March 1, 2013

Investment Strategies: Maximize Your Social Security Benefits

The Investment Strategies Committee

Interview with Walter T. Burke & Karin Lopez

Social Security appears very simple but can be very complex. Some financial planners have developed strategies for maximizing social security benefits for married couples by analyzing the amount of benefits, the work plans of the couple, and the timing of the appli- cation. Walter T. Burke, a member of the SLD Investment Strategies Committee and chair of the SLD Elder Law Committee, asked financial advisor Karin Lopez, MBA to explain several different claiming strategies for Social Security benefits. Ms. Lopez  is a shareholder and financial planner with Arista Wealth Advisors, a registered investment advisor (RIA) with the Securities and Exchange Commission. Mr. Burke is a founding member and vice president of Arista Wealth Advisors. He is also cofounder of the law firm of Burke & Casserly in Albany, New York, where he has concentrated his law practice in elder law; trusts and estates; succession planning; and financial, retirement, and tax planning.

 

Walter T. Burke: Shouldn’t I just wait until I get to my full retirement age of 65, 66, or 67 and then simply take my social security? Shouldn’t it be the same for my spouse?

Karin Lopez: As we approach retirement age, it is inevitable that we ask the question “What is the best age to start receiving Social Security benefits?” The answer is not the same for everyone, and it becomes a very personal decision and may be one of the most important decisions we face at retirement. This decision can depend upon a number of factors, including current cash needs, your health and family longevity, whether you plan to work in retirement, what other income sources exist, anticipated future financial needs and, of course, the amount of your future Social Security benefit.

In years past, retirees were urged to take Social Security as soon as possible. It was often viewed as, why let Social Security keep your hard-earned money and take the chance of dying without having collected your rightful benefits? That is no longer the case, and the question should be thought about differently. One reason to wait is that it effectively buys more longevity insurance—more insurance against living longer than expected. Your benefit is increased by waiting, and thus it effectively means that, given increasing life expectancies, you will probably be better off financially because you will receive a higher retirement payout for years to come, rather than the reduced benefit you would receive if you took Social Security early.

This calculation is similar to the one you make when you buy homeowner’s insurance. Actuarially, we lose money by purchasing it if our house doesn’t burn. But losing money is not a reason to go without homeowner’s insurance. We are risk-averse by nature and want to protect against the down- side. This desire to protect against risk is the same reason one should consider insuring against the “risk” of longevity—or rather, the risk of not being able to afford longevity. In effect, delaying your Social Security benefit may insure against not having enough income to last throughout a long retirement.

In order to answer the question of when, understanding some of the below claiming strategies may help lend some clarity to the making of an educated decision about when to begin claiming benefits. The Social Security retirement program’s rules are complex, allowing for a variety of claiming strategies and, while the ones listed here should provide a baseline for your decision, it is wise to consult with an advisor for additional research and analysis in order to reach your maximum payout benefit.

Your Social Security benefit will be determined by the age at which you retire. The amount you receive will depend on whether you elect to begin receiving retirement benefits at your “full retirement age” (FRA), which is generally age 65.  The benefit amount designated by the Social Security Administration (SSA) for your full retirement age is called your “primary insurance amount,” or PIA. Thus, many of you will be entitled to your PIA benefit when you turn 65.

However, for those of you born in 1943 or later, the SSA definition of “full retirement age” has changed. It has increased in small increments up through the birth year of 1960. People born in 1943–59 will attain their full retirement ages during the year they turn 66. For those born in 1960, the full retirement age becomes 67.

If you retire before or after your full retirement age, your benefit amount will be different from your PIA. The following shows how retirement age will affect the amount received by a person whose full retirement age is 65.

•     Age 62: You will receive a lower monthly benefit (75% of PIA).

•     Age 65 (FRA): 100% of PIA

•     Age 70: You will receive 132% of PIA

•     After age 70: There is no additional benefit.

It is widely known that there is an increase in benefits the longer you delay collecting Social Security (up until age 70). Waiting until after age 70 confers no additional benefit for an individual or married couple, as the benefit no longer accrues. As the following chart indicates, your benefit increases in accordance with the year and month of your birth.  See  also www.socialsecurity.gov/retire2/delayret.htm.

Increase in Social Security Benefits for Delayed Retirement

Year of Birth

Yearly Rate of Increase

Monthly Rate of Increase.

1941–42

7.5%

5/8 of 1%

1943 or later

8.0%

2/3 of 1%

Note: If you were born on January 1, you should refer to the rate of increase for the previous year

 

Burke: What happens if I continue to work while I collect social security?

Lopez: While you are working, and if you claim benefits before you reach your full retirement age, your benefits will be reduced. The SSA uses the following formula to determine the reduced benefits:

•     If you are under full retirement age for the entire year, your benefit will be reduced by $1 for every $2 earned above the annual limit of $15,120, the 2013 limit.

•     In the year you reach full retirement age, your benefit will be reduced by $1 for every $3 earned above a different limit, but earnings are only counted up to one month before you attain full retirement age.

•     After you reach full retirement age, you can get your full benefit with no limit on your earnings.

 

Burke: My spouse’s benefit is less than mine. What should we do to maximize benefits? What about benefits for my ex-spouse?

Lopez: If you are married, you may collect up to 50 percent of the benefit owed your spouse based on her PIA. If your spouse’s own PIA is less than 50 percent of yours, the benefits will be combined. If benefits are claimed early, the spousal benefit may be reduced by up to 35 percent of the PIA. There are also benefits for ex-spouses, but the marriage is required to have lasted for at least 10 years.

It is very important to understand that this “50-percent spousal benefit” does not increase with delayed retirement credits. For example, if a worker’s full retirement age is at age 66, yet he or she continues to work up to the age of 70, the 50-percent spousal benefit does not also increase. The spousal benefit remains at 50 percent of the PIA, which is determined for the full retirement age or, in this case, at age 65.  It will not increase to half of the worker’s benefit at age 70, and it will remain the same. Remember, PIA is the benefit only at full retirement age. So, if a non-working spouse has a lower PIA or none at all, it is not advantageous to wait to collect the spousal benefit when the working spouse claims his or her benefit at the age of 70. In this case, “file and suspend” (defined next) may be a better option.

Burke: My spouse wants to start receiving benefits now, but I want to keep working and delay starting my benefits so I get a higher benefit. Is there a way we can do that?

Lopez: Yes, this is the so-called “file and suspend.” This is slowly becoming a better known strategy and is a pretty effective way to collect greater benefits. If one spouse reaches full retirement age but wants to continue working thereafter, he or she can file for benefits and immediately suspend his or her own benefit while at the same time allowing the spouse to collect on the spousal benefit. This allows the worker to continue earning delayed retirement credits (DRCs) at the same time the non-working spouse, at full retirement age, begins to enjoy the 50 percent spousal benefit. It should also be noted that this spousal benefit cannot be collected until the worker has actually submitted his or her application and filed for Medicare.

Burke: Is there another strategy to help us maximize our Social Security benefits?

Lopez: Yes, another little known option worth considering is called “claim now, claim later.” If you are married and have reached full retirement age, you can claim a spouse’s benefit and then, at a later date, switch to a benefit based on your own work record. An example would be a married couple in which both people have attained the full retirement age. The husband files for his benefit and the wife then files for her spousal benefit, or 50 percent of the husband’s benefit. She, however, continues to work while earning additional delayed retirement credits up to age 70 on her own record. At age 70, she then switches from the spousal benefit she has been receiving and begins to claim her own increased benefit through the DRCs she has accumulated.

Burke: I have already started receiving benefits. Is there any- thing I can to change things?

Lopez: The golf term “mulligan,” which is essentially a “do- over,” comes to mind. A Social Security mulligan is available only within 12 months of a submitted application. The rule essentially allows you to withdraw your application and repay all your benefits to the Social Security Administration. You can then refile no later than age 70. This option may be worthy of consideration if someone reenters the workforce or now wants to consider a different claiming strategy. All benefits must be paid back.

Before claiming your benefit, know the rules. Talk with the Social Security Administration and consider receiving additional advice to review your optimal payout strategy. Remember that life expectancy matters. The optimal strategy for a couple changes depending on how long they may live. If the individuals in a married couple today are both age 65 and both expect to reach the average life expectancies, which are 83 for men and 85 for women, delaying is likely the better option.

Social Security is meant to be only one of the sources for retirement income. It was never intended to be the sole means or only income source. The option you choose will have a significant impact on your overall lifetime benefits and retirement security. Choose wisely!