Social Security may be on shaky ground and it will certainly have to undergo reforms in the future, but the program is here to stay. And, even if Congress does follow through with its proposed changes to the cost of living adjustment, collection age and benefits taxation, those alterations will have little effect on current and soon-to-be retirees.
It's therefore crucial that advisors organize not just their clients' Social Security collections, but their entire portfolios, to maximize their spending power for decades to come. While the program's benefits are primarily based on recipients' lifelong work histories, the amount of money any individual can draw is hardly set in stone.
The Collection Age: Who Should Wait?
"By far the biggest mistake people make with Social Security is to just coordinate their benefits with their actual retirement dates," said Joe Lucey, President of Secured Retirement Advisors. While the Social Security Administration's full retirement age is 66 for people born from 1943 to 1954, recipients can actually postpone and grow their annual benefits until the required distribution age of 70. A delay of just one year yields an 8 percent increase in monthly benefits, while waiting the full four years will result in a whopping 32 percent increase for the rest of a recipient's life.
Whether they're retiring early or still working part-time, some recipients are also rushing into early distribution at age 62. "People are rushing to get Social Security because they think it won't be there in the future," Lucey said. "They're willing to take fewer dollars now because they think the money won't be there later on." While this strategy may be necessary for truly cash-strapped seniors, it yields sizable lifelong reductions. Collection at 62 entails a 25 percent reduction, and collecting even one year early means 6.7 percent less money per month. Given current inflation rates and the rising costs of healthcare and long-term care, advisors would be wise to steer retirees towards more conservative collection strategies – as well as higher rates of saving and lower rates of spending while they're still working.
And, while early collection may seem like a better idea for people who want to keep working and earning, this option actually carries an additional downside. Workers still receive the same lifelong reductions for collecting early, and if they make enough money, those benefits are diminished even further. For every two dollars over $15,120 an individual makes per year, his yearly benefits are reduced by one dollar. The SSA does allow early collectors to change their minds for up to a year after they begin, but they have to pay back all of the benefits they've received so far in a lump sum. This may be feasible for well-off recipients who come to understand the flaws in their strategies, but it's an unlikely option for those who needed the money quickly, or who spent more to increase their living standards while they continued to work. Because it's so difficult to reverse these kinds of decisions once they're set in place, advisors should help their clients adjust their standards and spending years before retirement – not months.
Of course, advisors know that not every family or individual should postpone collection as long as possible. "Our philosophy is that it's great to maximize, but some people may have very different goals for Social Security income, and those goals may not require maximization," said Christine Fahlund, Senior Financial Planner at T. Rowe Price. As lucrative as postponement can be, many seniors don't want to wait, or don't have the means to wait, until age 70 to activate a new stream of income, she said.
Marriage and Divorce
Couples have even more options for maximizing their benefits, though far too few take advantage. "People don't usually realize that there are potential spousal benefits, even if you're no longer married to that person," according to Fahlund. At any time past age 62, either spouse can draw upon his or her own benefits or collect half the benefits of the other spouse. If one spouse takes this option, their benefits can continue to grow until age 70. For clients who can afford to live on smaller checks early in retirement, this is a great strategy to maximize income in older age.
When one spouse has significantly higher lifetime earnings than the other, the couple may realize even greater savings with a "file and suspend." The high-earning spouse goes to the Social Security office, claims benefits and immediately suspends them. Those benefits will continue to grow, but the lower-earning spouse can immediately draw upon half of them, while their still-untouched benefits grow, as well. Once the higher-earning individual reaches the age of 70, both can collect their own benefits in full.
