Advisors who know the ins-and-outs of Social Security help their clients navigate the rules and get the most out of their benefits. While the notion of filing at age 62, sitting back and collecting that cold, hard cash is the approach that might appeal to most, it isn't always advisable.
It turns out that clients may want to keep working now and deploy specific strategies that ensure they will receive enhanced benefits. In some instances, their families can also increase their benefit amounts with proper planning (and if they meet certain criteria.
9 Social Security Tips To Think About
Remember: The Income is Nothing But Net Income
$2663 or $32,000 (maximum social security payout for a 66 year old in 2015)
That “pile” of Social Security money clients anticipate receiving is probably about to get smaller. In order to qualify for the maximum payout, the collector of the benefit must have paid the maximum Social Security tax for 35 years. This means that some will receive less from Social Security. And, in certain instances, clients will receive far less.
So, for example, a couple with Social Security income between them of $50,000 that desires $90,000 a year in retirement has an annual gap of around $40,000. However, at a 4% initial withdrawal rate, this couple could still have a $1 million retirement goal. Keeping the payout amount in realistic net numbers is key for planning.
Who Should Collect at Age 66
$2400 vs. $1800
At 66, clients can earn any employment amount and still receive their full Social Security benefit. This is in addition to avoiding the 25% benefit reduction imposed for collecting at age 62. Additionally, Medicare premiums are due for many people at age 65. Having the payments directly subtracted from a Social Security direct deposit is easier than writing a monthly check.
Working Past Age 70 Pays Off
17% vs. 20%
The Social Security Administration re-calculates benefits every year based on a retiree's 35 highest-earning years. As such, retirees that held off until 70 to saw an 8% boost in each of their last four working years.
Additionally, retirees with low benefit levels and pay that remains flat can expect to see a 9%-10% boost in benefits if they work until age 75. While this increases if the person gets raises, keep in mind that the increase is lower for higher wage earners.
Deferral Has its Merits
76% is the increase in benefits received if retiree deferred collection from age 62 to 70.
A 62-year-old considering filing for Social Security can assume a monthly benefit of $750 at 62, if they wait until 70 to collect, their monthly benefit (in constant dollars) will be about $1,320 per month, or 76% higher.
However, choosing to receive that substantially higher benefit means they miss out on 96 months of benefits, or about $72,000. To earn all that missed money back, figuring in constant dollars, the client would have to live past 80.
People Can Turn Back the Clock
Options include penalty-free reversal, Undoing “file and suspend” and redoing spousal benefits
With the penalty-free reversal, clients who retire and claim benefits at 62 have a 12 month window to reverse their decision and repay the benefits they’ve received without penalty.
The file and suspend option is when a married couple with two earners chooses one spouse to file for benefits at full retirement age and then suspend the benefits until age 70, allowing for the other spouse to collect spousal benefits on the first spouse’s account while leaving their account untouched to continue growing until age 70. In order to undo the option, the recipient can cancel the file-and-suspend. Social Security then pays out any foregone benefits as a lump sum. Another area where a client can redo a Social Security decision is spousal benefits. The spousal benefit, for someone who begins taking it at 66, is 50% of what the spouse whose account is used is receiving. Consult your advisor before making such a move. Also, there are new laws in the books that limit people from doing some of these things in the months ahead.
Protect Your Spouse and Assets
Having one spouse delay Social Security until age 70 may ultimately help the survivor. If you rely heavily on social security benefits it may be in the best interest of the spouse to delay until age 70. For example, if the husband dies then the wife is entitled to the husbands full social security benefits but she now loses her own. If a husband delays until age 70 then the check may be enough for the wife to survive.
Those Working While Collecting Will See Less Green
$15,720 is the amount those working can make without having benefits reduced. After that, $1 out of every $2 is withheld.
Clients that need to collect Social Security while working and/or before full retirement age will see their work income decrease the amount in benefits that they get, at least temporarily.
Every two dollars they earn over $15,720 (the figure for 2015) equates to a dollar in benefits withheld. For example, if one makes $25,720, they would be $10,000 over the limit and $5,000 of their Social Security benefits would be withheld.
However, benefits are adjusted further down the road.
Despite Incentives to Defer, A Large Percentage of Clients Will Begin Collecting Social Security at Age 62
45% of men and $50% of women opt to start receiving benefits at age 62
1% of men and 2% of women wait until age 70 to collect, despite the increase in payment if they wait until then.
Clients cited the need to tap into their money and fear that Social Security wouldn’t be around as prime reasons for collecting at age 62.
Check in From Time to Time
Your advisor should do an annual Social Security check up every few years.
via financial planning magazine
