Social Security and the single retiree

In response to a recent column, one reader aptly noted that not everyone who applies for Social Security…

In response to a recent column, one reader aptly noted that not everyone who applies for Social Security benefits is married.

“It would be nice for you to give information to us single-by-choice folks,” I was informed.

The point is timely. A new book, “Going Solo: The Extraordinary Rise and Surprising Appeal of Living Alone” (The Penguin Press, 2012) by New York University sociology professor Eric Klinenberg, documents that more people live alone now than at any other time in history.

In some cities, including Atlanta, Denver, San Francisco and Seattle, 40% or more of all households contain a single occupant. And in Manhattan and Washington, nearly one in two households is occupied by a single person.

Because today’s workers will be tomorrow’s retirees, the timing of when single people choose to collect Social Security benefits will have a big impact not only on their own retirement income but also on public policy and the economy in general.

Ironically, assuming that a single person lives to 80, it makes almost no difference when he or she begins drawing benefits. The cumulative lifetime benefits from Social Security will be about the same whether reduced benefits begin at 62, full benefits are taken at 66 or en-hanced benefits start at 70.

Say our fictional Ms. Single is entitled to collect full retirement benefits of $2,000 a month at 66. If she decides to collect as early as possible at 62, her benefit will be permanently reduced by 25% to $1,500 a month.

On the other hand, if she wants to boost benefits to the maximum amount by waiting until 70 to claim, she will capture a delayed retirement credit worth 8% per year for every year between 66 and 70, boosting her monthly check to $2,640.

A larger monthly check will mean a bigger annual cost-of-living adjustment in future years, and for many retirees, Social Security is the only source of inflation-adjusted income that can be counted on for life.

As we said earlier, the sum of the benefits under all three scenarios is just about the same — because we’re assuming that Ms. Single lives to 80. But what if that’s not the case?

As Clint Eastwood would say: Do you feel lucky? Or perhaps more accurately, do you feel healthy? The median life expectancy for a 65-year-old man today is an additional 17 years, and for a woman, it’s nearly 20. That means that half of Americans who reach 65 will live even longer than 82 or 84 — some much longer. Unless you are in poor health, waiting at least until 66 to collect Social Security benefits — particularly if you continue to work — makes sense for most singles.

EARNING CAPS

Remember, if you plan to keep working, you’ll lose $1 in benefits for every $2 you earn over a certain limit, which for 2012 is a mere $14,640. There is a more generous earnings cap in place for the year you turn 66: You lose $1 for every $3 you earn over $3,240 per month in 2012 prior to the month you turn 66. Once you reach your full retirement age, there is no limit on how much you can earn.

For those individuals who expect to live a long time, delaying benefits until 70 could mean a huge difference in lifetime benefits. Say you live to 95. If you were entitled to collect $2,000 per month at 66, you would receive $792,000 over your lifetime if you waited until 70 to collect benefits — nearly $100,000 more than you would have collected if you started benefits at 66 and nearly $200,000 more than if you collected them early at 62.

If you are single because of divorce, you have more flexibility in your strategy for claiming Social Security.

As long as you were married for at least 10 years, have been divorced for at least two years and are not currently married, you can collect benefits on your ex-spouse’s earnings record as early as 62 (subject to earnings limits). And your ex doesn’t even have to collect benefits to trigger yours. He or she just needs to be old enough to be eligible to collect benefits.

But if you wait until at least 66 to begin collecting, you can get creative with your claiming strategy by restricting your claim to spousal benefits only. That means you can collect half of your ex’s full benefit while your own benefits continue to accrue delayed-retirement credits. Then, at 70, you can switch to your retirement benefit, assuming it’s higher. And if your ex dies, you are eligible for survivor benefits, even if your ex remarried. Talk about sweet revenge!

Mary Beth Franklin ([email protected]) welcomes your comments and suggestions for column topics. She will discuss strategies for claiming Social Security benefits at the InvestmentNews Retirement Income Summit in Chicago, April 30-May 1.