Why Social Security Planning Is A Must

Social Security CardWhen I was growing up I was sure I wanted to be a teacher. My mother, knowing me best, suggested I try substituting before making any final decisions. I substituted in high school for one day . . . just one day and that was it.
Fortunately, I have found a way to teach a subject that I love, albeit to a less rambunctious crowd. In my professional practice, I educate folks on the importance of having their investment, income and advanced tax planning strategies work together. I empower my clients to use logic and facts, rather than what is more commonly used, emotion, to make their financial decisions. I have also been lucky enough to offer continuing education courses to the local community. Recently, I taught a course in Mashpee on Social Security and how to maximize those benefits. Let me share with you, my well informed Cutter Family Finance readers, what I told my students.
Social Security typically accounts for a significant portion of retirement income. Nevertheless, that percentage can vary depending upon one’s investment strategy. Having an investment plan that is “pro-actively” managed and based on capital preservation can significantly increase the success of a solid financial future and retirement income plan. Unfortunately, what I often see is a traditional buy and hold investment strategy that, historically, has suffered crushing losses in market downturns such as 2001 to 2002 and most recently 2007-2009.
So, if we have shrinking investment values from outdated investment strategies and historically low savings account yields, then increasing our Social Security income is more important than ever. Additionally, we are living longer and experiencing reduced employer retirement benefits, and that trend does not seem to be ending any time soon. Therefore, it is vital to plan a strategy for collecting Social Security that will maximize those benefits.
The first step in creating such a plan is a Social Security analysis to evaluate your “vitals” which includes the current ages of you and your spouse, your life expectancies, earnings history, and financial goals. The results of such an analysis will dictate which one of numerous collection strategies is most advantageous for your situation.
Married couples literally have hundreds of options when choosing how and when to collect Social Security. The difference between the best and worst possible election can translate into well over $100,000 of additional income in a couple’s lifetime. Single people also have many options to choose from when deciding how and when to collect Social Security.
Unfortunately, a significant portion of pre-retirees and early retirees do not “do the math” to maximize their Social Security income stream. In fact, I find that many folks are not even aware that these different Social Security collection strategies are available to them. Failure to examine and implement these claiming strategies can result in a significant shortfall in lifetime income for many retirees.
At the end of the class I just finished teaching, I offered a free social security analysis to my students to help them figure out their optimal collection strategy. On Thursday of last week a couple from class, John and Anne, came in to see me. They are 63 and 61 respectively and are about to retire. They have not made any decisions yet regarding when to collect Social Security and are hoping to find the most effective way to maximize their Social Security lifetime income. Our analysis showed that if John had chosen to collect Social Security at age 62 and Anne were to begin collecting when she turns 62, they would have received about $843,000 over their lifetimes. While they might have liked to receive their Social Security checks as early as possible, I am glad that they did not choose this option. Let me explain why.
People born between 1943 and 1954, are entitled to receive 100% of their Social Security income benefit at age 66. However, for every year until age 70 that a person defers collection, they earn an 8% increase in the amount of their benefit. .
So, John and Anne can collect approximately $158,000 of additional lifetime income by using a technique called “Claim Some Now, More Later.” Using such an approach, John would wait to collect his Social Security until age 68 for the amount he would collect for the remainder of his life. Anne, at age 66, would collect spousal benefits (the amount of which is calculated from Bob’s earnings record). Then at age 70, Anne would switch to begin collecting benefits based on her own Social Security earnings record. Therefore, even though Anne would be entitled to collect 100% of her own benefits beginning at age 66, by deferring until age 70, she would be increasing the amount of her benefits (which will never decrease), while still collecting spousal benefits. Should John and Anne use this strategy, they will receive $1,000,662 over their lifetime, compared to the $843,000 they would receive if they both claim on their own records at age 62. (Keep in mind these projections presume inputs and assumptions unique to John and Anne’s situation, such as each spouse’s Social Security income benefit, their relative ages, and their estimated life expectancies.)
Performing a Social Security analysis may be one of the most important strategies both individuals and couples can use to increase future income. The website, www.ssa.gov, is a good place to start learning about collection options and several on-line calculators can provide preliminary projections of future benefits. Knowledgeable financial advisors and accountants can also be excellent resources for helping navigate the Social Security maze. And, new advanced software has recently been developed to assist folks with projecting their unique income scenarios and choosing strategies that will capture their greatest lifetime Social Security income benefit.
Be vigilant and stay alert because you deserve more!
Image courtesy of Microsoft Office.