Maximizing Social Security
“Coordination is the key to success”
Securities offered through Newbridge Securities Corp. member FINRA / SIPC. Advisory Services offered through Newbridge Financial Services Group Inc. 1451 W. Cypress Creek Rd. Ft. Lauderdale, FL 33309 Information regarding securities issues and markets is obtained
from sources believed to be reliable, but is not guaranteed as to accuracy, completeness, or fitness to a particular use.
Congratulations! By requesting this report, you have taken an important first step – one that millions of Americans fail to do every year: making an educated decision on your Social Security benefits.
Social Security can represent a significant portion of your income during retirement, and it may well be the only source of guaranteed retirement income that isn’t subject to investment risk, inflation or financial market fluctuations.
Most people are eligible to start receiving monthly Social Security benefits at any time between the ages of 62 and 70. However, the majority simply start Social Security at whatever age they decide to retire.
And there’s the problem.
Most people start their benefits when they retire – or as soon as they are eligible – simply because they don’t explore (or even know about) the other options that are available.
As you’ll see later in this report, whether you are single, married, widowed or divorced, there are strategies for every situation that allow you to maximize your lifetime Social Security benefits.
And we’re not talking about pocket change, either.
The difference between starting Social Security when most people do, and the best possible scenario can be huge – more than $100,000 over a lifetime in some cases.
No matter what your current financial situation, isn’t that kind of money worth looking into?
This report will cover:
· The basics of Social Security
· Coordinating Social Security with other retirement accounts
· Specific strategies for maximizing your benefit
· Case studies showing how the right strategy can pay off big
· Where you can get help in making your own Social Security decision
Let’s start with the basics.
The three main things that determine how much you receive from Social Security are:
· Your FICA taxable earnings record
· How long you expect to live
· When you elect
Since the first is in the past, and the second is outside of your control, figuring out how much you will get from Social Security over a lifetime mainly depends on when you elect to start receiving your benefits.
You can start collecting at any age between 62 and 70. The later you claim Social Security, the higher your monthly benefit. Accessing benefits ‘early’ at 62 will
permanently decrease the amount you may receive each month by 20-30 percent. On
the other hand, if you delay taking benefits past your full retirement age (currently 66
to 67 depending on the year in which you were born), your monthly benefits will
continue to increase at a rate of 8% simple (7.2% compound) interest per year.
As you can see from the example in the graph below, if your benefit at Full Retirement Age is $2,200 per month and you draw early at age 62 you would surrender 25% only receiving approximately $1,650 per month. But if you delay taking your benefits until age 70, you will receive approximately 32% more or $2,904 per month. This is also assuming no cost of living adjustments or COLAs along the way.
How does that play out over a lifetime?
Let’s assume for this example that you will live to age 86 and we factor in no cost of living adjustments or COLAs.
If you start taking benefits at age 62, you would receive
$1,650 x 12 months x 24 years = $475,200 total lifetime benefits If you start taking benefits at age 66, you would receive
$2,200 x 12 month x 20 years = $528,000 total lifetime benefits If you start taking benefits at age 70, you would receive
$2,904 x 12 months x 16 years = $557,568 total lifetime benefits
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Monthly Benefit Comparison
SS - 62
SS - 66
SS - 70
So if you delay until age 70, you stand to increase your overall benefit $82,368 over a lifetime than if you claim at 62. And remember, we are assuming absolutely no cost of living or COLA adjustments in this example!
Clearly then, it pays to wait in most situations.
But not everyone has the financial flexibility or the means to defer Social Security benefits. Bridging the gap to a delayed Social Security benefit may require you to spend more of your retirement savings on the front end. While at a glance this may not seem ideal, financial Monte Carlo simulations show significant advantages to this strategy when sufficient assets are available to bridge the gap. If you’re considering it, you must compare the advantage of increased monthly benefits against the cost of receiving benefits for fewer years. In theory, if you elect early you will get a smaller benefit – but for a longer period of time. If you elect later, you will get a larger benefit for a shorter period of time. For those with a family history of longevity, the benefits can be much greater than in the previous examples. As you can imagine, analyzing the advantages and disadvantages becomes very complex and is best handled by a highly trained financial professional with in depth financial planning systems and software.
$420,000
$440,000
$460,000
$480,000
$500,000
$520,000
$540,000
$560,000
$580,000
Cumulative Lifetime Benefits
SS - 62
SS - 66
SS - 70
Beware of the Break-Even
Beware of basing your decision solely on a simple break even calculation as this does absolutely nothing to address spousal protection in the case of married couples.
Spousal protection planning is one of the most often overlooked aspects of Social Security planning potentially cheating widows/widowers out of thousands in lost benefits.
What if you do file early and continue to work
Many retirees are blindsided by the earnings test. If you do plan on surrendering a portion of your benefit by drawing Social Security prior to your Full Retirement Age or FRA and you plan on continuing to work, you may be subject to the earnings test. The earnings test will withhold $1 in Social Security Benefits for every $2 you earn over the annual threshold. To complicate things even more, the earnings test jumps to a 3 for 1 withholding the year in which you reach your full retirement age or FRA. Unfortunately we see many retirees fail to realize the effect that the earnings test will have on their Social Security and end up receiving nothing if they continue to work.
Coordination is Key to Success
Coordinating Social Security with your other assets and income streams is a
fundamental building block of retirement planning. Like constructing a home you must have a plan and a solid foundation. Critical decisions in retirement planning such as
when and how to file for Social Security benefits could prove to be detrimental in meeting future income needs. Filing for Social Security is a decision potentially worth tens of thousands of dollars, yet most Americans spend more time planning a vacation than they do making one of the largest financial decisions of their life.
For the purposes of this report, we suggest that you view Social Security as a Guaranteed, Inflation
Adjusted, Tax Preferred, Lifetime Income stream.
Don’t underestimate these very important characteristics of Social Security and the money you may leave behind.
Guaranteed By Your Federal Government - with all the uncertainties and risk associated with other investments, Social Security is backed by your Federal Government. So after your Credit Union, Bank, Insurance Company and other
investments may have failed, your federal government is all but sure to remain the last standing. Many obviously question the financial stability of our government but as a 50+ pre-retiree or retiree you have very little chance of Social Security reform
significantly decreasing your benefits in retirement. For those under 50…you may not be so lucky.
Inflation Adjusted - With the fed printing money on what seems like an endless basis, inflation is looming. Seeing your money as purchasing power is an important concept to understand when planning for the future. Even small increases in inflation can equal thousands of dollars over life expectancy. If you needed $50K per year today in
retirement income, then in just 10 years you would need just over 67K to buy the same goods and services. In twenty years that figure jumps to 90K. Unlike relying on
investments to protect your purchasing power, Social Security has a built in inflation component or COLA (Cost of Living Adjustment). While this adjustment does vary from year to year, the historical average COLA since 1975 was 4.1% per year as reported by SSA.gov.
Tax Preferred – Here’s a good question, “Do you think taxes will go up in the future?”
If you answered yes then it may make more sense to defer your Social Security till much later in life and spend some of your retirement accounts on the front end to bridge the gap to a much larger delayed benefit. While this may sound counter intuitive to the “Traditional” mentality in retirement planning, it may prove to be very effective as taxes increase in the future. Let me give you an example. Think about your tax deferred retirement account for a minute. The key word there is deferred. You see, you are simply deferring your taxes into the future when they are likely to be at a
higher rate. You’ll notice that I said “Rate” and not “Tax Bracket”. Many so-called
retirement planners would say that you will more than likely be in a lower tax bracket in retirement. While I would agree with that statement, I would pose this question,
“Are tax rates on individual brackets likely to increase over time?” Let me give you an example of why it may make more sense to bridge a delayed Social Security benefit with tax deferred retirement accounts. If you withdrawal $10,000 from your tax deferred retirement account, then how much of that $10,000 is subject to taxation?
That’s right, 100% of the $10,000 withdrawal is counted as taxable income for the year in which it was withdrawal. Now let’s look at Social Security. Depending on the
amount of provisional income (almost everything counts, even ½ of your Social Security) determines how much of your Social Security benefit is subject to taxation.
There are three general levels of taxation relating to Social Security. None of your benefit is subject to taxes, 50% may be subject to tax or 85% may be subject to tax.
Now, remember what percentage of your retirement account withdrawals are subject to tax? That’s right, 100%. Think of yourself as a very thrifty shopper for a moment.
Thrifty shoppers know that the best time to shop is when things are on sale. If we go back in history and look at historical federal marginal tax rates for married couples filing jointly we find that taxes are on sale today! So with all this being said, do you think it could ever make sense to spend some of your 100% taxable income first, while taxes are on sale and defer your tax preferred Social Security income into the future when tax rates are likely to be much higher? Often times it does.
Lifetime Income – Outliving income in retirement is a real fear for many retirees.
Advances in modern medicine are slowly increasing life expectancy. While we may not be living any healthier, as a society we are living longer. Managing risks such as
outliving your income in retirement is not a simple task. The unknowns like future tax rates, inflation, longevity and the all dreaded healthcare expenses keeps retirees
scratching their head. These days, there are some investment related products that have lifetime income features but none of these are backed by your Federal
Government like Social Security.
One of the biggest mistakes I see married couples make when electing Social Security
is the failure to effectively plan for their spouse. Most wives will outlive their husband
by around seven years. The lifetime Income along with the widow/widower benefit
provided by Social Security continues on to the surviving spouse and can provide a significant cushion when properly planned.
CASE STUDIES
Everyone’s situation is unique. Planning Social Security involves precise planning of all available assets and income streams. The following is a short case study and some of the planning opportunities that may present themself.
If you’re single:
For singles, the decision of whether to elect early or later is usually as simple as answering the question: will you live long enough to make waiting worth it? For example, if you decide to elect at 66, how long will it take for the larger payments to make up for the payments you missed from 62-65? For this reason, a simple break even calculation has more weighting for singles. While this may seem to make the decisions fairly simple, it still does not address the tax efficiency of properly planning benefits.
If you’re married:
Married couples face a much more complex decision because Social Security offers three distinct benefits for married couples:
· Retired Worker Benefit – Based on your own earnings record
· Spousal Benefit – Provides your spouse with a benefit once you claim (Or Trigger) your own benefit.
· Survivor Benefit – Provides your spouse with a benefit after your death There are certain strategies involving these benefits that can help pad a married
couple’s retirement savings with tens of thousands of dollars of additional lifetime
income.
The “File and Suspend” Strategy
A spouse cannot file a restricted application on spousal benefits alone unless the main beneficiary claims or triggers benefits first. So as soon as the main Social Security
beneficiary hits Full Retirement Age (FRA) at 66 or 67, he or she can file for benefits, but then immediately suspend receipt of those benefits until some future date.
Why? By filing, this triggers the spouse’s ability to file a restricted application on the spousal benefit only and begin receiving a monthly check. By having the main
beneficiary suspend the benefit, the main beneficiary can let his or her own retirement benefit continues to grow at 8% a year simple interest (approximately 7.2% compound) until age 70.
Here is an illustration. Let’s say a married couple, Bill and Shirley, have just turned 66 or Full Retirement Age (FRA). Shirley wants to retire at 66, but Bill wants to continue working until 70. Bill’s monthly Social Security benefit would be $2,000 if he claimed now. Shirley’s current monthly Social Security benefit based on her earnings history is
$900 per month if she claims now. If she could claim spousal benefits, she could access
$1,000 per month (1/2 of Bill’s Benefit) but Shirley cannot claim a spousal benefit
unless Bill files for his own benefit first. But as mentioned previously, Bill wants to let his benefit grow until the age of 70 because he would then receive an estimated $2,640 per month or approximately 32% more. Bill knows that in the current low interest rate environment he can’t beat the 8% simple interest per year (7.2% compound) provided by the federal government for the four years between 66 and 70.
By taking advantage of the file and suspend option, Bill can file for benefits now at age 66 and then immediately suspend receipt of those benefits. As a result, his monthly benefits will continue to grow with the 8% simple interest credits. Then at age 70 he would receive a significantly larger benefit of $2,640 per month as previously
mentioned. The key is that when Bill “Files and Suspends” this opens the spousal suite
of benefits for Shirley now allowing her to restrict her filing to her spousal benefit only
which is $1,000 a month vs. her $900 per month if she had filed for her own. Since
Shirley has now restricted her application to her spousal benefits only, her own primary
benefit of $900 a month continues to earn the 8% simple interest delayed credits. At
her age 70, she could then switch over from her $1,000 spousal benefit to a larger benefit of approximately $1,188 ($900 x 8% simple x 4 years).
Let’s do a quick breakdown on the calculations. To keep the math simple, we’ll assume that Bill and Shirley are both 66 and will both live 20 more years to age 86.
First off, take a look at what Bill and Shirley’s lifetime benefit would be if they both simply took their own benefits at 66 – or Full Retirement Age (FRA).
Bill would receive $2,000 x 12 months x 20 years = $480,000 Shirley would receive $900 x 12 months x 20 years = $216,000 Combined Total = $696,000
If they chose the File and Suspend Strategy instead, look at the difference:
Bill would receive $2,640 x 12 months x 16 years = $506,880 So even though Bill suspended taking benefits for 4 years, he still ended up with
$26,880 MORE than if he had taken his benefits at Full Retirement Age of 66 as in the example above.
From age 66 to 70, Shirley would receive a monthly spousal benefit of $1,000
$1,000 x 12 months x 4 years = $48,000
Then at age 70, she would switch to her own primary benefit, which has now grown to
$1,200
$1,200 x 12 months x 16 years = $230,400 Add in Bills Cumulative Benefits =$506,880 Total File & Suspend Benefits=$785,280
This strategy provides Bill and Shirley with a clear advantage of $89,280 assuming
they don’t need the additional income prior to the age of 70 or have other assets to
bridge the gap.
The file and suspend strategy also provides Shirley with a potentially larger widow benefit should something happen to Bill. As a widow, Shirley would step into Bill’s larger benefit that had been deferred. This could provide significant spousal protection for Shirley should Bill pre‐
decease her.
As you are probably starting to realize, navigating through Social Security can be a very complex piece of the retirement planning puzzle. It is critical that you work with a financial professional who truly understands the ins and outs of Social Security planning.
“Alarmingly only around 22% of Financial Planners have the knowledge to effectively plan benefits”
Talk to Someone Who Knows
PlanMyBenefit and our network of advisors is part of an elite group of financial professionals who understand Social Security planning and how to maximize lifetime benefits. There are hundreds of Social Security calculators that can help you determine your optimal Social Security filing strategy. What they can’t tell you is, will the proposed strategy even work for you? Do you have the assets or other income streams to bridge the gap? By working with a PlanMyBenefit member you can be assured that you are working with a true problem solver and not a product salesperson. Our members have been trained on the ins and outs of Social Security and how to properly coordinate benefits. Located across the country we offer complimentary consultations, workshops and webinars designed to help you navigate through the very complex world of Social Security.
Let us help you lay a solid foundation for your retirement. You have nothing to lose and everything to gain. And remember, you can’t get a second opinion from the person who got you to the point where you are today. We look forward to seeing you soon!
Securities offered through Newbridge Securities Corp. member FINRA / SIPC. Advisory Services offered through Newbridge Financial Services Group Inc. 1451 W. Cypress Creek Rd. Ft. Lauderdale, FL 33309 Information regarding securities issues and markets is obtained from sources believed to be reliable, but is not guaranteed as to accuracy, completeness, or fitness to a particular use.
