When should you claim Social Security benefits? Here's a surprising split answer for married couples.
More than half of Americans claim Social Security retirement benefits at age 62, the earliest allowed. This has long been a source of consternation to financial and policy pundits, who contend that, given Americans' lengthening life expectancies, they should work longer and wait longer--until 66 or, better yet, 70--to start collecting. The longer you wait, the bigger your monthly Social Security check.
But now two sets of researchers have suggested in separate papers a novel strategy that should benefit many married couples: One spouse (usually the wife) claims at 62 to 66, while the other waits until 69 or 70 to collect. This pays off because of obscure Social Security rules and some facts about life expectancy that aren't obvious if you don't make your living as an actuary.
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For the boomers turning 62 next year (and anyone born from 1943 through 1954) the Social Security "full retirement age" is 66. If they claim benefits at 62, they get just 75% of their full retirement age benefits. For each year they wait past 66, they get 8% more (plus an inflation adjustment), for a maximum benefit at 70 equal to 132% of the full retirement age payout.
These adjustments are supposed to be actuarially neutral--meaning if you live to the average age, you get about the same whether you start collecting smaller checks early or bigger checks later. But they're not. One reason is that married couples get a special deal: When one dies, the survivor can take the dead spouse's benefits (if they're higher) and drop his or her own.
"Whoever the higher earner is should plan to delay taking Social Security, because the higher benefit will always live on," says James Mahaney, vice president of Prudential Retirement and coauthor of one of the papers. "The key message is keep your husband in the workforce as long as you can,'' quips Alicia H. Munnell, director of the Center for Retirement Research at Boston College and coauthor of the other paper. (She notes that a wife might continue to work, too, while collecting Social Security. Although early retirees can lose a portion of their benefits if they earn too much, once you reach 66 you don't incur any penalty for working.)
Part of why the 62/70 solution works is something known as joint mortality. Consider a husband and wife, both born on Jan. 1, 1950. When they become eligible for Social Security at 62, the wife will have a projected life expectancy of 84 years and 8 months. That roughly means there's a 50% chance she'll live that long (roughly, because the median life span is not necessarily the average life span). The husband's life expectancy will be 81 years and 10 months. But there's a 50% chance one spouse will die before 78 and a 50% chance the second will hold on until almost 89, the Government Accountability Office calculates. So, in effect, a woman who takes Social Security at 62 isn't necessarily accepting a smaller payout until 84, but only (on average) until her husband (or she) kicks off shy of 78. And that bigger check that the husband waited until 70 to get? Half the time it will keep coming to one of them for 19 years or more.
The table shows the total Social Security payout a high-earning husband and his wife would get in net present dollars, assuming average life expectancies. In all cases, it pays for the husband to wait and the wife to collect earlier. The numbers shown actually understate the advantages of the split-age strategy for many couples, since the husband and wife in this table are both now 62. If the wife is younger, as is common, the benefits of this split strategy are even bigger.
Note that a wife who hasn't worked outside the home can collect "spousal" benefits, but not until her husband either draws his own Social Security check or reaches full retirement age. Spousal benefits are reduced if taken at 62. But unlike worker benefits, they don't grow if they're delayed beyond 66. That used to be a disincentive for a husband in a one-earner family to delay claiming Social Security. But in 2000 Congress added a provision allowing a worker to file for Social Security at 66, so his spouse could collect, and then "suspend" his own benefits, thereby earning a bigger delayed retirement check for himself and, very likely, his widow.
What if a couple of high earners decides to go with the 62/70 approach and then he keels over from a heart attack at 64? Incredibly, the wife can undo her early retirement by paying back, without interest, the Social Security benefits she has received and then wait until 70 to claim bigger retirement checks for herself.
The split-age strategy works even if both husband and wife have earned the Social Security tax base maximum ($97,500 for 2007 and $102,000 for 2008) their whole careers. Still, this strategy isn't for everybody. If both spouses have Methuselah genes, it probably pays for both to wait until 69 or 70 to collect. If they're in poor health, they may both want to collect at 62.
- Social Security benefits