“Obvious” Social Security Decision May Not Be Best One

By Jeffrey Levine, IRA Technical Expert
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Suppose your good friend, John Doe, has just come to you with extremely troubling news. He’s been diagnosed with a terminal illness and has been given just three to six months to live. John has always been the primary breadwinner in his family and is understandably concerned about his wife, Jane’s, financial security. Jane is in excellent health and has longevity in her family genes.

Some further background on John and Jane. They are both 62 years old and John’s Social Security benefit, if he claimed at 66, is projected to be $2,000 per month. Jane’s on the other hand, is projected to be about $1,200 per month.

The question John has for you is, “What should I do about my Social Security? When should I file?”

If you’re like most people, you’ve already come to the obvious conclusion. John should file for his Social Security benefits now. After all, he’s not likely to make it much longer. He might as well get as much as possible now, while he still can, right?

Wrong! And that’s the problem. The “obvious conclusion” is one that is deeply flawed. While every situation is different and there’s a lot more about John and Jane that we haven’t discussed, the overwhelming likelihood is that John should NOT file for his Social Security benefits. In fact, if anyone should file now, it’s probably Jane.

Unless you happen to be a Social Security savant, chances are that makes absolutely no sense to you right now, but here’s the logic behind the decision. If John files for his Social Security benefits now, at 62, his benefit will be reduced to 75% of what he would have received at age 66. So instead of getting $2,000 per month, he would receive $1,500 per month.

At first glance, you’re probably thinking, “who cares?” $1,500 per month for as long as John can get it is better than nothing, right? Probably not, because it’s not just John we’re concerned about here. We have to consider Jane too, and as John’s spouse, she would generally be entitled to a survivor’s benefit. By claiming his Social Security benefits early at 62, John is not only reducing his benefit, but he’s also reducing the survivor benefit that will be available to Jane after his death for the remainder of her life. 

Note: The precise survivor benefit Jane would be entitled to would be determined both by when John claimed his original benefit and when she claimed the survivor benefit. A more thorough analysis of how the survivor benefit is calculated is beyond the scope of this article.

So what is likely the better course of action for John and Jane here? Chances are that Jane should, at some point, file for her own retirement benefit. John, on the other hand, should likely do absolutely nothing. He should probably leave his own benefit alone. This way, when Jane reaches her full retirement age – 66 – she can switch from her own lower benefit, to the unreduced higher survivor benefit for life.

Putting some numbers to the whole thing, here’s how it would look.

Jane starts collecting her own Social Security benefit at age 62. Since she’s claiming early, her $1,200 monthly benefit at 66 will be reduced to 75% of that amount, or $900 per month. For the next four years, Jane can receive that amount (plus cost-of-living adjustments) and then, at 66, she can swap out her own benefit for John’s survivor benefit of $2,000 (plus cost-of-living adjustments). If Jane lives even close to her expected life expectancy, this approach will produce greater lifetime benefits compared to the “obvious” choice of John filing for Social Security now to get what he can before he dies.

So just remember, when it comes to Social Security, the obvious choice may not be the best choice.

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