Social Security Case Studies: What’s at Stake for Single, Married, Divorced and Widowed Retirees?

This article will take a look at some actual Social Security cases for all relationships – single, married, divorced, and widowed. These cases illustrate the critical role a smart Social Security claiming decision can make on retirement finances. You will also see the variety of circumstances that must be considered in order for retirees to make the optimal Social security claiming decision.  

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A comprehensive Social Security analysis and further retirement planning requires that clients estimate their life expectancy. This is not a topic most people want to think about or discuss! I recommend they use the Living to 100 Life Expectancy Calculator at www.livingto100.com in order to help them get a more accurate estimate based on their own personal circumstances. Avoiding longevity risk, or running out of money if we live longer than expected, is an important part of Social Security planning.

SINGLES

Case #1: I met Karen at a local Social Security seminar we held. She is 61, single and never been married with a life expectancy of 90. Her case is typical of someone who has worked consistently throughout their adult life, earning an above average to high wage that increased over her career. Her Social Security statement listed her Primary Insurance Amount (PIA) at $2,750, the monthly amount that she would collect at her Full Retirement Age (FRA) of 66. Note: FRA is also known as Normal Retirement Age (NRA).

Karen was smart to become educated on Social Security and get advice prior to reaching age 62. By understanding her options and the financial consequences of her Social Security election decision, she was able to accurately plan her retirement date.

For singles who can do so, waiting to claim later will provide the most Social Security income over their lifetime. Approximately 42% of men and 46% of women currently claim their benefit as early as possible at age 62. For those who are able to wait, not only will their monthly amount increase each year due to Delayed Retirement Credits, but potentially higher income years could replace earlier low income years, increasing their benefit even more. See the SSA Retirement Benefits Booklet.

As a high earner with a long life expectancy, Karen’s case exemplifies the difference between claiming early or waiting to claim later. Since she planned to continue working until age 66 she did not consider claiming at age 62. Also, if she were to start collecting Social Security prior to her Full Retirement Age of 66 she would be subject to the earnings test, as shown on the SSA Earnings Test Booklet.

For Karen, waiting to claim until age 70 will give her a cumulative Social Security lifetime income of $842,520 (present value) or $42,890 per year (today’s dollars). If she claims at age 66 her annual income would be $32,490 (today’s dollars) for a total of $753,740 (present value) over her lifetime. The difference of over $10,000 per year is a significant increase and for Karen, worth waiting the 4 years to claim.

Case #2: A local CPA who had attended one of our Social Security seminars referred Mark to me. He was single, never been married, age 64 and estimated his life expectancy at age 95.

After working in private industry for most of his life, Mark had returned to school a decade before and changed his career. He was currently working as a college counselor and contributing into the State Teachers Retirement System. So he qualified for Social Security benefits and would also be receiving a pension.

This is a fairly common situation and triggers two Social Security rules, the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Mark knew that he was affected by the rules, but was having difficulty determining the exact affect it would have on his Social Security benefit. Please reference the SSA WEP and GPO Booklets for this case study.

Unless you love crunching numbers, the cases with WEP and GPO calculations are best left to software to quickly determine the optimal claiming strategy. As a general rule, it is almost always still beneficial to defer applying for Social Security for as long as possible up to age 70, but all clients have different circumstances that affect that decision.

Mark’s Social Security statement indicated that he had a PIA of $1,180. The WEP rule takes into account how many years of “substantial earnings” covered by Social Security that a person has in order to determine the reduction factor that applies to their PIA calculation.

The PIA calculation is made by separating a workers Average Indexed Monthly Earnings (AIME) into three amounts and multiplying the amounts by three factors, 90%, 32% and 15%. The three amounts are determined each year by the two Bend Points, https://www.ssa.gov/OACT/COLA/bendpoints.html . The bend points in 2016 are $856 and $5,157 and the WEP adjustment applies only to the first of these calculations.

In Mark’s case he had 18 years of work that was equal to or above the “substantial earnings” for those years. His adjustment to his PIA was therefore 40 percent, as shown on the WEP table. This means that the first $856 of his AIME is multiplied by 40% instead of 90% when calculating his WEP adjusted PIA. The reduction to his PIA is therefore approximately ($856 x 0.9) – ($856 x 0.4) = $428.

Due to the precise nature of the software calculations, the dates of application being in the future, and use of present vs. future dollars, exact benefit income amounts vary. However, if Mike begins collecting Social Security at age 66 his monthly income would be about $775 or $9,285 annually. If he is able to delay claiming until age 70 his monthly amount increases to $1,020 or $12,255 per year. The last I heard from Mark he was planning to wait until age 70 to start collecting his Social Security, which would provide him with $218,810 of lifetime income (present value).

MARRIED

Passage of the 2015 Bipartisan Budget Act on November 2, 2015 included reforms to Social Security, in particular Section 831 – Closure of Unintended Loopholes. This new Section would phase out two claiming strategies commonly used by couples known as the “file and suspend” strategy and the ability to “file a restricted application”.

The limited 6-month window for use of the file and suspend strategy until April 29, 2016 received significant media attention and suddenly retirees who had not even heard of the rule wondered if it applied to them. The first 4 months of 2016 were therefore filled with inquiries about these rules and how they worked.

Although the majority of my cases are with married couples, no two are the same by any means. The difference in ages, earnings history, life expectancy, and whether one or both spouses may have a pension in addition to Social Security, makes each married case very unique. The following two cases illustrate how couples could, and in some cases still can, coordinate their Social Security claiming strategies to increase their total lifetime income.

Case #3: I met with Robert and Sarah in March 2016 and spent an hour reviewing the information they were looking for and how I could help them. Their first step towards a comprehensive retirement plan was to analyze their Social Security claiming strategy.

Robert and Sarah were both 65, but Sarah was about to turn 66 in early April. Since the “file and suspend” strategy would only be available to couples where one or both would be 66 or older by April 29, 2016, understanding their options in the next month or so was very important.

Both had high PIAs and since the early 2000’s their annual incomes have been greater than the Maximum Taxable Earnings. https://www.ssa.gov/planners/maxtax.html. They also both planned to continue working until age 70. Robert listed his life expectancy at 84 and Sarah’s was 95.

Robert and Sarah have an adult son who had been disabled prior to turning 21. He therefore may be eligible for an adult “child’s” Social Security benefit based on his parents’ earnings once they have started receiving retirement benefits. It also allowed them, as parents, to collect “child-in-care” spouse’s benefits. Both these benefits are 50% of the parent’s PIA up to the Family Maximum Benefit (FMB) https://www.ssa.gov/OACT/COLA/familymax.html

The details of qualifying for different benefits based on a disability is a subject beyond the scope of this article however, the Benefits for Children with Disabilities Booklet is a good summary of the process. Robert and Sarah were still uncertain if the specifics of their son’s disability would allow him to qualify for benefits so we would run several scenarios assuming he either did or did not qualify for Social Security as an adult child.

The original analysis indicated a multi-step process to maximize their Social Security income benefits as a family. First, Sarah would file for benefits then immediately suspend them when she turned 66 in early April, aka the “file and suspend” strategy. By her having filed and suspended her benefits, Robert and their son were then eligible to collect spousal and adult child benefits. So in the month of April Robert would file for a “child-in-care” spouse’s benefit and Sarah was eligible to receive an adult child’s benefit for their son.

Upon turning 66 in June, Robert would file a “restricted application for spousal benefits”, also 50% of Sarah’s PIA. Use of the restricted application was required if he wanted to receive his lower spouse benefit, rather than his own higher retirement benefit.

Interestingly, the analysis indicated that Sarah should file for her own retirement benefits in November 2016 at the age of 66 ½ and Robert would switch from his spouse benefit to his own retirement benefit at age 70. He would also then become the parent to obtain their son’s adult child benefit.

Although I have listed all the various steps and applications involved in this case, it is not my intent to overwhelm the reader with those details, but merely to highlight how complicated a family Social Security case can become.

I have to admit that I am still not completely sure why Sarah claiming at age 70 would not have given them a higher amount of Social Security income. I do know that the interconnectedness of their various benefits, the fact that they were still working and earning high incomes until age 70, and the way the FMB works all combined to make this the best strategy.

Not everyone may want to “jump through the hoops” of the various applications required in a case like this. The value of detailed, precise software is that further examination of a variety of claiming age scenarios can quickly be made. In the end, the exact date to file for Social Security is a very personal decision and should be the best fit for the clients’ needs, not necessarily the exact maximum amount.

For Robert and Sarah, the analysis with their son qualifying as a disabled adult child would provide them with a lifetime Social Security benefit of over $1,700,000 (present value) with an annual income of over $90,000 (today’s dollars). Should their son not be eligible as a disabled adult child, their benefit would total over $1,300,000 and give them an annual income of about $80,000 (today’s dollars).

As is the case for all married couples, when the first one dies, the survivor “inherits” the larger of the two Social Security income benefits. For this reason it is important as a couple to plan to maximize the higher earner’s benefit since it will be the one left to the survivor.

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