Traditionally, the decision about when to take Social Security has been the most important part of many retirement plans.
Software used by many financial planners simply asks for the input of when a client will begin drawing their benefit, and the estimated amount, using this input as one of the many variables to calculate retirement income scenarios. Most pre-retirees are aware that by delaying benefits until full retirement age or until full delayed actuarial credit at age 70, they can dramatically increase their benefit.
The difference between age 62 and 66 is about 25 percent, and between 66 and 70, another 32 percent.
However, many approaching retirement have no idea that there are literally hundreds of different ways to file for Social Security.
They could be missing out on tens of thousands of dollars of additional retirement income. Given Social Security benefits often make up 20 percent to 50 percent of retirement income for many married couples, it makes sense to maximize these benefits. How the benefit is taken, especially for couples, can be a far more impactful decision than when the benefit is taken. This decision is even more important than which investments to pursue.
Let’s look at a few simple strategies that make a significant difference.
Restricted application. The first retiring spouse applies for benefits, (as early as age 62) the later retiring, higher-earning spouse applies for spousal benefits, based on the first spouse’s benefits. This has no impact on the second spouse’s individual benefit, and that benefit simply continues to grow, until at age 70, the second spouse, the later retiring, higher earner, switches to their own, now “maxed out” benefit.
If the second spouse had waited and not applied for the spousal benefit, the spousal benefit would have been lost. If the first spouse had for example been entitled to $1,000 per month, the spousal benefit of $500 per month would have been lost, and the couple would have missed out on tens of thousands in benefits. Additionally, by allowing the second, higher earning spouse’s benefit to grow to age 70, they were able to increase that benefit amount to 132 percent of the full retirement age benefit.
File and switch. The lower-earning spouse files for his/her own benefits at retirement (as early as age 62). Upon the retirement of the higher-earning spouse (as late as age 70) the lower-earning spouse applies for spousal benefits, which are as much as 50 percent of the higher earner’s benefit, if the spousal benefits are higher.
File and suspend. The higher earning spouse applies for benefits at full retirement. The lower earning spouse then files for spousal benefits based on the earnings record of the higher earning spouse. The higher earning spouse then suspends or withdraws their application and repays any benefits received, (limited to one year) even though the higher-earning spouse withdraws the application, the spousal benefit continues.
It’s easy to see how not understanding the rules and nuances of Social Security can cost you and your retirement lifestyle thousands or even tens of thousands of dollars.
It’s critical to know not just what your benefit may be at age 62, or 66, or 70, but what scenario will work best for your specific situation. Many retirement income planners now incorporate sophisticated Social Security optimization software into their practice, which will identify the specific strategy that will optimize your Social Security benefit, as well as incorporate benefit amounts into planning scenarios.
You owe it to yourself to get all the facts and not rely on a neighbor, family member or generic advice. Knowing how to take Social Security could be the difference between enjoying your retirement or simply enduring your retirement.
Darren Vilardo is an independent financial adviser specializing in retirement income planning, and the owner of Inland Retirement Advisors in Rancho Cucamonga. Vilardo can be reached at 888-944-6266.