the numbers
Had neither Jerry or Mary claimed I would have had Mary claim survivorship immediately while delaying her own benefits until age 70. Since they both claimed that option is no longer available and should Mary decide to delay until 70 and earn the delay credits she must suspend ALL BENEFITS from 66 & 8 months until age 70. As you’ll see from the attachment doing so will increase Mary’s benefits at age 70 to approximately $4,700 instead of $3,700 if she continues as she is now.
Carpenter’s Rule – Measure Twice – Saw Once
The decision they made will cost Mary approximately $500,000 over the next 24 years without taking into consideration the time value of money! I can’t tell you how upset I am, that I was unable to counsel them prior to making such an important decision. What is sad is they didn’t really need the money, they had other assets available, they just took it because they could! These hasty uniformed decisions are being made way too often!
It’s worth repeating that when one spouse dies the surviving spouse inherits the greater of the two benefits, but not both. In most cases I recommend that the higher earning spouse, delay until 70, especially if longevity runs in either spouses family or if there is a dramatic difference in ages between the spouses.
Conclusion
The question that is always asked whenever I meet with a client or give a presentation is “When should I claim benefits?” My answer is “What’s your check out date?” Since we don’t know, nor would we really want to know, all we can do is take and educated guess, but look at all circumstances prior to making an irrevocable lifetime decision!
How do you get the most out of Social Security? Answer – Don’t Die……….
Have a Great Month,
