My F&M

Social Security

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My previous articles have focused on death (estate taxes, really), so I’d like to explore something lighter, something that evokes more positive emotions – Social Security.

Social Security began in 1940 when Ida May Fuller received a check for $22.54 (about $375 in today’s dollars).  Fast forward 74 years and Social Security will pay $863 billion to 59 million beneficiaries this year.

I do not have a crystal ball for the future of Social Security.  I read the same reports that everyone else does projecting the Social Security Trust Fund will run out sometime around 2030, and thereafter current tax receipts will only fund 70% of projected benefits.  It’s easy to get bogged down with this uncertainty, throw up your arms and proclaim, “I’m going to take it while I can get it.”   Unfortunately, this strategy misses some advantages of delaying your benefits.  There is a very simple strategy that helps mitigate three of the biggest risks retirees face:

· Outliving your money

· Higher than expected inflation

· Lower than expected investment returns .

The strategy: wait to claim your Social Security benefits.  Benefits can begin anytime between age 62 and 70.  Each year you wait to start benefits after 62 increases your future benefit by more than 7%.  Over an 8-year period this adds up to a compounded 76% increase!  Even better, this growth then receives future cost of living increases which help your benefits keep pace with inflation over time.  Plus these benefits will be paid until your death or your spouse’s death if he/she receives a spousal benefit. 

The risk, of course, is you die earlier than expected and you leave some money on the table.  A typical breakeven point is around 78 years old.  If you wait and you live past age 78, you win; if you die before age 78, you lose.  Because of the compounding growth of the cost of living increase, you quickly start to “win big” into your 80’s and beyond.  Many people worry about outliving their assets; delaying Social Security benefits can provide effective “longevity insurance.”

What if you’ve already claimed your Social Security benefit and you wish you would have waited?  You’re not alone.  A recent survey of retirees by Nationwide Financial Retirement Institute found that 23% of retirees who claimed benefits before their full retirement age regretted the decision. The good news is you can change your mind. If you claimed benefits in the past 12 months, you can complete form SSA-521 to withdraw your application.  You will also need to repay all of your benefits, including spousal and dependent benefits received on your record.  If you have received benefits for more than 12 months you need to wait until your full retirement age.  At this point you can suspend your benefits application.  In return you will receive 8% delayed retirement credits for each year you wait to take benefits until age 70.  The 8% annual delayed retirement credits will be based on your original (reduced) benefit amount.

There is no one-size-fits-all strategy for claiming your Social Security.  The purpose of this article is to simply challenge the early claiming strategies used by about 80% of Americans. Many factors can quickly complicate your claiming strategy including a government pension, divorce, and poor health. 

Claiming strategies for couples, especially those with significant age differences, can be more complicated and confusing as well.  Using lesser known strategies such as “file and suspend” or “filing a restricted application” can increase cumulative benefits because of the interplay of individual, spousal, and survivor benefits. 

Ultimately, Social Security will be one of many factors that create a successful retirement.  Having a discussion with your financial planner about your facts, goals, and preferences will be most helpful in developing a Social Security claiming strategy that fits best into your overall retirement plans.   We would be happy to discuss this with you.