As we’ve discussed over the past 18 months, The Bipartisan Budget Act of 2015 really threw a monkey wrench in spousal claiming options! The File & Suspend option was eliminated on April 29th 2016 and the Restricted Claiming Provision is eliminated for those individuals born after 1953. So where does that leave individuals and couples who are contemplating all their options regarding when and how to claim their Social Security benefits?
Rule of thumb: Whatever your benefit is at 62 it will be DOUBLE at 70!
Even under the old rules regarding spousal claiming options, only 2% waited until age 70 to claim Social Security benefits! The $64,000 question then is how many will be willing to wait, if they can’t claim spousal benefits or divorced spousal benefits at age 66 (Restricted Claiming Provision) while postponing claiming their own benefits until 70? I’ve run hundred’s of analyses over the past 5 years and, in most cases, I’ve recommended that the higher earning spouse delay claiming their own benefits until age 70 — especially if either spouse is healthy and longevity runs in the family. The reason for this is twofold: #1 I want to capture the delayed credits of 8% per year one earns between age 66 to age 70 and #2 Upon the death of either spouse, the surviving spouse inherits the greater of the two benefits. Thus, if the husband had the higher benefit, the wife would inherit his benefit upon his death!
There are Only 3 Options are Available
If one decides to take my advice and wait until 70 to claim their own benefits, what are the 3 options to fill the income gap between their current age and 70?
Option #1 - Work
Contrary to popular opinion, WORK is not a 4 letter word. It’s been my experience that those who continue working tend to live longer, happier and more productive lives. As a matter of fact, many individuals wish to continue working in some form and I believe that PHASED RETIREMENT will be huge in the coming years and decades.
Option #2 – Use your investments
Qualified Plans (IRA’s, 401k’s, etc.) were designed for 1 purpose only and that is to create income during one’s retirement years, however the dilemma many individuals struggle with is using those dollars and running out of money before they run out of time. Since one does not know their check out date (Date of Death) they are extremely reluctant to spend down on their principal, especially when they can start drawing their Social Security.
Option #3 – Use your Home Equity
Over the last 2 years, I’ve studied, explored, examined and even got licensed to offer Home Equity Conversion Mortgages (Reverse Mortgages) to individuals & couples who meet the requirements. Now, before you roll up your nose and question my sanity, hear me out.
Think of a HECM as an Irrevocable Line of Credit that uses one’s home as collateral. The borrowers must be 62, own their home and intend to live in the home as their primary residence. It’s just like any other type of mortgage. Should you decide to sell your home, you would pay off the mortgage if any and receive the proceeds from the sale. Unlike a traditional mortgage, one does not have to pay principal and interest until the home is sold or both spouses pass away. The individuals however must pay property taxes, insurance and general upkeep of the home. They must also continue to live in the home as their primary residence.
Why would I use one?
- Payoff any existing mortgage & use unused LOC (Line of Credit) when needed.
- Create a Social Security Bridge – Example: Instead of taking Social Security at age 62, we take money from the LOC to create spendable income while delaying Social Security benefits until 70.
- Use the LOC for income in down stock markets, thus we are not selling off securities at depressed prices during Bear Markets, like we went through in 2008 & 2009. When the market comes back you can pay off the LOC if you wish.
- To purchase a new home without having to put down 100% of the purchase price of the new home. This is huge for individuals who wish to downsize or move into their dream home, but do not want or can’t qualify to carry a traditional mortgage or use up all their liquid assets to do so.
There are a number of other uses for a HECM. But when one considers the alternative (continuing to WORK or liquidating INVESTMENTS), maybe using HOME EQUITY could be a viable alternative!