Editor's Note: Associate Editor Karen DeMasters writes the Social Security beat. Please send ideas to her at [email protected].
Deciding when to start taking Social Security benefits is more complicated than just deciding what is right for the primary beneficiary. If the beneficiary is married, he or she needs to take into account what the decision means for the spouse.
A common mistake is not looking ahead at how long the spouse may live after the beneficiary dies. The spouse can be dependent on those benefits for many years, says Brian Parker, managing director and co-founder of EP Wealth Advisors in Torrance and West Los Angeles, Calif.
"A lot of people just look at their own life expectancy and base their decision on when to start collecting Social Security on that, when they should also be looking at how long their spouse might live after they die," he says.
Most people try to determine at what age they would break even if they wait to collect monthly benefits until their full retirement age, usually 66 years old, rather than starting early at 62, when they get less per month.
"Generally speaking, the breakeven point is about 15 years between taking lower benefits early at 62 and higher benefits at the later full retirement age of 66. A lot of people think they would rather have the money in their 60s and 70s than their 80s," says Parker, a majority of whose clients are retired. "But I believe many retirees make this decision based on their personal situation rather than taking their spouse's future into consideration, so taking early benefits may not be the best decision."
If a couple lives to be 65, there is a 72 percent chance one of them will live to be 85, a 45 percent chance one will live to be 90 and an 18 percent chance one will live to be 95. Chances are it is going to be the woman who lives the longest and she may be totally dependent on the survivor benefits she receives from her late husband's earning record, especially if she has no earnings record of her own to draw on or if her earnings were lower than her late husband's.
Whatever amount the husband receives when he starts collecting is the amount that will be collected for the rest of his, and then the survivor's, lifetime, plus cost-of-living increases, according to the Social Security Administration.
If the husband wants the wife to collect as much as possible after he is gone, he will wait until at least full retirement age, and if possible he will wait until age 70 to begin collecting because the benefit grows each year until then.
"Maybe Social Security should be looked at as old age insurance as we continue to live longer, as opposed to trying to maximize income early in retirement," Parker says. "Many people want the money early because they have had to make sacrifices during their working years, such as foregoing travel."