For Social Security. timing becomes vital

December 23, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,Tribune Media Services

My wife and I are both 61. She is retired, and I plan to work until I am 65. We have 401(k) savings of $900,000 and owe approximately $160,000 on our home. That is the only debt we have. I earn roughly $140,000 a year. Should my wife begin taking Social Security at 62? She would be eligible for $700 per month. I read that it makes sense for a non-working spouse to begin taking Social Security at 62. What would the income tax ramifications be of doing this if we file a joint tax return?

Researchers at Boston College studied couples' optimal Social Security benefit-claiming strategies, so the material you read may have come from that study, which was published in the Journal of Financial Planning in June.

Although the college's Center for Retirement Research did conclude that it is often optimal for a spouse to claim benefits early and the primary wage earner to delay claiming until age 70, your situation may call for a different approach.

The center's optimal strategy works best when a spouse's lifetime earnings are at least 40 percent of the larger wage earner's lifetime earnings, said Alicia H. Munnell, director of the center. So by claiming early and receiving at least a moderate-size benefit, the spouse maximizes the claiming time before qualifying for the full survivor benefit upon the death of the primary wage earner.

The strategy hinges on several factors, including the earnings difference and the age difference between the spouses.

Munnell and her team agreed to review your situation to see if a different strategy might be appropriate, though she warned that this is an estimate based on limited knowledge of your overall financial picture.

Your wife's projected benefits on her work record - $8,400 a year - indicate that there was a big income gap between the two of you, Munnell said.

Assuming that's the case, you should both probably claim at 66, she said.

"Her benefit is so small that getting it from 62 to 65 will not compensate for the losses from the actuarial reduction to the spousal benefit," she said.

Spouses who have not worked or who had very low earnings relative to the primary earner are entitled to benefits equal to half that of the primary earner. The Social Security Administration calculates benefits on the spouse's work record and on the primary earner's record and pays the higher of the two.

Your wife's spousal benefits that are tied to your work record (the research team estimates they'll be $12,500 annually) will be so much larger than what she would qualify for on her own work record that the future reduction in those benefits by claiming early would outweigh the benefits of the income in the early years, she said. Claiming at 62 would reduce that $12,500 benefit to $9,375 when you retire and she starts collecting spousal benefits, Munnell's team estimates.

The tax ramifications are another reason to delay, Munnell said.

"Given his income, as much as 85 percent of her Social Security benefits might be taxable," she said.

Now, here's the monkey wrench: You.

When you die, your wife will receive your full benefit, no matter what her age was when she started claiming benefits. So the question for her becomes, how long will she receive the spousal benefit while you are alive? If you make it at least to age 72, she's still better off waiting to claim at 66 and taking those spousal benefits as long as possible, researchers at the center calculated.

If you believe you might have a shorter life expectancy, however, she might be better off claiming benefits at 62 on her own work record, then collect the spousal benefits when you retire until you pass away and she starts collecting survivor benefits.

Consider one more caveat. Some experts say that people who don't need to claim benefits should take them early anyway and invest them in the financial markets. Their argument? Over time, the money will grow at a faster clip than the actuarial benefits. But it takes saving discipline and investing success to make that work.

Beyond the claims question, the researchers estimate that if you purchased an annuity with your net liquid assets - the 401(k) savings minus your mortgage - it would generate at least $40,000 per year. With your maximum Social Security benefit of $25,000 and your wife's full spousal benefits of $12,500, that would bring you to about 55 percent of your gross income today.

As you approach retirement, start assessing whether this will cover your living costs. With no debt other than the mortgage, it looks like you have been living within your means. If you think you might be cutting it too close, though, working an extra year or two can make a big difference.

yourmoney@tribune.com

Janet Kidd Stewart writes for Tribune Media Services.

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