Today’s column addresses whether it’s appropriate to use break even analyses when deciding when to file, when to file to get a certain amount of delayed retirement credits, suspending a retirement benefit after receiving disability benefits, eligibility for widow’s benefits based on remarriage and level of assets. Larry Kotlikoff is a Professor of Economics at Boston University and the founder and president of Economic Security Planning, Inc, a company that markets Maximize My Social Security and MaxiFi Planner.
See more Ask Larry answers here.
Ask Larry about Social Security here.
Can Break Even Analysis Help Decide When To File For Social Security Benefits?
Hi Larry, I’ve used a lot of your information to convince clients to wait until age 70 to file for a claim. I’m in complete agreement that it often makes sense to do so, and I find that showing them that the breakeven date is often relatively early is useful in convincing them to delay filing. I often encourage clients to spend down their portfolio if they need to do so in order to wait to file. I had a recent case where we decided to spend down about $150,000 out of the portfolio so that she could retire a year earlier than originally planned and we are waiting five more years for her to claim Social Security. I can see how individuals may not choose that path on their own, but from my perspective, it often makes sense to wait and the breakeven analysis helps me drive that point home.
The cynical part of me says that some advisors don’t recommend clients wait on filing as they don’t want to see the portfolio spent down as that’s how many of them get paid. Maybe I’m being too jaded. Just my 2 cents. Thanks, Craig
Hi Craig, Thanks for using our software! Breakeven analysis, would, it seems, reference two strategies that have the same lifetime value. An example would be a) collecting at 65 versus b) collecting at 62, suspending at full retirement age (FRA) and restarting at 70. Our calculations are showing the strategy with the maximum lifetime value. Maximum, by definition, means there is nothing against which it breaks even. You can set up different base cases and show that our maximized solution is better than break even.
The date at which accumulated benefits under one strategy equal accumulated benefits under another will naturally lead clients to consider whether they will live that long. Now they are into actuarial analysis, which is appropriate for insurance companies, but not for households. Households need to focus not on their life expectancy, but on their maximum age of life. That’s their catastrophic longevity event because living to the maximum age of life requires supporting yourself till then.
So this is why we don’t present breakeven dates. It will lead people to make the wrong decision because they will look at the wrong metric. I think the way to convince the risk is to point out that waiting represents an enormous arbitrage opportunity. The real yield on 30 year TIPS is around 70 basis points. On SS, the internal return is 300 basis points. Plus they are using very old actuarial tables. Best, Larry
Which Month Would I Choose To Start My Benefits If I Want To Start Drawing At Age 69?
HI Larry, I will turn 69 next June 28 and I am planning on filing for my Social Security retirement benefit at that time. What month should I request my benefit to start in so that I will be sure to get the higher age 69 benefit and not the lower age 68 benefit? Would that be in June or July? When I spoke to Social Security today, they said that it did not matter that my birthday was at the end of the month; my benefit would start in June and my first check would be sent in July. Please clarify this issue. Thanks, Jane
Hi Jane, In your case you would choose June, which is the payment delivered in July. However, you may want to consider using our software to compare your options before you make your final decision. If you file in June 2020, i.e. the month you attain age 69, you won’t initially be credited with delayed retirement credits (DRCs) for the first five months of 2020. When a person files midyear between their full retirement age (FRA) and 70, they initially only receive credit for DRCs accumulated through the prior December. Credit for any months of DRCs earned in the year of filing aren’t payable until benefit payments due for the following January.
So if you file in June 2020, you won’t receive your full 24%, i.e. 8% per year, DRC increase, at least not to begin with. Instead, your payment rate for June through December of 2020 will only be roughly 20.66% higher than your full retirement age rate. The additional 3.33% increase due for the first five months of 2020 would eventually be credited effective with your payment for the month of January 2021, but you probably wouldn’t actually receive the increase until much later. Social Security only processes recomputations to include partial year DRCs every other year. The additional increase would be retroactive to your benefit payments starting for the month of January 2021, though, regardless of when Social Security gets around to processing the recomputation. Best, Larry
Is Social Security Correct About My Case?
Hi Larry, I became eligible for SSDI in 2015 when I was 62. My wife began collecting her full benefit when she turned 66 in February. I turned 66 in May and I told Social Security that I wanted to suspend my disability benefit until 70 and collect a spousal benefit as she was already receiving her benefit. Social Security denied my claim saying that I would have to pay back the four years of SSDI or $120,000 in order to receive a spousal benefit of $875 per month. Obviously that makes no economic sense. Are they correct? Thanks, Phil
Hi Phil, Unfortunately, the answer is yes. Social Security rewrote their rules at the end of 2014 in order to prevent people receiving Social Security disability (SSDI) from filing for spousal benefits only at full retirement age (FRA) while letting their own benefit rate grow until 70. Social Security calls the rewriting a clarification, but it appears to have been a clear change in positions. I wrote about the change in this article: “Social Security’s Christmas present: Benefit cuts for millions of disabled workers“.
Based on the regulations as they are now written, you could not file just for spousal benefits only at 66 unless you withdraw your claim for SSDI and repay all of the benefits you’ve received. That almost certainly would be disadvantageous, so it’s probably not worth considering. You could still voluntarily suspend your benefits in order to let your benefit rate grow by 8% per year until age 70, but you wouldn’t be able to draw any spousal benefits while your own benefits are suspended. Best, Larry
Is It True That I Can’t Claim Widow’s Benefits If I’m Now Married?
Hi Larry, I am a widow and remarried at age 60. I am now being told I cannot claim survivors benefits because I am now married. Is this true? Thanks, Carmen
Hi Carmen, Not if you remarried on or after your 60th birthday. A marriage that occurs at or after age 60 does not end eligibility for widow’s benefits. However, if you’re remarried and your current marriage took place before you reached 60, then you could not qualify for widow’s benefits on a former spouse’s record as long as your current marriage continues. Best, Larry
Will It Affect My Social Security If I Co-Sign An Equity Loan?
Hi Larry, I recently starting getting benefits after my husband passed away. I’m 67 and own a home with no mortgage. My son is trying to buy a home but unable to qualify. He is a veteran suffering from PTSD. Our accountant suggested I cosign with my son and apply for an equity loan on the house I own which is worth approximately $800,000. If I do this, will it affect my Social Security Benefits as that is my only form of income now. Thanks, Anne
Hi Anne, I’m sorry for your loss. Your Social Security benefits can be paid regardless of your net worth or the type of assets you own. Only earned income associated with a W-2 or a 1099-MISC if self employed can affect your benefits through the earnings test but the earnings test is only applied up to your full retirement age (FRA) anyway. Best, Larry
To learn more about your Social Security options, visit Economic Security Planning, Inc.