Waiting to Take Social Security

In a financial-planning.com article (September 2010) by Donald J. Korn entitled The 8% Solution he suggests that patience is a virtue. Waiting from age 66 until age 70 to take social security means that you will have to wait until your mid-eighties to "break-even". But the break-even decision is not the only factor. Other factors besides health issues:

If you are married, "...it's the joint life expectancy that's relevant..." because delaying benefits "...commonly increases a widow's pension substantially..." (Michael Kitces).

If you liquidate low-yielding assets "...in order to get a higher-yielding asset..." (Eric Wikstrom), then that may make sense. Each year you wait, from age 66 to age 70, the social security annuity payment increases 8%. Inflation adjustments could add even more to that monthly amount.

"...Inflation also affects the break-even point...moving the assumed rate of inflation from 1.5% to 4.5% can cut the break-even period in half..." (Michael Kitces)

Finally, another factor to consider, is taxes. The maximum amount of social security that will be taxed is 85%, so "...at least 15 cents is tax-free...studies have shown that taxation magnifies the advantages of delayed claiming of Social Security..."

Delaying from 62 to your normal retirement age may be advantageous, but delaying until age 70 should be considered thoughtfully.

Social Security Optimizer

I have written about Social Security Solutions in a previous blog.

BAM Advisor Services has a free site that provides some information about when to file for social security also.

www.WhenToFileSS.com

This site provides a basic solution for free but does not consider the many factors and options available. It is free. It is a start. You are only providing some very basic information and nothing secretive and so the answer is going to be very basic, too.

Social Security Solutions

There are other entries about social security in this blog so I encourage you to read them. There is also a respectable company that provides social security solutions for a reasonable price. They can be found through Kiplinger's website or directly at this site:

www.socialsecuritysolutions.com

Dr. William Reichenstein, CFA is one of the principal researchers for this company and he has written many articles to the financial industry about taxes and social security benefits as well as William Meyer who is another principal of Social Security Solutions.

Before taking social security at age 62 please take more than a few moments to consider the implications of waiting until later and, maybe, even delaying until age 70. For some it may be appropriate to begin at 62 and for others much beyond that age.

Social Security Statements

Yikes! To save costs, the Social Security Administration (SSA), in April 2011, stopped sending out paper statements of your potential benefits and earnings history a few months before your birthday. So, if your birthday is in late June or early July 2011 you will be the first ones not to receive your statement.

Did you miss it? Will you?

You can (and should) still go online periodically at http://www.socialsecurity.gov/ and obtain the information but you will no longer be able to retrieve your earnings history.

If you are 60 years old or older, the SSA may restart mailing them in 2012 and a few months before your birthday but those younger than 60 will have to go online to obtain their benefit information.

Working More Years

According to another conclusion from Michael Tucker's July 2009 article in the Financial Planning Journal, "...working more years to decrease the probability of exhausting savings at a more advanced age appears to be warranted only for the most risk averse..."


The author's analysis used a 4% withdrawal rate from a portfolio of $450,000 and social security income representing ranges of 20% to 80% of total retirement income. If you can earn a real rate of return of 10% or more (that is substantial), then delaying social security may be justified. If not, then the more safe your investments/savings then it may be better to take social security earlier to avoid using up those savings.

Delaying Social Security Beyond Age 62

The Social Security Administration reports that 6 out of 10 retirees begin collecting social security at age 62 at the reduced benefit. Though each year of delay results in about a 7-8% increase (depending on your birth date) in payments, the key point may be best defined by Michael Tucker in a July 2009 Financial Planning Journal article. There are other considerations, too, for married couples and the calculation of survivor amounts. For this blog entry:

He states "...the greater the proportion of retirement income derived from Social Security the more advantageous is delayed retirement..." If, and the big "if" here is if "...enhanced standard of living is the decision criterion." 

The question must be raised whether you desire to maximize your wealth or maximize your retirement income. Not everyone wants to just accumulate and some choose the lifestyle of retirement living.

So, if you are one who expects your social security payments to account for 10% of your retirement income, then taking it at age 62 may be economical.

For some retirees who will be counting on 20% and up to even 80% or more of their retirement income from social security, then delaying may be a better solution.

Social Security - Changes as of 12/8/2010

Previous entries from March of 2008 and May of 2010 describe a strategy where you could take your social security benefit at age 62, then repay those benefits and claim the higher monthly benefit at a later age. No more. Effective December 8, 2010 your decision to take social security is now an irrevocable decision. If you decide to take a lower monthly payment at any age prior to your Normal Retirement Age (or forego the increases available if you wait until age 70), then you cannot later change your mind.

EXCEPT...

You still can suspend your benefit, once started, and restart later.

Social Security Rules of Thumb

Two-thirds of Americans take social security at age 62. At 95 years of age, that could mean the loss of over $300,000 in additional earnings potential had the recipient waited until age 70 to start taking the benefit.

Rule of thumb: wait to start your benefit, if you can, and have other sources of retirement income. By the way, I hate rules of thumb because there is always another side.

Rule of thumb: the social security office's default advice to applicants is to explain to them how they can obtain the highest benefit NOW. They often will not explain the potential benefits of waiting until age 70.

Rule of thumb: married and lower income person's PIA (primary insurance amount due at full retirement age) is more than 1/3rd of the higher person's PIA benefit:

(1) lower wage earner takes benefit based on their own record at age 62
(2) higher wage earner takes spousal benefit at full retirement age (that is a 50% benefit)
(3) higher wage earner then switches to their own benefit at age 70 (much higher benefit)
(4) lower wage earner then takes 50% of higher earner's record, if higher than their own

Rule of thumb: when lower wage earner spouse is much lower than higher earner (less than 1/3 rd):

(1) lower wage earner takes benefit based on their own record at age 62
(2) higher wage earner "files and suspends" at their full retirement age
(3) why? so the lower wage earner spouse can then take the spousal benefit of the higher wage earner

THIS IS LEGITIMATE (at least today) AND GOOD PLANNING.

(4) higher wage earner then takes their age 70 benefit (which is much higher)

It is important to note that age 62's reduced benefit and the age 70 increased benefits are in actuarial terms the same and carefully calculated by the social security agency. Delaying benefits is a way to obtain "longevity insurance" should you live longer than the "averages". Otherwise taking the benefits at age 62 or age 70 come out the same if you have an average life expectancy.

Social Security Planning Strategies

With married couples, the one with the higher benefit should generally wait until age 70 to start benefits (note that benefits do not increase past age 70) because the surviving spouse is eligible for that higher benefit too.

Exceptions to this rule for maximizing this government "longevity insurance" would be:

(1) shorter life expectancy due to known illness
(2) need the lower benefit now to meet income needs
(3) desire to minimize withdrawals from current investable assets so they can grow
(4) convinced that you better get it now before the benefit runs out (wrong reason, I do not believe this and will write more about this at a later date)
(5) plan to take it at age 62, pay it all back at age 70 and then get the higher benefit (if you die before age 70, then spouse is limited to lower benefit, too)

By the way, the spousal benefit (receiving income off of other spouse's record) does not increase after full retirement age (FRA), so there is no reason to wait past FRA if eligible.

You are eligible to do this off a divorced spouse's record (once they file) also if you had been married to that ex-spouse for at least 10 years prior to divorce. But, you cannot be remarried when filing for benefits or remarry while receiving those ex-spouse benefits.

Widows and widowers can remarry after age 60 and benefits have begun off of their deceased spouse's record.

Again, it is worth repeating that if you start your benefit at age 62, then die, your surviving spouse is limited to your lower benefit (unless their own record allows them a higher benefit).

Social Security - Interesting Concepts

Once you reach your FRA (full retirement age), you can "file & suspend". Basically this means that you are telling the social security agency to not start paying you yet but it allows others, like your spouse, to file for their benefit based on your record.

This is an interesting strategy to begin receiving some social security in the household. Then, when your spouse reaches full retirement age that person can begin to receive their full benefit based on their own record. You, in turn, have allowed your benefit to continue to grow until you decide to take the benefit.

It is simple to do, check the box at the end of the normal application form.

"File & Withdraw" is another strategy that may be useful, if applicable. Complete Form 521 and repay all benefits previously received (but note that all interest/gains on those funds do not have to be repaid, you can keep those).

Why?

Social security is just like an annuity except the payout is better than a life insurance company and it is backed by the government. So, with this strategy, you are purchasing a single-premium annuity for your lifetime. And, your surviving spouse, continues to receive your higher benefit after your death as the survivor.

If, for example, you had started your benefits at age 62 (at 70%-80% of your normal retirement age benefit) and are now age 70 with a very healthy lifestyle and longevity in your family, then you can repay the benefits and begin receiving the age 70 benefit. This may be a substantially higher monthly benefit (from age 62 to 65, the monthly benefit increases 20%-30% and then from age 65 to age 70 it increases at 8% per year, for another increase of about 35% - substantially more than your age 62 benefit.

Why not?

It still takes about 15 years to break-even on this deal, so if you get hit by a bus, then your heirs lost out on that nest egg that you just used to purchase your new lifetime annuity through social security. If you are married, though, consider the potential remaining lives of both of you.

2010 Social Security Limits

The 2010 social security wage base remains at $106,800. You will pay social security taxes up to this limit (6.2% if employed and 12.4% if self-employed). The 1.45% Medicare tax (2.9% if you are self-employed) has no limt on earned income but the rate has not changed for 2010.

Social Security will not be increased in 2010 but last year (January 2008) social security recipients received a 5.8% increase. So, over two years, it is an average of 2.9% - not bad.

Medicare, however, is expected to go up and there may be an extra payment coming from a new stimulus package for social security recipients.

Social Security Earned Income Limits for 2008

Many do not know that at your normal retirement age (66 to 67 for many to-be-retirees) you can make as much money as you want without any reduction in benefits. The old limits were removed. However...





At age 62, in 2008, the limit is $13,560 of earned income allowed before the $1 for $2 penalty hits you. So be prepared if you plan to take your social security benefit early and still work. And, yes, you can take it early at age 62. This is something else many do not understand but it is a 20-30% reduction in monthly amount depending on when you were born.



In the year you reach your full retirement age (know this number, it is on your last social security statement that arrives annually a couple of months before your birthday), the "penalty" shrinks to $1 in benefits being deducted for each $3 you earn above a higher limit of $36,120 in 2008.





An interesting bit of knowledge is that if you decide to take your social security early and accept the reduced benefit, you could change your mind later as long as you repay the benefits received. This may sound silly but it might be a very effective strategy because, in effect, you are buying a higher monthly annuity payment. There are other strategies, too, worth exploring with a financial planner. Go to the http://www.ssa.gov/ site for everything you ever wanted to know about these features of the social security system.

Social Security deferrals

If a husband, for example, delays retirement past his NRA (FRA) (that is, normal retirement age or full retirement age) – say age 66, then the spouse only gets 50% of his benefit at the age of 66 – not 50% of the benefit at age 70 or whatever the delayed time was.
READ ON:
She only gets half his Primary Insurance Amount (his pension at his Full Retirement Age), assuming that she waits until her FRA. She never gets more than 1/2 (as a spouse) even if he gets delayed retirement credits.HOWEVER, she will benefit from his delayed credits as a WIDOW, if he predeceases her. In that case she gets his current benefit (but gives up the spousal benefit).

Jean Fullerton

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The SS representative was right on this. While your client is alive, the spouse can only collect 50% of his benefit at his FRA. However, when he dies, her benefit will be increased to his full delayed benefit. The spouse only benefits from his deferral of receipt after he dies.

Robert Frey