Kotlikoff said that of late the split strategy has become a hot topic in the financial planning community. Advisors, he said, have come up with an idea of how to reproduce the strategy to produce a sort of file-and-suspend outcome to get some free benefits. The idea, he explained, is that the lower-earning spouse would take the retirement benefit at 62 while the higher-earning spouse would wait until age 70, and then they would hope that the higher-earning spouse dies “young.”
He explained that if the higher-earning spouse dies, the lower-earning spouse will be able to collect a widower’s benefit, which will equal the higher-earning spouse’s maximum benefit at age 70. “So that’s a scenario in which a lower-earning spouse gets retirement benefits for free in a sense that if you [the high-earner] die at, say, 70 … she starts collecting your check.”
And while this is an outcome where financially advantageous things can happen if the higher-earning spouse dies at 70, there is no guarantee that will happen, Kotlikoff said, noting that if that higher-earning spouse instead lives to age 80 or 100, then the lower-earning spouse, because she took benefits at 62, will continue to receive a low benefit even after age 70. Had she waited until 70 to collect, she would have gotten a 76% higher retirement benefit, adjusted for inflation, he said.
“So basically, this idea of getting a freebie can work out under some circumstances but can also not work out,” Kotlikoff said. “It’s a pretty reckless thing to be pushing this because it could be that the lower-earning spouse takes the benefit early again, the high-earning spouse refuses to die and the lower-earning spouse is stuck with this low benefit her entire life.”
There’s also a possibility that the low-earning spouse dies two weeks before the high-earning spouse and never collects the widow’s benefit. “And the whole thing was a mistake in decision,” he said.
Kotlikoff has developed software, called MaxiFi, that analyzes current and future finances. He said it takes the approach of playing it safe as possible. And that is what advisors should also be doing, he said.
“The fiduciarily correct thing to do is to assume that people are super risk-averse. They never want to see their living standard be lowered or below what they could possibly be,” he said.