Dear Dr. Don,
I'm 65, retired and married. I'm not currently collecting Social Security benefits because my husband and I have considerable yearly income. I'm considering taking Social Security at my full retirement age of 66 -- not to spend the money, but to save it. I will receive about $2,000 per month, which would be about $1,700 after taxes.
If I saved this money every month for the four years until I reach 70, I would have more than $80,000 in the account. If I then died at age 70, my heirs would receive an additional $80,000 -- minus whatever estate inheritance taxes would apply -- that they wouldn't have had otherwise. If I don't collect until age 70, but still die at age 70, that money would simply stay with Uncle Sam to waste as he sees fit.
Since the Social Security system is set up to disburse approximately the same total dollar amount over an average life span regardless of whether one starts collecting at 62, 66 or 70, I don't understand why nobody ever mentions this "inheritance consideration." And if I didn't die at age 70, I'd still have this savings to draw from monthly, just as I would continue to get that monthly Social Security check. What do you think of this idea of mine?
-- Susan Stripes
Financial planners are more concerned about managing longevity risk, which is the risk you'll outlive your retirement income sources, than they are about whether you'll leave some money on the table with the federal government or leave Social Security savings to your heirs as an inheritance. A woman at age 65 has an additional life expectancy of 20.8 years. Barring any family health history that puts you at risk for dying early, you should plan on being with us for a while.
If you wait until age 70 to file for benefits, you earn delayed retirement credits on your work record. What's so attractive about this is that you can then get a Social Security benefit that is up to 32% higher than the benefit you would receive at your full retirement age. Another plus for this strategy is that the increased benefit is indexed to inflation.
In the choice between taking Social Security at 66 and saving the money or waiting until you're 70 to file, the benefit break-even point is somewhere between age 82 ½ and 83 ½. Think you'll live past 83? Then go for the delayed retirement credits.
Inflation-indexed annuities are very expensive. Social Security behaves like an inflation-indexed annuity, and you get the inflation-index benefit for free. Since you don't currently need the money, why not let it grow?
If you qualify for Social Security on your own record, then you can look into collecting a spousal benefit at your full retirement age of 66, and earn delayed retirement credits through age 70 on what's called your primary insurance amount. That'll let you build up the inheritance account and increase your retirement benefits.