Social Security Maximization

Financial Oversight: Overlooking Key Strategies to Optimize Retirement Assets

Social Security Optimization

While some may speculate about the future of Social Security, it remains a critical source of retirement income for your clients. With 10,000 Baby Boomers reaching age 62 each day, inquiries regarding Social Security are likely to increase. One of the most pressing questions you may encounter is, “When should I apply for Social Security Benefits?”

For many middle-income married couples, Social Security accounts for 20% to 50% of their retirement income, with potential lifetime benefits exceeding $500,000. Social Security benefits are adjusted for inflation each year and may be subject to taxation of up to 85%. Importantly, benefits are backed by government guarantees for the duration of one’s life.

Given the significance of Social Security in your clients’ retirement planning, it is prudent to maximize this essential asset. By optimizing Social Security benefits, clients can potentially save tens of thousands, or even hundreds of thousands, over their retirement years. Below are key strategies to consider in your planning.

Optimization Strategies

Delay Benefits: Waiting longer to receive Social Security can significantly increase the benefit amount, up to age 70.

Spousal Strategies: Married couples can strategize around each other’s benefits. One spouse may choose to delay their own benefits to allow for growth while claiming spousal benefits, which amount to half of the other spouse’s monthly benefit. Once the delayed benefits reach their peak, the spouses can then switch.

For instance, consider a 59-year-old wife and her 61-year-old husband utilizing this strategy. She initiates benefits at age 64, while he claims spousal benefits until he turns 70, at which point he begins to receive his own benefits. Assuming both have average life expectancies of 82 for him and 86 for her, they will likely realize approximately $76,000 more than if they had both begun claiming benefits at age 62.

**Life Expectancy Considerations**

For couples anticipating a lifespan that exceeds the average—she projecting to live to 92 and he to 88—it may be beneficial to wait until she reaches age 66 to claim spousal benefits. Both partners have the option to defer their Social Security benefits until she is 69 and he is 70, resulting in an additional $137,000 in benefits.

Unless there is a medical history suggesting a reduced life expectancy, it is advisable to plan for a longer life.

For divorced individuals, there is an opportunity to claim spousal benefits from an ex-partner for a period, provided the marriage lasted over 10 years.

Single individuals can also consider delaying their benefits, allowing for potential growth in their retirement funds.

Implementing strategies such as allocating income into tax-deferred annuities or other tax-efficient options can help protect income and enhance retirement savings.

**Asset Evaluation:** Determine whether you have sufficient resources to sustain yourself should you choose to delay your benefits. If you do, drawing from personal accounts may be worthwhile for the increased future income.

**Core Concept #1: Timing**

The amount received in Social Security benefits is influenced by your earnings history, the age at which you apply, and your life expectancy. While your earnings record is fixed and life expectancy is largely beyond your control, the age at which you choose to start receiving benefits is a critical decision.

Assess your circumstances: Can you afford to delay your benefits, or do you require them immediately? Each situation is unique, and the timing of Social Security applications will vary based on individual needs and whether either spouse is currently employed.

You will be eligible for full benefits at age 66; however, applying as early as age 62 allows you to receive 75% of your total benefits. Additionally, delaying benefits beyond age 66 accrues delayed actuarial credits up to age 70, increasing your benefits by 8% per year. Consequently, if you wait until age 70 to apply, you will receive 132% of your full benefits.

The central question to consider is whether to delay receiving benefits for a larger monthly amount or to apply early and maximize the duration of collection. Understanding the implications of delaying is particularly important for the primary earner in the household. In most cases, postponing benefits will result in a greater monthly income.

In essence, if you begin receiving Social Security benefits early, you will receive a smaller monthly amount over a longer period. Conversely, delaying results in a larger monthly benefit for a shorter duration. Using “break-even calculators” can help determine how long one would need to live to justify delaying benefits. While primarily applicable to individual beneficiaries, the calculation becomes more complex for married couples.

The decision-making process for married couples involves additional considerations related to how the retiree benefit, spousal benefit, and survivor benefit interact, all of which can significantly influence overall benefit amounts and lifetime maximums.

**Core Concept #2: Delayed Actuarial Credits**

The Delayed Actuarial Credit is a crucial aspect of enhancing Social Security benefits. These credits, often referred to as Actuarial Reductions or Delayed Retirement Credits, play a significant role in an individual’s financial planning.

An Actuarial Reduction is implemented when a retiree opts to receive Social Security benefits before reaching their full retirement age (FRA). For instance, if the FRA is 66 years old, a retiree choosing to begin benefits at age 62 would experience a reduction of 25%, resulting in benefits equal to 75% of what they would receive at full retirement age due to the actuarial adjustment.

Conversely, if an individual delays claiming benefits past their FRA, they become eligible for delayed retirement credits. Specifically, for each year they postpone their benefits, they will accumulate an 8% delayed retirement credit. This interest is applied simply. Therefore, for someone who delays until age 70, their benefit would amount to 132% of their full retirement age benefit.

Social Security also has favorable provisions for married couples. Notably, there are significant differences between spousal benefits and those based on an individual’s earnings record. Spousal benefits tend to diminish at a faster rate than individual benefits when an early election is made. For example, an individual claiming their own benefit at 62 receives 75% of their full retirement benefit, while claiming a spousal benefit at the same age results in only 70% of the full benefit, following a different reduction schedule.

Crucially, spousal benefits do not qualify for delayed retirement credits. Only individual earnings records benefit from this adjustment; for each year an individual delays after reaching FRA, an additional 8% is granted. Although spousal benefits lack this mechanism, they can still be a strategic tool when paired with the concept known as “File and Suspend.”

Survivor benefits represent another vital dimension for maximizing Social Security. These benefits are exclusively available to married couples. Upon the passing of a spouse, the surviving partner typically receives the greater of their own benefit, the benefit of the deceased spouse, or 82.5% of the full retirement age benefit of the deceased. Lesser benefits are not available.

In many scenarios, it is common for a married couple to have a female spouse who outlives her husband, who may have a higher earnings record. If the husband opts for early retirement, he may inadvertently diminish the survivor benefit available to his wife.

**Core Concept #3: Little-Known Filing Strategies**

There are several uncommon claiming strategies that can assist your clients in maximizing the growth of their Social Security benefits. These strategies, often referred to as “switch strategies,” involve the election of a limited benefit for a brief period, after which clients can transition to a higher benefit in the future. Some individuals have reported gains of $20,000 to $30,000 through these methods. This white paper will briefly outline these concepts.

**File and Suspend**

The “file and suspend” strategy allows the primary earner to defer their benefits, resulting in a guaranteed growth of 8% per year, while the lower-earning spouse collects monthly benefits. By filing for their benefit, the primary earner makes their spouse eligible for a spousal benefit and can then immediately request a suspension of their own benefit. This suspension results in the accrual of the 8% growth annually, enabling the individual to later draw Social Security benefits at an increased amount.

**Restricted Application**

The second strategy is known as the “restricted application.” For instance, if the lower earner receives $1,000 per month, the primary earner can choose to delay their retirement until age 70 to achieve the 8% growth rate. During this period, the primary earner can file a “restricted application” for the spousal benefit based on their spouse’s earnings record. This allows them to receive $500 per month (which is half of the spouse’s benefit) until they reach age 70, without negatively impacting their delayed retirement benefits. It is crucial to recognize that failing to file this restricted application could result in a loss of up to $24,000 in potential benefits.

**Integrating Maximization with Retirement Planning**

It is essential to invest time in understanding the complexities of Social Security with the assistance of your advisor’s educational resources. Social Security remains a vital topic in financial planning, and it is important for all stakeholders to comprehend its intricacies. We can support clients in strategizing for their retirement while addressing potential challenges along the way. The cornerstone of a successful plan lies in starting early and consistently reviewing progress.

Social Security Administration: Social Security Basic Facts (www.ssa.gov)

Would you like to explore effective strategies to enhance your Social Security benefits*?

We invite you to schedule a complimentary, no-obligation financial review with one of our Future Benefits Agents.

You can also reach us at 901-754-2040.

*Please note that we do not operate on behalf of, nor represent, Social Security or any governmental entity. If your Social Security circumstances are intricate, we recommend consulting with a qualified attorney.

For more details, please see our Professional Disclaimer.