Monday, June 28, 2010

Married Men: Don't Take Social Security Too Early

Social Security (SS) benefits typically begin to be received between ages 62 and 70. The most common scenario involves a married couple where the husband is both older and the higher earner. In these cases, the largest monthly payment is produced if the husband waits until age 70 to claim his benefit. Once payments begin, they will continue until the end of the surviving spouse’s life.

Most married men usually claim SS benefits at age 62 or 63, despite the fact that their family’s overall expected lifetime income would be much greater if they waited a few years. The longer an individual waits to claim SS benefits the larger his or her monthly payment will be. This is the result of an actuarial calculation that takes into consideration the delayed commencement of benefits.

Those most affected by an early claim of SS benefits are wives who outlive their husbands. While men who begin taking benefits at age 62 lose about 4% of the lifetime income they could have expected to receive if they had not started early, a surviving spouse typically receives a survivor’s benefit that is 20% less than it would have been.

So why do men generally begin taking SS benefits at age 62 or 63 even though it’s usually not in their family’s best interest to do so? A recent study by the Center for Retirement Research at Boston College examined this question, with surprising results. While it might be assumed that men are more likely to claim early because they need the money, the study found that wealth makes little difference in when benefits are claimed. Men without a lot of savings often claim early because they need the money to live on, but wealthy men often claim early too, because they want to leave their children an inheritance and they prefer to live on SS benefits instead of spending down other assets that could otherwise be passed along to their children.

A Roth IRA would certainly be a great asset to pass to the children. For example, a Roth IRA has no required minimum distributions (RMDs) during the owner’s lifetime and the designated beneficiary generally can withdraw it over his or her own life expectancy. This means, a 40-year-old beneficiary who inherits the Roth can draw it down over approximately 43 years. With no RMDs during the owner’s life and the extended time the beneficiary has to withdraw it, there should be ample time to generate meaningful growth to pass on to heirs, income tax-free.

By IRA Technical Consultant Marvin Rotenberg and Jared Trexler
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