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Your Bank > Education and Advice > CNB University

When Social Security Behaves Like Insurance

James P. Terwilliger
James P. Terwilliger, PhD, CFP® is Senior Vice President - Group Manager, Financial Planning Strategies and can be reached at JTerwilliger@CNBank.com or (585) 419-0670 x50630.

We previously published articles dealing with preferred strategies for claiming Social Security retirement benefits.

What is not appreciated by many is that by managing claiming strategies carefully, it is possible to build the equivalent of a sizeable longevity insurance benefit and life insurance benefit into a married couple’s retirement wealth picture – all at the same time.

The opportunity is greatest when one member of the couple has a significantly-higher earnings record.

Let’s look at an example created by Elaine Floyd, CFP®, Director, Retirement and Life Planning at Horsesmouth, LLC to see how this plays out.

Bob and Jane are both age 60. Bob was a high earner throughout his working years. His full-retirement-age (66) monthly benefit is $2,500. If he files early at age 62, his monthly benefit will be reduced to $1,875. But if he delays to age 70, he will maximize his monthly benefit at $3,300. Jane worked part-time for a portion of her working years. Her full monthly retirement-age benefit is $1,400, her reduced age 62 benefit is $1,050, and her delayed age 70 benefit is $1,848. These numbers do not include COLAs.

Both live to age 95

If they both apply early at age 62, they will receive a total of $1,158,300, assuming no change in the current Social Security benefit formula. If they both wait and apply at 70, with Jane receiving a spousal benefit from 66 to 70 (requiring Bob to “file and suspend” at age 66), they'll receive a total of $1,604,400, a difference of $446,100.

This can be considered the value of Social Security's longevity insurance feature – enhanced protection for both spouses in case they both live to ripe old ages. But the opportunity requires waiting until age 70 to claim their own benefits.

Bob dies at age 70, Jane lives to age 95

Jane’s benefit will cease at Bob’s death and be replaced by Bob’s benefit at that time – the survivor benefit. If they both had applied at age 62, the household would receive $843,300 over their joint lifetimes. Again, if they both wait until age 70 before applying for their own benefits, with Jane receiving a spousal benefit from 66 to 70, the household would receive a total of $1,050,000 over their joint lifetimes, a difference of $206,700.

If Jane had started her own benefits at age 62, the difference would be $247,500, a bit greater, given that Bob died before Jane reached her “breakeven” age of 78-79, beyond which it would have been better for her to delay benefits rather than start early at 62.

This can be considered the value of Social Security's life insurance feature – enhanced protection for the surviving spouse in case he/she lives to a ripe old age. Here, the opportunity requires the higher earner to wait until age 70 to claim own benefits.

The above examples do not consider annual COLAs. When factored in at, say, a 2.8% assumed annual rate, the longevity and life insurance features are close to three times the above numbers.

The last illustration above deals with when Jane should start benefits. This depends on Bob’s life expectancy. If his health is poor and he is not likely to live long, Jane might better start benefits early at age 62 because her reduced benefit will not be permanent. The same is true if he is significantly older. Jane likely will switch to the survivor benefit before her “breakeven” age. But if Bob is in good health with a strong family health history, Jane will likely receive her own benefit for many years before switching to the survivor benefit. In this case, it may be prudent for Jane to delay her own benefits to age 70 and take spousal benefits between ages 66 and 70.

Regardless, it will be to the couple’s advantage for Bob to delay starting his benefits until age 70, since his higher benefit will be the survivor benefit regardless of order of death.

The delayed-filing strategy would not work if both die early. This is why factors such as health, family history, need for cash flow, among others, must be considered when mapping out a Social Security claiming plan. Relative ages of the two spouses also must be taken into account. The above strategies are not as straightforward, for example, if the higher-earning spouse is younger.

As always, we caution folks not to try this without seeking competent advice from a trusted financial planner. Contact us with any questions at 585-419-0670.

This material is provided for general information purposes only and is not a recommendation or solicitation to buy or sell any particular security, product or service. Past performance is not indicative of future investment results. Any investment involves potential risk, including potential loss of capital. Before making any investment decision, please consult your legal, tax and financial advisors. Non-deposit investment products are not bank deposits and are not insured or guaranteed by Canandaigua National Bank & Trust, or any federal or state government or agency and are subject to investment risks, including possible loss of principal amount invested.

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