Why Is It Optimal for Me to File Before My Full Retirement Age

May 27 2016 - 11:00pm

My birthdate is Nov12, 1951. Why does the Maximized Strategy In your software suggest I file effective October 2016 at age 65? Wouldn't that yield less of a monthly benefit? I guess that I don't understand the logic there.

Dear Anonymous,

You specified your maximum age of life to be 85. Just to be clear, your maximum age of life is not your expected age of life. Your maximum age of life is the oldest age to which you could live. Your expected age of life is when you'll die, on average.

Since you only have one life to lose and you could lose it at the last possible moment, i.e., at your maximum age of life, you have to focus on that case because that's your worst case scenario.

Why is living as long as possible a worst case scenario? Isn't it a good thing? Yes, it's a good thing in terms of spending time with your grandchildren, but the worst thing financially. The reason is simple. The longer you live, the longer you have to pay for yourself. So living to, say, 100 is, financially speaking, a disaster -- the catastrophic outcome when it comes to your financial longevity risk. This is why you need to focus on this case and insurance yourself against it to the greatest possible degree. The story here is no different from any other type of insurance. Whether it's health, car, or homeowners insurance, we all seek full coverage of the worst case -- having a disease that requires repeated operations, totaling the case, have our house burn down.

In general, waiting to collect your retirement benefit at 70 is the way to get maximum coverage against longevity risk because your retirement benefits will start at their highest possible value and you'll receive this larger number right through age 100 if you live that long.

But in your case, you told the program you will die by 85 for sure. In addition, you have a 7-year older wife with a very limited earnings record. If you wait till 70 to collect, you'll receive a much higher benefit, but for only 15 years and your wife will have to wait till she is 79 to start receiving a spousal benefit on your work record. Thanks to the new law, she can't collect until you start collecting your retirement benefit. Given these special circumstances, you family's lifetime benefits (maximum coverage in effect, since the program plans for you both to die at your last possible date of death) is for your to get your benefits going early and, thereby, get her benefits going early.

If you run the program with your maximum age of life being 100, the program has you start your retirement benefit early, get some benefits for your wife for a few months, receive close to one month extra in free benefits due to a quirk in the Earnings Test, which our software knows about, and then have you suspend your benefit after you reach full retirement age and restart it at 70. Thanks to the new law, your wife can't collect a spousal benefit from you while your own retirement benefit is in suspension. But this strategy still produces the highest lifetime benefits for the two of you, jointly were your maximum age of life 100, not 85, which is what you entered.

My best, Larry