02 Feb Maximizing Social Security when one spouse has health issues

 Q. My husband is one year older than me and has significant health issues. We are currently 57 and 56. For this reason, he is planning to collect Social Security at age 62. I would like to collect a spousal benefit as early as possible and then switch to my own benefit at age 70, when it will be higher. I am the higher wage earner, but I am in better health. Do I need to be 65 before I can collect as a spouse? Does he need to be 65, or can I collect when he is 63 and I am 62? I thought about collecting my own benefit at 62, then switching to spousal benefit for a few years when I qualify, then back to my own benefit at age 70.

A. It is a wise decision to be strategic about Social Security Planning.

For most individuals, Social Security is the only pension-like income that they will have, and it currently comes with cost of living increases, which is 1.7 percent in 2015, said Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

If you take the benefit at the earliest possible age 62, that benefit is locked at that level, she said. It’s also 25 percent lower than your benefit at your full retirement age, which would be age 66.

“Each year that you postpone taking the benefit from your FRA till age 70, the maximum benefit allowed, you would get 8 percent more,” she said.

If your spouse starts to collect his benefit at age 62, and you try to collect your benefit when you reach age 62, you will be collecting the higher of the two benefits automatically — one half of his benefit or your benefit at age 62, D’Agostini said.

“Since your individual benefit is higher, you will permanently reduce your benefit and only be eligible to receive the cost of living increases,” she said. “You could not select to receive his lower amount.”

Also, D’Agostini said, if you are under your full retirement age and continue to work and collect Social Security, you would lose $1 for every $2 of benefit payments that you earn above the annual limit, which is $15,720 for 2015.

You are not able to switch back and forth as you suggested at the end. D’Agostini said if you do not collect at age 62, you could file and suspend your benefit at your full retirement age and collect half of your husband’s benefit, allowing your benefit to grow the 8 percent a year.

“You could then switch to your full benefit at age 70,” she said. “If you enjoy good health, and have longevity in your family, this could maximize your benefit over time. Since you are the higher wage earner, and therefore most likely have the higher benefit, it makes sense to maximize yours.”

Let’s do this again with the nitty-gritty of the numbers — especially if you’re thinking the 8 percent reduction isn’t a big deal.

First, you will each receive a reduced benefit for each month prior to Full Retirement Age (FRA) that you elect to start Social Security. That benefit reduction will be 32.5 percent for your husband and 33.33 percent for you at age 62, said Stephen Craffen, a financial advisor with Stonegate Wealth Management in Oakland.

“We used a specialized piece of software to try to determine the best scenario for you,” Craffen said. “Now it is important to understand that the projected life expectancy for yourself and your husband alters the best scenario — that which maximizes your potential benefit — and the potential benefits for claiming strategies are very different.”

Here’s what Craffen came up with:

Scenario 1, Life Expectancies:

You: 75
Your Husband: 70

Recommended Strategy:

• Husband begins benefits based on his earnings record in the estimated amount of $1,606 in November 2019 at age 62 and 1 months.
• Wife begins benefits based on her earnings record in the estimated amount of $2,017 in July 2021 at age 62 and 8 mos.

Total Benefits Collected: $450,767

Scenario 2, Life Expectancies:

You: 70
Your Husband: 70

Recommended Strategy:

• Husband begins benefits based on his earnings record in the estimated amount of $1,606 in November 2019 at age 62 and 1 months.
• Wife begins benefits based on her earnings record in the estimated amount of $1,871 in November 2020 at age 62.
• In October 2027 wife switches to survivor benefits in the estimated amount of $2,302.

Total benefit: $320,384

Scenario 3, Life Expectancies:

You: 85
Your Husband: 70

Recommended Strategy:

• Husband begins benefits based on his earnings record in the estimated amount of $1,606 in November 2019 at age 62 and 1 months.
• Wife files a restricted application for spousal benefits only in the estimated amount of $1,315 in July 2025 at age 66 and 8 mos.
• In October 2027 Wife begins survivor benefits in the estimated amount of $2,302.
• Wife switches to benefits based on her earnings record in the estimated amount of $4,189 in November 2028 at age 70.

Total benefit: $1,012,900

You can see that the expected life expectancies for you and your husband are important in deciding as to the best claiming strategy for Social Security.

“In these scenarios we assumed that your husband has a health issue that causes him to predecease you,” Craffen said. “In every scenario it makes sense for him to start taking Social Security as early as you thought.”

The critical decision to make, though, is deciding whether to take your own benefit early, and that depends on your health.

“It is important to realize that what happened to our parents may not necessarily be what happens to us,” he said. “Additionally, medical technology is always advancing so your life could be much longer that you thought.”

If you do not need the money immediately when you are age 62, Craffen said, he recommends delaying your benefit.

“The option of taking it early is non-recourse – by that we mean that even if you later decide to suspend your benefit you will always have a reduced benefit in the future,” he said. “Delaying it is not non-recourse; you can always decide to take Social Security at 64, for example, if you see your health declining.”

He said he believes the advantages of delaying Social Security are “asymmetrical,” meaning you may not collect as much as you would have if you die prematurely, but you will collect much more if you live a very long life and Social Security provides some insurance against living “too” long.

The dramatically larger payments you receive allow to you to invest your portfolio a bit more aggressively, perhaps allowing it to grow more, Craffen said.

“Many people are concerned about the `regret’ they may experience if they did not collect all they could have by delaying the beginning of their benefit,” he said. “Our view is that the greater risk you have for outliving your assets and having a much smaller Social Security benefit when you are 90 is a much worse outcome.”

He recommends you consider having your entire financial picture reviewed by an advisor who knows your whole situation to help you with your overall retirement strategy.

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This story was first posted in February 2015.