Retirement Planning/Social Security strategy

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Question
My wife is planning to retire in a little over a year at age 66. I will turn 62 in January of 2015, and have recently lost my job, so I may be looking at taking my SS benefits early at age 62.  Between us we have approximately $300k in IRA and 401k accounts. I was recently reading an article about "claim and switch" strategies that one person taking half another's  social security until both reach age 66, then switching.  I really don't get the whole thing, but would appreciate your general advice on how each of us should approach our SS benefits.  Thanks.

Answer
If you were born between 1943 and 1954, then your full Social Security retirement age is 66. If you retire at age 62, you will receive 75 percent of your full monthly benefit. On the other hand, if you delay your retirement until you are 70, you will receive 132 percent of your full monthly benefit. The Social Security Administration allows you to estimate your benefits at this website: http://www.ssa.gov/estimator/

As a 62-year-old male, you have an actuarial life expectancy of approximately 20 years while your 66-year-old wife also has an actuarial life expectancy of approximately 20 years. Thus, although your wife is older than you are, you are predicted to die within a year of each other because women generally live longer than men. However, actual longevity depends on many factors, including family and personal health history and health and safety practices, like smoking and wearing seatbelts.

Social security benefits are designed to pay individuals approximately the same total amount regardless of when they retire – a smaller amount over a longer time or a larger amount over a shorter time. However, people who retire early and live longer than average lives may exhaust their other savings and find that their social security benefits are insufficient to support them. People in poor health may want to start drawing on their Social Security benefits as soon as possible, while people who are the descendants of a long line of centenarians may want to delay drawing on their benefits. AARP advises individuals about when to apply for Social Security benefits at this website: http://www.aarp.org/work/social-security/social-security-benefits-calculator.htm

Assuming a 19-year payout of retirement accounts worth $300,000 in January 2015 and a rate of return of 5 percent, you and your wife would have monthly income of approximately $2,045 in addition to Social Security benefits. If you exhaust your retirement income before you die, then you would be reduced to relying on your Social Security benefits.

Because I do not know your actual earnings or your relative earnings or how much income you need to meet your expenses, I cannot tell you exactly what to do. If you elect to retire at age 62, you can collect 35 percent of your wife’s full monthly Social Security benefit or 75 percent of your own full monthly benefit, whichever is higher, for the rest of your life unless your wife were to predecease you, in which case you would receive her monthly benefit if it were higher.  However, if you elect to retire at age 66, you can collect 50 percent of your wife’s full monthly Social Security benefit until you reach an older age, when you can collect a larger benefit or up to 132 percent of your own full monthly benefit, when you reach age 70.

Thus, this “claim and switch” strategy does not work for an individual who intends to retire at age 62. It is intended for use by an individual who intends to retire at age 66 and can survive on 50 percent of a spouse’s Social Security benefit for a period of time in order to increase his or her own monthly benefit thereafter.

One subject you did not mention is healthcare coverage. Regardless of when retire, you will not become eligible for Medicare until age 65. Therefore, if you elect to retire at age 62, you will need to purchase health insurance coverage for a period of three years. If you recently lost your job, you may be entitled to coverage under COBRA for a period of 18 months. However, you must elect coverage within 60 days of receiving notice from the plan administrator and then pay the required premium within 45 days. You may also be entitled to coverage under your wife’s group health plan and then, if she has one, her retiree health plan. If you need to purchase an individual policy, then you can search for one at healthcare.gov or look at the website of your state’s insurance agency. Your wife, however, will not be eligible for an individual policy if she is eligible for Medicare.

Once you apply for Medicare Part A (free) and Part B ($104.90 deducted from each Social Security check), which you can do online three months before you turn 65, you should purchase a Medigap policy during the six-month open enrollment period, which starts the month when you turn 65. A Medigap policy helps cover the substantial deductibles and coinsurance amounts that are not covered by Medicare. You should also consider purchasing Medicare Part D prescription drug coverage. The open enrollment period is the three months before you turn age 65, the month you turn age 65, the three months after you turn age 65, and every October 15 to December 7 thereafter. As an alternative to Regular Medicare, you might also consider a Medicare Advantage Plan that rolls Medicare Parts A and B, some Medigap coverage, and sometimes Medicare Part D all together, usually at a cheaper price. For more information about Medicare, take a look at the federal government’s website: http://www.medicare.gov/index.html

Retirement Planning

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Michelle

Expertise

I can answer questions about Social Security eligibility, benefits and income taxation. I cannot answer questions about employer pensions, 401(k)s, IRAs or other private retirement funds.

Experience

During my career, I counseled the elderly about Social Security, Medicare and Medicaid benefits.

Education/Credentials
B.A., Bowdoin College, History and French M.S., University of Southern Maine, Health Policy and Management J.D., New York University School of Law

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