Ready For Retirement

When Should You Collect Social Security if Your Spouse is Much Older?

James Conole, CFP® Episode 193

James addresses a listener's question regarding Social Security strategies in retirement. Sasha, aged 59, seeks advice on when to start collecting Social Security, considering her husband's benefits and their overall retirement plan. 

James emphasizes the importance of considering spousal benefits, survivor benefits, and age gaps in making this decision. He explores the complexities of Social Security analysis, encouraging listeners to run break-even calculations based on the assumed age of the first spouse's death rather than just life expectancy. 

James also shares a real-life example where delaying one's own benefit and collecting a survivor’s benefit early can be a strategic move. When choosing a Social Security claiming strategy, evaluate the broader impact on taxes, withdrawal rates, asset allocation, and legacy considerations. 

Questions Answered: 
How does the age gap between spouses impact the Social Security claiming strategy?
What factors should be considered when deciding on your Social Security claiming strategy?

Timestamps:
0:00 - Sasha’s SS question
2:19 - Analysis of Sasha’s situation
5:51 - The challenge
9:08 - When assumptions don’t pan out
12:29 - General principles
16:08 - Look at the whole picture

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Speaker 1:

So to ready for retirement, we're going to be discussing social security strategies and how that strategy should potentially change if there's an age gap between you and a spouse. This is another episode of Ready for Retirement. I'm your host, james Cannell, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. Today's episode is based on a listener question. This question comes from Sasha, and Sasha says the following. She says Hello, james, I love your show. You help me look at a variety of ways to view different retirement and investing strategies. Here is my question.

Speaker 1:

My husband is 74 years old and he's in great shape. His social security benefits are $2,455 each month. I am 59 years old and also very healthy. We both will stop working at the end of this year. I am considering taking social security at age 62, but I would love to understand the best ways to view this. If I collect social security at age 62, then my payment will be $1,153 per month. At age 67, my payment will be $1,639 per month, and at age 70, my payment will be $2,032 per month.

Speaker 1:

We don't need my social security income to live on. We can live comfortably without it. And since our income comes directly from a Roth IRA, we won't be responsible for taxes on it. I'm not really concerned about the tax implications. Let's assume, for the sake of argument, that my husband lives to 90 years old and I live to 95 years old. How do I calculate when it's best to start collecting social security?

Speaker 1:

Sorry to be so wordy, but I thought it'd be easier if you had as many details as I could think of to help us solve this problem. Thank you, sasha. Well, thank you, sasha, for that, and thank you for being wordy. It's actually helpful to have all that information, because social security, at the outset, maybe seems like a simple decision how long are you going to live? And then you make a decision that, at least based on that assumption, is going to optimize a number of dollars that you put into your pocket over the course of your lifetime. What people fail to take into account, though, is exactly what you're talking about. What if there's a spousal decision as well, or a spousal component as well, because you're married, and not just that, but what if there's a potential age gap between you and your spouse? So that's what we're going to be looking at today, so keep in mind that, as you're doing this analysis for yourself of when do you collect social security, the decision should be very different if you're single versus if you're married versus if you're married and maybe have a significant age gap between you and a spouse. So that's what we're going to be contemplating or exploring today.

Speaker 1:

So what we're going to do is we're going to start by looking at Sasha's specific situation. Again, none of this is ever intended to be specific advice or guidance, but we're going to use it for illustrative purposes, to illustrate some of the points. We're going to look at Sasha's situation first. Then we're going to extract some general principles from that that anyone can take some information from to apply to their situation. So here's what we need to understand Sasha, you have a few different options or a few different components to your own social security benefit that you need to be mindful of when you're contemplating the strategy. That's best. You have your own benefit, so your benefit based on your earnings record and how much and how many years you paid into social security. Number two you have a spousal benefit, so you could potentially collect up to half of your spouse's benefit at their full retirement age. And then there's a survivor benefit, so if you outlive your spouse, then there's a survivor benefit component to this, which is to say you are eligible for whatever your spouse's benefit was when they passed away. So let's explore all three of those so we can start to see how Sasha should go about doing this analysis.

Speaker 1:

Let's start by taking a look at Sasha's survivor benefit. Now, this is not something that she can't take today. It's not something she's even eligible for until her spouse passes away. But here's what we do know. We know that her husband's current benefit is $2,455 per month today, and we know that Sasha's benefit even if she waits until age 70, is $2,032. So what that tells me is, assuming that she's at least full retirement age by the time that she collects, she is going to be switching to a survivor benefit. Unless somehow she puts a lot more years into social security and a lot more income into it, her benefits not gonna rise over where it is today because she says that she's going to retire at the end of this year. So that tells me that she is going to collect or be eligible for a survivor benefit at some point. Assuming her husband predeceses her, the challenges she has no, I shouldn't say the challenge maybe the good thing is she has no control over when the timing of that is. We hope it's a long way out, but it's something that we don't have full control over, which is the timing of Sasha's husband's passing away. So just keep that in mind for a second. I'm going to table that for one minute.

Speaker 1:

The second thing that we want to look at is the potential for a spousal benefit. So a spousal benefit would be half of her husband's benefit at his full retirement age, and I say that because I know what her husband is currently receiving in Social Security. It's $2,455 per month. I don't know if that was his benefit that he started at full retirement age, if that was started at age 70, if that was based on him collecting early. So we can't just look at that number and take half of that to calculate what the spousal benefit would be. But if we assume that is the benefit, for example, that he collected at his full retirement age, then Sasha's spousal benefit that she'd be eligible for at age 67 is $1,228 per month. Well, if we compare that to her own benefit that she'd be eligible for at age 67, which is $1,639 per month, then what we see right off the bat is there's really no point in her utilizing a spousal benefit in calculating the decision that's best for her. There is no spousal benefit. She would elect her own benefit because it's higher than what she would get from spousal. So we've looked at survivor and we know that will be higher than hers at some point, but not until a future date when her husband passes. We've looked at spousal and we know that's just irrelevant for her specific situation. Now let's look at Sasha's benefit, her benefit based on her earnings record.

Speaker 1:

Here's the challenge that most people fall into. They think of social security as a very simple decision. They say there's a break-even point somewhere around age 80-81, where, if you're going to live past age 80 or 81, it makes sense for you to delay your benefit all the way until 70, because in doing so what you're doing is, yes, you're forgoing more of a benefit upfront, but now you get a larger benefit that's going to, over the course of time, have a cumulative benefit. So total dollars collected that exceeds what your total dollars collected would have been if you collected earlier, but a smaller amount. And people get locked into that thinking and sometimes that thinking can be accurate, but here it absolutely wouldn't be.

Speaker 1:

Here's why I say that let's assume that Sasha was to employ that thinking of wait until 70 because, as she said in her question, she's healthy. She plans to live to 95. Not that we have any control over that, but at least in making some of these decisions we might think oh okay, sasha's going to live till 95. Therefore, she should wait as long as possible to collect social security, because at age 70, she gets her max benefit and she'll then have that benefit for the next 25 years, which is well past the break-even age. Therefore, it makes sense for her to wait until age 70. But here's what that analysis misses we have to use Sasha's husband's passing as the end of that break-even calculation, because what we're essentially saying is that once Sasha's husband passes assuming that she outlives him, and there's a good chance that she does simply because of the age gap here once he passes Sasha's no longer going to be collecting her own benefit. So whatever break-even analysis we're doing on Sasha's benefit ends at the point that her husband passes away, because she's then going to be switching over to his benefit, regardless of if she collects her own at 62 or 67 or 70. So what we're really asking is we're asking what option will put more dollars in your pocket before she collects her survivor benefit. And if we assume that she is correct, she said let's assume that my husband lives until 90. Well, that means that Sasha will be about 75 years old at the time that her husband passes.

Speaker 1:

So if people say, wait till 70 to collect, were to look at this analysis, I think they would really quickly see the error in that, in that they're only collecting, that Sasha would only be collecting, in that instance, five years of her own benefit before switching over to a survivor benefit. So yes, it's a higher amount, but she's only collecting it for five years in this instance. So from 70 to 75, her husband passes away and she switches over to a survivor benefit Instead. If these numbers were accurate and by these numbers I mean Sasha's life expectancy and her husband's life expectancy it probably makes a lot more sense to begin collecting as soon as possible. Because yes, that's a lower benefit that she's collecting, but now she has to collect, or now she gets to collect that benefit for 13 years until her husband passes away. So from age 62 to age 75, as opposed to waiting all the way until 70, only getting to collect that benefit for five years. So we don't know the exact age of our death. We don't know the exact age of our partner or spouse's death. But what we can start to do in these analyses is, if we make some assumptions, we can start to see what might make more sense, making certain assumptions about each of our life expectancies.

Speaker 1:

Now, reaction some people might have as they're listening to this is might say well, what if her husband lives a whole lot longer? Well, number one great, I'm very happy to hear that. I hope he does live longer. We both have a happy retirement together. And then number two if he lives longer, well, great. How do you protect against that? How do you protect against Sasha having collected a lower benefit at 62? And now it is starting to cost them because they're both alive for much longer? Well, sasha could always look to invest some of that money. If she's collecting money that they don't need to live comfortably and she wants to protect her future self or the couple's future self, you could always turn around and invest some of that or save some of that.

Speaker 1:

Just because you collect early doesn't mean you have to go spend it. So if you're concerned, as hey James, your analysis really only works for husband only lives till 90. What if he lives in 95 or 100? Number one great, like I said, but number two there's still ways to protect against that by taking some of the benefits Sasha's taking early and investing it. And when you invest that money, what you're doing is you're pushing back that typical break even age I mentioned. There's a break even age if you're collecting social security at 62 or 67 or 70, depending on what ages you're comparing the break even age might be somewhere around age 80, where, if you're going to live past that, it makes more sense to delay your benefit. Well, if you are taking that benefit and you are investing it, it's pushing that break even age out. It's meaning you now have to live much longer in order for it to make sense for you to have collected later.

Speaker 1:

Now, if you want more information on what I'm talking about here I know this may be kind of confusing as you're listening to me verbalize it I actually illustrate this go over to the YouTube channel. There's a video called should I collect social security early and invest it? And, sasha, this could be a perfect case of when might that make sense and how does that change the analysis in terms of when your break even age might be to collect at 62 versus 67, versus 70?. So that's a general principle that I would extract for anyone here, not just specific to Sasha. But when you are taking a look at your social security benefit, it's not just what option puts more dollars in your pocket, it's what are you doing with those dollars once you receive them and how does that impact the analysis that you should be doing with your social security. Here's another thing that will add. That is a generic thing or general thing that's not applicable just to Sasha.

Speaker 1:

This is a very personal decision that should incorporate a whole bunch of different factors. Whenever I do a YouTube video or a podcast about social security and should you take it 62, should you take it 70,? What if you take early and invest it I get some very, very passionate comments. I'll call them of people who passionately agree with collecting early and investing and other people who could not be more passionate about their disagreement of saying why on earth would you collect early? You should always delay. You should always maximize your guaranteed investment, which is social security. So it's a very personal decision. Don't let this podcast or this episode make or break your decision to do one or the other. All I want to do is say consider the alternatives and understand what's best for you. So there's no right or wrong answer between collecting earlier or later. There's not even a right or wrong answer when you just see what the numbers say. There's also the personal side of this, the financial piece side of this, the comfort side of this. That can't be quantified into a single number. So make sure you're taking a look at that as you're making your own decision.

Speaker 1:

So now that we've gone through Sasha's analysis and helped to address some different options and the right way to think about this, let's extract some general principles that anyone can take from this. Number one. The first one is if there's an age gap, run your break even analysis with the assumed age of death for the first spouse as the end of that analysis, not just the life expectancy. What does that mean? Well, in Sasha's case, don't run her analysis based upon a life expectancy of 95. That's what seems like the simple, straightforward way of doing it, but it's the incorrect way of doing it. If Sasha were to run her analysis for when to collect her retirement benefit using her life expectancy, she would probably wait until age 70 to collect, because at age 70, she would then have 25 years of benefits to collect, which would be more powerful than collecting more years of benefits, but a lower number by starting early. As we illustrated, though that's incorrect, that's not the right way of looking at it, because Sasha's not going to collect her own benefit for 25 years, even if she lives for 25 years after age 70. She's going to be collecting a survivor benefit at some point. So in this type of a situation, use the death of the spouse that passes first as the end of that break even age or that break even analysis when determining when you should collect your own benefit before switching over to a survivor benefit. A second general principle and this is not necessarily a principle, but an example it's not always the case that the younger spouse collects early and then switches over to their survivor benefit later.

Speaker 1:

I actually had a client a couple years ago. I still have this client, but a couple years ago her husband was terminally ill and he was in his mid-60s and she was in her early 60s. Now, in looking at this, we ran a full gamut of analyses to say what's going to make most sense for your social security strategy, and here's an important thing to note about that. In this case, the husband had been an entrepreneur his whole life, a business owner his whole life, so he actually didn't pay a whole lot into social security, whereas the wife she had been a nurse for her whole life and she had earned a pretty healthy income, so she had paid a lot into social security. So he was already collecting his social security benefit and when we went to look at what should she be doing with her benefit, we actually did the opposite of what we looked at in Sasha's scenario. What we did is, knowing that he was going to pass soon, I encouraged her not to take her benefit.

Speaker 1:

What happened was her husband passed away.

Speaker 1:

She immediately collected his survivor benefit. So she collected his survivor benefit when she was still in her early 60s or mid-60s. What that did over the next few years, her own benefit, based on her earnings record, continued to grow, and that continued to grow all the way until age 70. And at age 70, she switched over to her own benefit. So what you see, this is the opposite scenario here. She took the lower benefit first to say, like I'm going to collect something because I'm eligible for either a survivor benefit after her husband passed or her own benefit, but as part of her financial plan, we wanted her own benefit to be maximized, so we collected the survivor benefit first and then her benefit at 70, which is closer to $3,500 per month. So she got a $2,000 per month bump by doing that. So this is a clear example where it made more sense to delay her current benefit by instead collecting the survivor benefit early.

Speaker 1:

So each situation is going to be different. If you have a spouse, especially if there's an age gap, what did each of you have in terms of an earnings record? And how do you look at your own retirement benefit, any potential spousal benefits and any potential survivor benefits? How do you look at all three of those to come up with a solution that's going to make the most sense for the two of you to put the most dollars in your pocket over time? And then the last thing that I'll say is this is, as I just mentioned, the goal is to maximize the combination of your own retirement benefits, spousal benefits and survivor benefits, but don't forget the other parts of your plan that this impacts.

Speaker 1:

Way too often and advisors do this too, unfortunately way too often when you're looking into social security analysis, people are only looking at social security income. They're making it way too simplistic. What's going to put more income in my pocket over time? They're not taken into account how those decisions impact other things like taxes. We know that social security is tax-differently than IRA distributions. We know that it's included differently in provisional income. We know that it might have a different impact on things like Irma surcharges or other tax considerations. So as you're looking at this of what social security solution is best, don't just look at income. Also look at how is it going to impact your taxes.

Speaker 1:

It also impacts your withdrawal rates. So if you're collecting earlier as part of your strategy, it's going to put less pressure on your portfolio earlier on. If you're delaying benefits and you're not still working well, it's going to put more pressure on your portfolio. So do you have a withdrawal strategy that's designed to sustain that or withstand that, knowing that it's going to impact your withdrawal rate? It's also going to impact your asset allocation.

Speaker 1:

So, depending on how you choose to collect social security, the higher your guaranteed income sources, the more at least from a risk capacity standpoint, the more you have the ability to invest aggressively in your portfolio. Super simple example if your core expenses are 5,000 per month in between you and a spouse, you have 5,000 per month in social security income. Well, theoretically, you have the rest of your portfolio to invest. Above and beyond that, you're not dependent upon it, which means if you wanted to, you could choose to invest more aggressively, because if there's a market downturn, you have your basic needs covered by social security. You can afford to let your portfolio recover before drawing on it again.

Speaker 1:

And then even things like legacy considerations should be considered. Now, I don't think that your legacy should be your main goal. I think that it should be incorporated, but for most people I would say it's smart not to have your inheritance. You can leave the kids be the primary motivation for what you do. However, you do want to keep in mind that social security cannot be passed to heirs. Your portfolio and the rest of your net worth can be.

Speaker 1:

So if leaving a legacy is important to you and you want to control for how much of that you can do, well, different social security strategies will have a different impact on that, because some of them you're not just looking at to say how can social security maximize my income. You also want to understand which social security claiming strategy is going to maximize the potential assets or net worth I have that I can then pass along to heirs. So that's a simple framework maybe not so simple framework of thinking about social security, of when there is an age gap. How do you consider all these different aspects of social security? But how do you also think of the second order and third order effects that it's going to have when it comes to things like what's the tax it going to be? What's the impact to your asset allocation going to be? How does your withdrawal strategy need to change? How might legacy considerations now be different? So, sasha, thank you very much for that question.

Speaker 1:

I hope that was helpful for all of you listening. Thank you, as always, for doing so. That is it for this week and I'll see you all next time. Hey everyone, it's me again. For the Disclaimer, please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment tax, legal or other financial advice. It is for informational purposes only. Thank you for listening to another episode of the Ready for Retirement podcast. If you want to see how Root Financial can help you implement the techniques I discussed in this podcast. Then go to RootFinancialPartnerscom and click start here, where you can schedule a call to one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember nothing we discussed in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.

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