Custom strategies may enhance the value of retirement benefits
by Mark E. Caner, AEP, ChFC, CLU, CFPMr. Caner is President of W&S Financial Group Distributors, Inc. Connect with him by e-mail:
Remember the popularity of “Deal or No Deal” when it premiered? Avid audiences watched contestants open cases, weigh offers and discover whether their choices had made or cost them money.
It’s unlikely any of your clients ever will appear on a game show. However, the day will come when all of your clients will likely face a major financial decision, one that will significantly impact their future retirement income.
That decision centers on Social Security retirement benefits – namely, when and how to claim them. Just as for a game show contestant, “How do I make the most of this?” is the key question. What’s different is that, while game shows rely on hunches and luck, clients can base Social Security claiming decisions on facts and strategies.
Start with Benefit Basics
First, before your client considers the Social Security benefit “case” they may wish to open, review some fundamentals. Some of the most important include:
- Social Security retirement benefits are earnings based. The calculation averages a worker’s highest 35 years of earnings, is indexed for inflation and is based on age. An individual’s full retirement age (FRA) varies by year of birth.1
- The higher your client’s Social-Security-taxed wages have been over the years, the higher their benefit amount will be at retirement. But as compared to those for high earners, the benefits for lower- and middle-earning clients will represent a larger share of their average earnings.
- Starting benefits at any time other than FRA results in either a reduction or an increase in benefits. The earlier benefits start (age 62 being the earliest), the more they will be reduced from what they would have been at FRA. Conversely, the longer benefits are delayed (up to age 70), the more the benefit amount will be increased from what it would have been at FRA. Either way, once in effect, any reduction or increase in benefit based on claiming age is permanent.
Show Me the Money
After decades of paying into the program, maximizing Social Security is a topic of foremost concern to clients approaching retirement. Deciding when and how to claim benefits is a challenging financial decision. It requires an assessment of factors that include life expectancy, ability to work, health care needs, spousal situation, tax exposure and financial solvency.
Considerations for making the most of Social Security and integrating it into a bigger financial picture can be found in optimization strategies inherent in the program itself and in supplementary strategies rooted in coordinated financial planning.
Optimizing a Social Security recipient’s claiming strategy is essential to managing benefit expectations. The right type and timing of the strategy selected can enhance benefits immensely. For example …
Most people are aware that delaying benefits will increase their amount. Despite that, 62 remains the most prevalent age to claim Social Security benefits, and the large majority of eligible workers claim by their full retirement age.2 If they delay retiring from work and taking Social Security until full retirement age (currently 66), or even later, the result is potentially more income. Doing this adds more earning years to a recipient’s record and higher lifetime earnings may produce a higher benefit. Also, for those born in 1943 or after, each year of delaying the start of their benefit beyond full retirement age increases it by 8%.1 In addition, a delay could also provide a surviving spouse with a greater benefit as well.
On the other hand, delay doesn’t necessarily always pay. If one is in poor health or from a family with shorter life expectancy, it may be better to start Social Security benefits as early as they can. For these folks, just having the program’s income as soon as possible may be more important than maximizing its benefits over a potentially longer period.
File and Suspend
This strategy seeks to maximize payout by filing for – but not taking – Social Security retirement benefits. If a worker reaches full retirement age but continues working, it may be better to file for benefits and immediately suspend them. Filing for Social Security allows the non-working spouse to receive benefits. Suspending allows the working spouse to continue earning additional deferred retirement credits to boost benefits up to age 70. Both spouses can benefit from the file and suspend approach.
Varying a Couple’s Retirement Times
In some situations, it may be a beneficial for a lower-earning spouse who retires early to start Social Security at age 62, while a higher-earning spouse continues to work to age 70. The early retiree may find it advantageous to switch to a spousal benefit thus increasing monthly benefits.
These are just a few Social Security claiming optimization strategies. Since each person’s potential benefit differs, it is important to make sure a claiming strategy suits a person’s individual situation. Understanding the retirement, spousal and survivor benefits unique to an individual situation is key to implementing the right strategy.
Even with the best available Social Security claiming strategy optimization, Social Security alone will not be enough to maintain a preferred standard of living in retirement. According to the Social Security Administration, 64% of retirement income for people aged 65 or older comes from sources other than Social Security.3
Various retirement income resources can be used to supplement Social Security and create a more comfortable retirement. If other sources can produce enough income early in one’s retirement, they can allow the start of the Social Security benefit to be delayed which, as discussed above, can increase the retirement benefit amount by 8% per year. 1 The strategy of delaying receipt of Social Security seeks to bridge the gap between stopping working and starting Social Security. Examples of resources that can help accomplish this include:
Drawing on personal savings at the start of retirement can help postpone Social Security, resulting in an increased benefit.
Starting the payout of an employer-paid defined-benefit retirement plan early in retirement may allow Social Security to be deferred until later in retirement, resulting in a higher benefit.
Starting the distribution phase of a 401(k) or 403(b) plan can generate retirement income and allow for the delay of Social Security, resulting in an increased benefit.
Tapping personal investments for income, on an as-needed or systematic basis, can help postpone Social Security, resulting in a higher benefit.
If there is less need for certain property in retirement, such as a second car or home, proceeds from selling it can help delay Social Security, thereby increasing the benefit.
Working part time, possibly in a new field or area of personal interest, in the early retirement years can help forestall taking Social Security, resulting in an increased benefit.
Nonqualified annuities provide unique and specific possibilities for bridging income gaps in the early years of retirement. Deferred and immediate annuities offer a variety of payout options that may allow for the delay of Social Security, resulting in a better benefit. Not only can the products be utilized to address short-term, long-term or even lifetime income needs, but their death benefit protections can address survivorship financial needs as well.
Is That Your Final Choice?
These are just a few ways to optimize and supplement Social Security benefits and defer a benefit start date as long as possible, resulting in increased benefits. What’s most important is that clients understand they do have options and then make a plan that seeks to optimize their benefits.
On “Deal or No Deal,” the choices were limited to 26 cases. In real life, for a married couple who both have earnings records with Social Security, there may be scores of claiming option possibilities when various strategy and starting age combinations are considered. That’s why more and more individuals nearing Social Security age want a financial professional involved in their planning process. Given so many complex considerations, they recognize the advantage of discussing retirement needs, including Social Security claiming strategies and supplemental resources, with someone experienced in pursuing financial preparedness. Together, you can take consultative steps toward addressing long-term financial needs in the context of informed Social Security claiming decisions.
Expand your knowledge by visiting the “Social Security Know How” section of WSFinancialPartners.com.
1 Source: “Retirement Benefits,” www.socialsecurity.gov, April 2013
2 Source: “Challenges for Those Claiming Social Security Benefits Early,” U.S. Government Accountability Office, April 2014
3 Source: “Fast Facts & Figures,” Social Security Administration, 2013