Social Security Strategies: Delaying to age 70

If you have read this blog in the past, you probably  know that I really don’t like life insurance. I like it even less in retirement. Still, I have seen enough situations, even in retirement, that someone passing away unexpectedly can put a strain on finances. Delaying your social security until age 70 is what is known as the social security insurance policy. You are giving up years of social security income in order to have a higher benefit in the future. The social security insurance strategy ensures that if you or your spouse have long lives, you are maximizing long term social security income. It can be a very effective strategy if the main breadwinner passes away early or if both spouses live long lives. This post discusses the situations in which you may want to consider delaying your social security benefit until age 70.

First, a little on how social security works.  If you are married, over age 60, and your spouse passes away, the remaining spouse can claim the higher of the two social security benefits.  For example, if the deceased spouse was collecting the higher social security benefit, the remaining spouse will start collecting the deceased’s spouse benefit and will lose her own benefit.  As long as the remaining spouse is over the full retirement age (FRA) she will collect the same benefit as her spouse.  If she is over the age of 60 and under FRA, she would collect a reduced benefit.  

The social security insurance strategy requires one, typically the higher wage earner, to postpone taking social security until age 70.  Age 70 is the longest a person can postpone their benefit and is when the social security benefit is the highest.  This not only allows you to draw a larger benefit while you are living, but also allows you or your spouse  to continue with a higher benefit when the first spouse passes away.  By delaying one spouse to draw their social security benefit until age 70, you are guaranteeing a higher social security benefit for the rest of your life, or your spouse’s life, whoever lives longer.  This larger social security benefit is essentially a life insurance policy, paid by the deferral of your social security benefit until age 70.  Next let’s discuss the pros and cons of the social security life insurance policy.  

Pros

  • If you or your spouse have a long life, you will probably collect more social security benefit
  • Comfort in knowing that you or your spouse will have a large social security benefit when someone passes away
  • The ability to have a higher fixed income after age 70, and less reliant on stock market fluctuations
  • Delaying social security helps maximize a Roth conversion strategy in retirement

Cons

  • Foregoing years of social security benefits to get a higher benefit in the future
  • If you and your spouse die prior to age 78, there is a good chance that you will draw less social security benefit than if you started collecting early
  • Giving up social security during your 60s when you are potentially more active, in order to get a larger benefit later in life when expenses may be lower

I’ll come right out and say that I’m not a huge fan of delaying social security just to draw a higher social security benefit later in life.  I have seen too many people retire and then delay social security and fail to live the retirement that they had planned. For example, I recently met with a couple who was delaying social security in order to maximize Roth conversions and pass on a large legacy to their children.  The trade-off was that they were hesitant to spend any money and actually live an enjoyable retirement.  All of their retirement income came from retirement distributions, and they were nervous they would run out of money or large distributions would negatively impact the amount of Roth conversions they could do on a yearly basis.  Therefore, although they were retired and should be enjoying this time of their life, they were essentially not able to enjoy retirement until they actually turned on social security at age 70.  Still, there are benefits to delaying social security and implementing the social security insurance policy.  

The biggest benefit of delaying social security until age 70, is that you will probably end up collecting more social security benefit over your life.  Most people will “break even” around age 78.  Meaning that you will collect more from social security by delaying as long as you live past age 78.  Life expectancy is currently in the 80s, so there is a good chance you will collect more by delaying social security.  Of course, this article discusses the “life insurance” aspect of drawing social security at age 70.  By waiting to draw a higher benefit you are guaranteeing a higher benefit for both you and your spouse during your life.  Even if one person were to pass away early, the surviving spouse will be guaranteed a higher benefit for the rest of their life.  As the smaller social security benefit goes away when the first spouse passes, it is a nice relief that the surviving spouse still gets a high social security benefit, and won’t take a huge hit.  

When should you consider delaying your social security until age 70?

You are the higher earner and more than 5 years older than your spouse

This is the ultimate social security insurance strategy. If you are older than your spouse, even more if you are a man and older than your spouse, there is a good chance that you will pass first. By delaying your social security benefit until age 70, your spouse is guaranteed a higher payment no matter when you pass. Recently, I was working with a couple and he was 67 and she was 59. He was the main breadwinner and also had a pension from Ford. If he were to pass first, pretty good odds, she will get a reduced pension and her social security benefit, which is small, will be eliminated. I helped with a retirement income plan, so that he could delay his social security benefit until age 70, giving her financial comfort if he were to pass before her.

You and/or your spouse have a long life expectancy

As I mentioned previously, the break even age for social security is around age 78. Therefore, if you or your spouse were to live past age 78, typically you will draw more from social security by delaying to your FRA or age 70. No one can predict when they will pass, but you can get an idea based on how long your family has lived. If you have a parent in their mid-90s, you may want to postpone drawing your benefit.

You are implementing a Roth conversion strategy in retirement

Many of my clients will take advantage of lower income and lower taxes in retirement to convert their pre-tax assets to tax free Roth assets. If that is the case, the goal is to be able to convert as much as possible while staying in lower tax brackets. Waiting to draw social security can help you keep income low in retirement, and can help you maximize Roth conversions.

For most of my clients, I do suggest starting social security once they retire and need the money.  Still, there are reasons that it makes sense to postpone your benefit and take the higher benefit. One of the biggest considerations is how much of your retirement savings will you withdraw while postponing social security. Remember, if you are not drawing social security, the money has to come from somewhere. This means potentially hundreds of thousands of dollars of income, between you and your spouse, that you are foregoing in order to get a higher benefit in the future. Can your retirement plan handle such large distributions in the early years of retirement? If not, you may want to consider turning on social security early. If so, delaying and creating a social security insurance policy may make the most sense for your family.

 

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