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Social Security Strategies with a Reduced Life Expectancy

The decision of when to claim Social Security involves a break-even analysis. By waiting to claim benefits, you give up something now (this month’s benefit) in exchange for an increased benefit in future months. As a result:

  • The longer you expect to live, the more attractive delaying benefits becomes (because you’ll receive the increased benefit amount for many years), and
  • The shorter you expect to live, the less attractive delaying benefits becomes. (Obvious example: If you have a medical condition such that you don’t expect to make it past age 64, deciding to wait until age 70 to claim benefits usually wouldn’t make sense.)

But there’s one big exception.

When It Makes Sense to Wait

If a married couple has one person who is the primary earner, it can make a lot of sense for that person to delay claiming Social Security for as long as possible, even if he/she has a reduced life expectancy.

The reason it likely makes sense to wait is that doing so increases not only the benefit received by the higher-earning spouse, but also the survivor benefit that the lower-earning spouse will receive once the higher-earning spouse passes away.

To show how surviving spouse benefits work (and how they’re affected by the age at which the deceased spouse filed for benefits) let’s run through a few examples.

To keep things simple, we’ll assume that:

  • Spouse A would receive an annual benefit of $15,000 if he/she claimed benefits at his/her full retirement age (FRA) of 67, and
  • Spouse B never had any earnings of his/her own.

Example 1: Spouse A files for benefits as early as possible at age 62. Due to claiming benefits 5 years prior to full retirement age, Spouse A’s benefit will be reduced by 30% to $10,500 per year rather than $15,000. Spouse A then dies at age 64. Upon reaching his/her own FRA, Spouse B claims survivor’s benefits. Spouse B’s annual benefit is equal to the $10,500 that Spouse A had been receiving (plus any applicable cost-of-living-adjustment for inflation).

Example 2: Spouse A dies at age 64, having never filed for benefits. Upon reaching his/her own FRA, Spouse B claims surviving spouse benefits. Spouse B’s annual benefit is equal to the $15,000 that Spouse A would have received upon claiming at full retirement age (again, plus any applicable cost-of-living adjustment).

Example 3: Spouse A dies at age 69, having never filed for benefits. Upon reaching his/her own FRA, Spouse B claims surviving spouse benefits. Spouse B’s annual benefit is equal to the benefit that Spouse A would have received, had he/she claimed at age 69 on the date of death (again, plus any applicable cost-of-living adjustment). Ignoring the inflation adjustments, that works out to approximately $17,400 per year (that is, $15,000 with an increase of 0.66% for each month that Spouse A lived past his/her FRA).

Note that in each of the above examples, if Spouse B had claimed surviving spouse benefits prior to his/her own full retirement age, the benefit would be reduced.

In short, if you have a reduced life expectancy and you’re unmarried or you’re the lower-earning spouse of a married couple, it likely makes sense to claim Social Security as early as possible. If, however, you’re the higher-earning spouse, putting off your claim for benefits might be wise, because it increases the survivor’s benefit that your spouse will receive for the rest of his/her life after you’re gone.

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Comments

  1. If one of the spouses is subject to the Government Pension Offset, many teachers are, it’s probably best to have the spouse collecting Social Security to begin collecting at 62. Otherwise, if that person dies, the person affected by GPO won’t be able to collect the Social Security anyway.

  2. There is an incentive to collecting Social Security as soon as you hit your full retirement age (even if you’re still working).

    That way you’ll get the most you can before the well runs dry.

  3. In my opinion, “runs dry” is an overstatement. According to the most recent trustee’s report, even with no increase in revenue and no changes to mitigate the shortfall, 100% of benefits would be able to be paid until 2032, after which 75% of benefits would still be able to be paid.

    Still, I agree that there’s some degree of political risk involved (though I think it’s far lower for people who already could claim benefits than it is for younger folks).

If you want to discuss this article, I recommend starting a conversation over at the Bogleheads investing forum.
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