21 Feb 2014 How Much Social Security Will You Leave on the Table?

One of today’s hottest topics for people over 50 is Social Security; its viability and its potential to offer substantially more in benefits than the average retiree will see. Studies show that almost half of recipients receive just the minimum benefit, while less than 2% receive the maximum. The difference can be as high as $100,000 over a person’s lifetime.

The confluence of boomers reaching retirement age, credibility questions resulting from the financial crisis, and hundreds of articles and books touting strategies to maximize benefits have all raised both interest and confusion. If you find yourself in either state, relax, we are on top of it. In fact we believe the topic is so important we are offering, for a limited time, a free personal analysis to determine your best strategy to maximize your Social Security benefits. Details appear at the end of this Brief.

There are two broad strategies to increase Social Security benefits. Many know about the first, which relates to delaying benefits to gain higher lifetime benefits later. But few know about or understand the second, much more complex group of strategies which involves coordinating the selection and timing of benefits and spousal options. These strategies can generate as much as $40,000 in additional benefits. While perfectly legal, they can get so complicated that few even in the Social Security offices can offer any guidance.

Let’s examine the timing of benefits first. While most people file their claims upon retirement, those who plan can grow their benefits 8% annually (up to age 70) to receive a government-guaranteed inflation-adjusted income stream for the rest of their life, including spouse. The determining factors are life expectancy and ability to bridge the income gap.

First some basics. Social Security (SS) benefits can be claimed by eligible recipients between the ages of 62 and 70. Age 67 is deemed full-retirement age. At 67 benefits are calculated at 100% of what a recipient is entitled to based on his earnings history.  Someone who earned at least the SS maximum over a full career would be entitled to a monthly benefit of $2,641 this year. The chart below shows the impact on benefits of taking SS early or delaying to age 70.

The increase in benefits in the eight years from age 62 to age 70 is 76% – guaranteed! The decision of how long to wait depends upon your life expectancy. Tapping Social Security early means smaller payouts over your lifetime. Waiting means fewer bigger ones.

The second group of strategies involves options such as filing and suspending benefits, not filing, filing for a spouses benefits (living, deceased or divorced) all in coordination with your spouse if married. In the case of couples, strategies can be employed to delay and grow a higher earner’s benefits while the spouse claims half of the higher benefits,  allowing the lower earner’s benefits to grow at 8%.

Andy Landis, author of Social Security: The Inside Story, says that 80 is the magic number. If you are single, you have to live this long to make delaying benefits until age 70 a good strategy. If you are a couple, one of you must live past 80 and the higher earner should delay as long as possible.

There’s also the question for some of whether they can afford to wait for eight years before taking SS benefits. Some may choose to take a job after retirement to make ends meet until benefits begin. Others will use their investments, ideally under the attentive eye of their financial advisors.

But there are additional SS strategies that can help you bridge the gap. Landis offers the following tips:

• If you are single and expecting normal longevity, there are some options to consider which are too complex to mention here. Other options to replace SS income while delaying benefits require working or tapping retirement investments a bit more heavily. But it may be worth it to ensure an 8% annual increase (until age 70) of a stream of income that adjusts every year for inflation for the rest of your life. In effect, you draw from less certain producers of income early in order to grow a higher source of guaranteed income later.
• If you’re married and one spouse earns significantly more than the other (or the second spouse doesn’t earn at all): Maximize the higher earner’s Social Security to the greatest degree possible. “That way, if I pass away, my surviving spouse gets 100% of whatever I was getting.” This strategy can be important to the survivor late in life when other assets may be running low.
• If you’re married with two high earners relatively close in age: The higher earner files and suspends. The lower earner draws spouse payments. And the couple uses that money to bridge them until age 70.

A basic element of the tips above is what is known as ‘file and suspend.’ Michael Kitces explains it as follows. “The individual [at full retirement age – 66] files for retirement benefits (triggering all the rules that normally apply when someone applies for benefits), but then suspends the benefits without receiving any payments (allowing him/her to earn delayed retirement credits that increase the future retirement benefit by 8% of the individual’s primary insurance amount).”

Kitces notes, “the primary purpose of pursuing the strategy is that, by filing for benefits, the individual can render his/her spouse eligible for spousal benefits (which only apply once the primary worker has applied for retirement benefits), while the individual themselves can still earn delayed retirement credits. Because benefits that have been voluntarily suspended can be subsequently reinstated, even single individuals may wish to routinely file-and-suspend if they intend to delay anyway, as a way to “hedge” against a future change in circumstances.”

Kitces offers an example of a couple using the file-and-suspend strategy. “Harold and Sheila are both 66 years old; Harold is eligible for $1,600/month in benefits, and Sheila for $1,300/month, based on their respective earnings histories. Both Harold and Sheila are very healthy and wish to hedge against the risk that they both live well into their 90s, so both of them would like to wait on their benefits and earn delayed retirement credits. If Harold goes through the file-and-suspend process, then Sheila can file a restricted application for just spousal benefits (while delaying her own individual benefits). The end result: Sheila receives $800/month in spousal benefits now based on Harold’s record, Sheila can switch to her $1,300/month individual benefit in the future (and earn 8%/year in delayed retirement credits while she waits), and because Harold filed-and-suspended he will continue to earn 8%/year delayed retirement credits on his benefit as well.”

We Can Help

Navigating the maze of regulations of Social Security as well as the myriad of options available to you for filing can be overwhelming, particularly when issues such as taxes, confidence in your investments seeing you through, and how your SS strategies will fit into your overall planning make it all the more daunting.

Because of the importance of getting it right, we are pleased to offer, for a limited time, a free analysis and strategy to maximize your Social Security benefits. To request a questionnaire please call 919-821-5225 or visit the Contact  section of our website to send your request (right hand side).

Enjoy a better retirement.