June 8, 2015

Diamonds Aren’t a Girl’s Best Friend, Delayed Retirement Credits Are!

Written by Jason Hiley

Typically people nearing retirement age decide when to claim Social Security based on their current needs and what they see as their own projected life expectancy.  People who do not anticipate outliving average life expectancies may claim Social Security benefits early.  Conversely, those who expect to live a longer than average life may consider delaying their election.

Furthermore, many people fail to consider that, after their own death, their Social Security election decision may have a significant impact on their spouse. Social Security benefits often continue in the form of a survivor income benefit and can total hundreds of thousands of dollars.  This may be THE most important factor as married couples decide when to claim Social Security.

(Men and women are both eligible for survivor income benefits.  Statistically speaking, women are most often the surviving spouse.  For the sake of simplicity, the surviving spouse will be referred to as “widow.”)

Delayed Retirement Credits

At full retirement age (FRA-66 for those born between 1943-1954), a person is eligible to receive 100% of his/her Social Security benefit, or Primary Insurance Amount (PIA).  He/she can elect to begin receiving benefits as early as 62, but doing so will reduce the monthly benefit by 25%.

On the other hand, a worker can delay the receipt of Social Security benefits beyond his/her FRA, up to age 70.  By doing this he/she receives what is known as delayed retirement credits (DRC).  DRC accumulate at a rate of 8% per year for up to four years, for a potential maximum benefit increase of 32%.

Consider Jim and Linda Wilson.  They are both 62 and contemplating when to claim their Social Security benefits.  Jim is eligible for $2,300/month in Social Security income at FRA.  His wife Linda is eligible for $300 on her own record at her FRA.

Due to his personal and family medical history, Jim feels strongly that he won’t live past the age of 77.  Assuming he lives until 77, Jim’s cumulative lifetime Social Security benefits would be:

Election   Age Percentage   ofPIA Monthly   Benefit Cumulative   Lifetime Benefitto   77*
62 75% $1,725 $331,200
66 100% $2,300 $331,200
70 132% $3,036 $291,456

*In current dollars

Jim does not think he will live past 77, so if he only considers his own projected lifetime benefit, he may come to the conclusion that there is no benefit to delaying claiming Social Security beyond 62. However, Jim and Linda need to consider the impact his election strategy may have on Linda’s survivor income benefit.  She is the picture of good health, has a strong history of longevity in her family, and thinks she will live until she is 92.

The Survivor Income Benefit

 After the death of her spouse, a widow is entitled to “step into” her husband’s Social Security benefit, provided it would be an increase over her current benefit.  Returning to the Wilson’s example, after Jim’s death at 77, Linda will spend the next 15 years collecting a survivor’s benefit.  As illustrated below, her total lifetime benefit varies greatly depending on the age at which Jim elects to claim his Social Security benefits.

Jim   Elects at 62 Jim   Elects at 70 Difference
Linda’s Monthly Survivor Income Benefit $1,725 $3,036 $1,311
Linda’s Cumulative Benefit in Widowhood $310,500 $546,480 $235,980(76% increase)

 

The numbers say it all – when deciding when to claim Social Security, a husband should not only consider his life expectancy, but that of his spouse as well.  By taking into consideration their combined life expectancy, the Wilsons will receive an additional$235,000 in lifetime Social Security benefits!  They say diamonds are a girl’s best friend, but maybe they should be asking for delayed retirement credits!

Consult a Professional 

Unfortunately, most people make Social Security decisions without consulting a professional.  You may be surprised to learn that the Social Security office is not allowed to give advice on strategies that would help maximize your potential benefit.  An expert in Social Security planning can take into account variables such as your current age, life expectancy, and financial assets in order to help you identify an election planning strategy best suited to maximize your lifetime Social Security benefit.

Don’t miss out on tens if not hundreds of thousands of dollars in lifetime Social Security benefits by making an uninformed decision.  Call or email us today to arrange a time to discuss your unique situation.

Learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE – Financial Planning and Investment Management