Wednesday, November 7, 2012

The timing of social security benefits

Bob is 61, working as a physical therapist, and is the owner of a clinic with two other therapists. He earns an average of $170,000 per year. His wife Carol, also 61, is a homemaker. She had worked as a medical secretary, full-time for 14 years before their first child was born, and part-time for the next ten years before her position was eliminated. She has not worked since. She made $30,000 per year in her last year of full-time work.

Both of them have earned enough credits to be eligible for social security benefits. They could begin as early as next year, when they reach age 62.

These are among the considerations:
  • If Bob retires at age 62 and begins collecting social security benefits, he will only receive 80% of what the benefit would be if he waited until 66, his "full retirement age." 
  • If he waits until age 70, the benefit he will receive will be 32% higher than the NRA figure, and 64% higher than the age 62 figure. 
  • The percentages of each will change each year. No one has to choose between age 66 and age 70. If Bob wants, he can decide to retire at age 68. 
  • When Bob begins collecting his benefits, Carol will be paid a spousal benefit that is 50% of Bob's benefit. That calculation, which uses his earning record, will be much higher than her own benefit, using her earning record. Essentially, the household will receive payments equal to 150% of his benefit. This is all the more reason to wait until he is age 70. 
  • If Bob dies, Carol will begin collecting benefits equal to those he was receiving, based on his earning record, in her own name. 
Carol cannot start receiving that 50% spousal benefit now. She has to wait until Bob starts collecting. But there is one step that she could take now. She could apply for a benefit based solely on her earning record now, and collect that (lower) monthly benefit until Bob decides to retire at age 66 or later. When he does so, she can then apply for the 50% spousal benefit.

Most people in her position should take that step. When Bob does retire, the total combined 150% figure will take effect, and it will not be affected by her decision to start taking her own benefits early. The cost-benefit analysis that goes into the personal decision on the question of when to retire does not enter into this question. If she does not begin collecting benefits on her own record now, that money will be forever lost.

As always, consultation with a qualified adviser is recommended.