In the last article, I talked about how a husband can improve his wife’s standard of living and retirement security in the event that he dies first by delaying the age he begins collecting his Social Security benefits. Now, let’s explore some of the key issues that surround the decision of when to start taking benefits.
Widowhood is costly. The average widow’s income drops materially when a husband passes away because, in most instances, while both are alive, most couples are drawing a Social Security check for each of them. Upon the death of the first spouse, one check stops, and the widow begins receiving the larger of her benefit or her husband’s but, not both. If she is dependent on the survivor benefit based on her husband’s check, the earlier he started collecting his benefits, the larger the drop in her income. Conversely, holding off means the husband will be able to pass on his higher benefit to his wife. For some, the difference can mean a life of relative comfort or forced frugality.
Lots of variables in deciding when to collect. Unfortunately, research conducted by The Federal Reserve Board and others, find that despite the impact on their wives, husbands too often make a costly mistake by choosing not to delay claiming Social Security. Some common explanations for this choice include: 1) concerns about tapping current assets in order to “bridge” the period until they start receiving benefits, 2) believing they will not live long enough to gain from delaying, and 3) fearing that if they wait, their benefits will be cut or lost because the Social Security program will run out of money.
Every household is different, so think carefully about your decision. Although the evidence strongly favors the high earner delaying benefits in most circumstances, there is no one right answer. For some, the liquidity issues play a central role. If you don’t have enough assets or income from other sources (e.g. company pension, rental income, etc.) to pay for your retirement spending needs and you are not interested in staying in the workforce longer, you may not have a choice but to start collecting benefits when you leave your job. Similarly, if you suspect that both you and your wife will have a short lifespan, it may make sense to start collecting sooner not later so that you can enjoy your lives while you both are still able. The key is to make a well-thought-out, informed decision based on your personal and financial circumstances.
This article is for general information purposes only and is not intended to provide specific advice on individual financial, tax, or legal matters. Please consult the appropriate professional concerning your specific situation before making any decisions. John Spoto is the founder of Sentry Financial Planning in Andover and Danvers. For more information, call 978-475-2533 or visit www.sentryfinancialplanning.com