Social Security is a very important facet of retirement planning and should not be overlooked. Popular convention has dictated that Social Security may not be available in years to come, causing many couples to ignore it. However, for most middle income couples, Social Security makes up 20%-50% of their retirement income, and may result in upwards of $500,000 in lifetime benefits1. It is vital to maximize this asset when possible.
Who should have the analysis done?
1. Anyone currently eligible or within 12-18 months of benefit eligibility (age 60 for widow(er) and age 62 for everyone else)
2. Clients currently receiving benefits and under age 70
For most married couples, Social Security is the only retirement asset that:
• Is adjusted annually for inflation
• Is tax-advantaged—at worst, it's only 85% taxable as normal income
• Will continue to pay as long as you live
• Is backed by a government promise
Most people are eligible to elect Social Security at any time between age 62 and 70. However, many people simply elect Social Security at whatever age they decide to retire, not the age when it will give them the maximum lifetime benefit. A recent study suggested that certain Social Security election strategies left unused represent over $10 Billion in unclaimed Social Security benefits2. The difference between a good election strategy and a bad one is often more than $100,000 for a married couple. For someone who is divorced or a widow(er) it’s not uncommon to receive an additional $20,000 to $40,000 in additional benefits1.
How much you receive from Social Security depends on three primary factors:
1. Your earnings record
2. When you elect
3. How long you expect to live
Since you can't go back and change your earnings record, and you have minimal control over how long you live, calculating an expected lifetime benefit largely hinges on when you elect.
In theory, if you elect early, you will get a smaller benefit for a longer period of time. If you elect later, you will get a larger benefit for a shorter period of time. For single people, the decision of whether to elect early or later is usually as simple as answering the question: do you think you'll 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.
Single people who have never been married can use a simple “break-even” calculator to determine how long they would have to live to make waiting worthwhile.
For married couples or people who have been married, however, the decision is much more complex since Social Security offers three distinct benefits:
1. Retired Worker Benefit: Based on your own earnings record
2. Spousal Benefit: Provides your spouse with a benefit once you claim your own benefit
3. Survivor Benefit: Provides your spouse with a benefit after your death
Simple break-even calculators typically ignore the Spousal and Survivor benefits.
If you file early (prior to full retirement age), you are considered to have filed for all benefits for which you are eligible. At full retirement age and beyond, you have several options to elect a limited benefit for a period of time, with the opportunity to switch to a larger benefit at some point in the future. We refer to these planning options as “Switch Strategies.”
There are two basic techniques that enable switch strategies: the “restricted application” and the “file and suspend.”
Once you reach Normal Retirement Age, you have the option to restrict your application to exclude certain benefits. If a benefit is excluded, it will continue to build delayed retirement credits.
As an example, a higher-earning spouse, who may want to wait until age 70 to collect his own benefit may be able to file at 66 for only the benefit available under his spouse's work record, while still allowing his own benefit to build delayed retirement credits. At age 70, he would switch to his own benefit.
Alternatively, a lower-earning spouse could restrict his or her application to only spousal benefits while continuing to claim delayed credits on his or her own earnings record.
File and Suspend:
The second technique is the ability to file and suspend. Spousal benefits are not available until the primary earner has filed for his or her own benefits. The Senior Citizens' Freedom to Work Act of 2000 allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. As a result, a higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits. In the process, he will have made his spouse eligible for spousal benefits under his earnings record.
There are many possible combinations
It is important to note that Social Security benefits are completely gender-neutral. In other words, any technique that is available to the “primary earner” is also available to the “secondary earner.”
Certain combinations of the two techniques are also allowed. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for only spousal benefits. This would allow both earners to earn delayed retirement credits on their own earnings records while one spouse still collects benefits now.
In total, a married couple would need to analyze up to 81 possible election age combinations across 9 different election strategies to determine how they may be able to maximize their benefits over their lifetime. Sequoia Financial Group’s Wealth Planning Department is fully equipped to perform these analyses and determine the best strategies to receive benefits.
Give us a call and learn if you qualify for Social Security Analysis, which can help maximize your Social Security benefits. If you have any questions or concerns, please don’t hesitate to contact us. We look forward to speaking with you.
Your Sequoia Financial Advisors
1SocialSecurityTiming.com which is based on possible outcomes experienced by clients
2Center for Retirement Research at Boston College 2009
Investment advisor services offered through Sequoia Financial Advisors, LLC, an SEC Registered Investment Advisor. Certain third–party money management offered through ValMark Advisers. Inc., an SEC Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. 3500 Embassy Parkway, Akron OH 44333, 330-375-9480. Certain insurance products offered though Sequoia Financial Insurance Agency. Sequoia Financial Group and related entities are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.