A series of articles in ThinkAdvisor has been examining claiming strategies using total lifetime benefits as the measure for optimal claiming. This, of course, is the same principle we use for Savvy Social Security Planning. The software calculates the starting benefit amount for each spouse based on claiming age and adds up all benefits paid over each spouse’s remaining life based on the life expectancies you enter. The scenario that pays the highest total benefits over the couple’s joint life expectancy is deemed the maximum benefit scenario. It’s pure, simple math that provides extremely valuable direction to couples in that it incorporates survivor benefits for the longer-lived spouse, which in turn informs the higher-earning spouse’s claiming age.
The beauty of the software is that it customizes the scenarios for each client based on their age, PIA, and life expectancy, so you can throw out rules of thumb and give clients personalized advice. Nevertheless, once you’ve run a few scenarios it’s natural to draw conclusions which can easily turn into rules of thumb. One rule of thumb we talk about a lot is that the higher earning spouse should always claim at 70. This maximizes the higher benefit during that spouse’s lifetime and, if that spouse dies first, during the lifetime of the longer-lived spouse.
So I did a double-take when I read the second of the three ThinkAdvisor articles which drew the conclusion that when you have a high-earning husband and a wife who never worked, the husband should claim his benefit at FRA, not age 70. The rationale—assuming both spouses are the same age—is that if he waits until age 70 to claim his benefit, she must also wait until she is 70 to claim her spousal benefit. Since spousal benefits max out at FRA, his waiting until 70 forces her to have zero income from FRA to age 70 while her spousal benefit is not growing. I checked it against our own Savvy software and confirmed the results. In this example using the PIA, ages and life expectancies they used, the husband would be better off claiming at FRA in order to start the wife’s spousal benefit as soon as it hits the maximum at her FRA.
Then I took a closer look at the life expectancies. They used 85 for him and 87 for her, which are the average life expectancies for men and women respectively. This means she would receive that higher survivor benefit for only two years after his death and this would not compensate for the three years of zero income while she waited until 70 to start the spousal benefit.
In our examples we usually use life expectancies of 85 for the husband and 95 for the wife. When these life expectancies are used, the surviving spouse will receive the survivor benefit for ten years, and this more than makes up for the few years of zero spousal benefits while she is waiting for her husband to claim. In other words, if she lives to age 95 his delayed credits are worth far more than three extra years of spousal benefits for her.
So clearly, the total amount of lifetime benefits that will actually be received by a couple depend on how long they each live. Since this is unknowable, we have to make assumptions.
I’ve always contended that when doing financial planning, different life expectancies may be used for different purposes. If you’re looking at portfolio withdrawals, the conservative assumption would be a long life expectancy for both spouses to make sure the couple’s money lasts. But when you want to assure sufficient income for a surviving spouse, the conservative assumption is a short life for him and a long life for her. This often leads to the purchase of life insurance, and also to the recommendation that the husband delay his Social Security to age 70. When he dies, his higher benefit will switch over to her and the strategy therefore serves as a form of life insurance. The husband claims at 70 just in case he dies early and she lives a long life. It’s low-risk longevity planning.
If you plan on a life expectancy of 87 for her and he claims at FRA, and if she ends up living longer than 87, she’ll end up with lower monthly income later in life—$2,302 vs. $2,854 if he’d claimed at 70 (using a PIA of $2,302). This also translates to lower lifetime income for the couple. So having the higher earning spouse claim at 70 is a protective measure—like buying life insurance—where the “cost” is her three years of spousal benefits from age 67 to 70 ($1,151 x 36 months = $41,436) and the “payout” is the extra $552 in income from age 85 to her death (not counting COLAs, which would make a significant difference). If she lives another 6 years, to age 91, it will have been worth it. If she doesn’t, the shortfall may be considered the cost of insurance which, unfortunately, wasn’t needed.