Social Security 6: The 70-66 Strategy

The following is a guest post from Marotta Asset Management.

Every retiree has significant choices to make regarding Social Security benefit options. One way to analyze the possible scenarios is by calculating the joint lifetime benefits for couples. This method suggests the higher wage earner should often delay filing to receive a maximum benefit at age 70.

If a higher earning husband opts to delay his retirement, the next decision involves when a lower earning wife should file. Let's consider the case of James and Betty Butterworth again. We have already established that if James is healthy, he should delay his filing. He should only consider the file-and-suspend option if his family history and/or personal health implies a premature death. Betty's short working life means she is only entitled to a small benefit of her own. Thus she will receive a spousal benefit from the point that her husband files, preferably at age 70, for the rest of his life.

You might assume Betty should file as soon as possible because she most likely will inherit James's increased benefit. But this decision may overlook the 25% penalty carried over from Betty's reduced personal benefit to her spousal benefit. Current retirees who file at age 62 have their monthly Social Security check reduced by 25%. If Betty files at 62 for her own reduced benefit, this 25% cut will apply to her spousal benefits. So instead of receiving half of James's increased benefit (e.g., $1,533 = half of $3,066) when he files at age 70, she will only get $1,149 monthly. If she waits until age 66 to file on her own record, her spousal benefit will not be reduced. The 25% cut does not carry over to survivor benefits. So in any case Betty will assume James's full $3,066 monthly benefit when he dies.

To avoid this reduction on both the personal and spousal benefit, Betty should file at age 66. This 70-66 strategy is a smart and very common way to maximize Social Security income for healthy couples. Waiting until age 66 means that Betty will receive her the full spousal benefit when James files. The 70-66 strategy can increase a couple's income 14% over filing early and 22% over both filing at full retirement age.

There's no incentive for a lower earning wife to delay her filing beyond age 66. Because a spouse can inherit no more than 100% of a benefit, filing at age 66 maximizes both spousal and survivor benefits. Thus no benefit accrues if both James and Betty wait until age 70 to file. He should file at 70 and she should file at 66.

If the wife is the high wage earner, her incentives are quite different. Unless she is much older than her husband, she will most likely outlive her spouse. But even in this case the wife should still consider delaying her own filing to secure maximum benefits for herself.

Interestingly, a higher earning married woman's Social Security income maximization incentives resemble those for a single person. Single people and higher earning wives should only consider their own life expectancy when making filing decisions. If healthy, they should delay filing. Filing early only makes sense for people who have reasons to doubt their longevity. Informed decision making should take all these calculations into account.

Delaying your filing means you could likely have a reduced income during these gap years. You may want to use that time to convert some of your pre-tax investments to a Roth IRA.

Converting some of the money in a traditional IRA to a Roth IRA requires paying ordinary income tax rates on the amount in question. If you can orchestrate some years in which your income is as low as possible by delaying Social Security benefits, you can minimize the tax required when the money comes out of your IRA.

To maximize your family's Social Security benefits, you must integrate Social Security legislation with your personal situation: your ages, earning histories and your best guess at life expectancy. Careful tax planning to anticipate future earnings and the potential for Roth IRA conversions should be part of your plan.

Finally, if you are eligible for Social Security disability or have been divorced, the rules become even more complex. Don't make these decisions quickly or carelessly. How you handle your choices about Social Security benefits can be worth more than a quarter of a million dollars.

Click here to read part 1 of this series.

Comments

[Maria]

From an actuarial point of view, according to the CDC the average US life expectancy is 77.8 years.
http://www.cdc.gov/nchs/fastats/lifexpec.htm
If Betty collects $1149 for 15.8 years she will have collected $217850.40, and left more of her original net egg intact(theoretically).
If Betty waits til she is 66 she will collect $1533 for 11.8 years collecting $217072.80, and may have had to use more of her original retirement assets.(again theoretically). If the average spend down rate for retirees is around 4% per year she will have 16% more of her assets and have collected approx$777.60 more.

[david]

A better table to use for this type of analysis would be http://www.cdc.gov/nchs/data/hus/hus08.pdf#026

This table shows a 65 year old woman will live about 20 more years and thus the 66 year old woman would live about 19 more years not the 11.8 years used in the calculation above.

Additionally, the data in the tables is an "AVERGE", however some people are healthier than others and/or have families with long life spans. Thus certain people could "EXPECT" to live longer than the average and thus assume to live even longer than 19 years I have shown above.

[Maria]

David,
My main point is that:
1 You have to get past the breakeven point, which happens to be average life expecancy. There are no guarantees.
2 You have to look at not only social security, but at the total picture. I wouldn't tell someone today to forgo early social security and start to draw down their portfolio in this market. Better to take a hit on Social Security and let their nest egg recover.
3. What happens when a retiree reaches 70.5 and must draw down retirement holdings? The larger SS income might get taxed anyway.

[M. Arant]

If one repays Social Security benefits received after having been taxed on 1/2 of his benefits for the years he received them can he then file amended tax returns for those years and recover taxes paid on the Social Security benefits? Will he receive some proof of the repayment that can be filed with the amended returns?