Long life expectancy? Defer Social Security benefits
Q: One of your recent columns was very interesting to me. It was from a 61-year-old woman with a 74-year-old husband. I am 62 and my husband is 78, so there are similarities. However, you assumed (or maybe the writer included the information but it was not in the printed question) that her Social Security benefits would be less than her husband's, and therefore she should start taking her own benefits right away.
In my case, my benefit will be higher than my husband's. So, from my understanding of the rules, if he dies before I reach age 70, I could get survivor benefits while still deferring taking my own at a higher rate at 70. So it would seem to make sense to defer taking mine when I retire next year or at full retirement age of 66.
Does this make sense? I am trying hard to understand the nuances of Social Security. - M.B., Seattle
A: The most common circumstance is for husbands to be older and to have a higher earning record. The earnings record part is changing, but slowly. In your case, the most important work record is yours, and the decision is keyed to your life expectancy alone, not to your joint life expectancy as a couple. Even so, your life expectancy suggests that you will benefit from deferring your benefits.
Here's why. If we use the life expectancy calculator on the Social Security website and assume that you were born on Jan. 1, 1954, your life expectancy today is 24.1 years; at 66 it is 21.1 years; and at 70 it is 17.9 years. Those estimates are important because the "payback" period for recouping the purchasing power that you defer is 12.5 years. Every additional year of life gives you a greater reward for having decided to defer benefits.
As you can see, it's pretty much a slam-dunk. If you defer for eight years at 62, your life expectancy at 70 will still be 5.4 years greater than what you'd need to "break even" on the decision. So, unless you have a known life-shortening health condition, focusing on your own work record and deferring benefits is what you need to do.
The decision isn't a complete slam-dunk since we never know when we will die. But it's a good bet based on the Social Security life expectancy tables, which cover the entire population. Your email, however, indicated that you have a doctoral degree. That tilts the tables in your favor: The greater your income and education, the longer your life expectancy.
While half of all individuals in a defined group will die before the life expectancy for the group, your income and education, alone, increase the odds that you will benefit nicely from deferral. You can learn more about this by Googling "life expectancy plus income."
Q: My husband and I are having a debate regarding paying off the mortgage on our second home. We are selling our home here in Illinois and moving to Florida. He will be retiring and I will continue to work for a couple of years. Our home here is paid for, and my husband would like to take the proceeds and pay off our Florida home. I'm sitting on the fence. Our mortgage in Florida is about $168,000. The proceeds from selling our first home will be about $200,000.
Friends tell us we should have a small mortgage for tax purposes. My husband feels that if something happens to him, he does not want me to have the burden of the mortgage. We are not rich. We have investment savings we both have contributed to over the years. And I have a small retirement fund from a previous job. He has Social Security. - M.J., by email
A: Your friends have fallen for the myth that all home mortgages bring valuable tax deductions. They don't. When you have a small mortgage, you have the burden of monthly payments but seldom have the overhyped benefit of tax savings.
You can understand this by comparing the size of your itemized deductions to the size of the standard deduction on a joint return. This year the standard deduction is $12,600. When you turn 65, you get an additional $1,250 each. That's a total of $15,100 as a standard deduction.
You will have no benefit from itemized deductions like mortgage interest and real estate taxes until they total over $15,100. For most retired couples, this means there are no tax savings from homeownership deductions.
• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser. Questions about personal finance and investments may be sent by email to scott@scottburns.com.
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