Many of your retiring clients have two primary looming fears about the coming years: either they'll outlive their money, or spend too little and die before they can enjoy their money.
But for those who are in what is likely the most-common family status, there is a standard method of order and timing of taking Social Security retirement benefits which can help soothe the worry over living too long, or not long enough.
Although the majority of your clients may not fit exactly into this stereotype, here's how you can help maximize Social Security income for a couple who filled “traditional” roles during the years before retirement.
They are a husband and wife, each 60 years old, and have been married to each other (and only each other) for the past few decades. She spent most of those years as a stay-at-home mom, and worked part-time after the kids moved out of the house.
He was the proverbial “breadwinner,” working full-time the whole time. He has built up a substantial retirement account, on which they plan to draw to cover living expenses over the rest of their years.
Helping them manage those assets and income is the primary component of your job. But at this point in their lives it may be at least as valuable to them if you can offer this coherent strategy on who, when, and how their Social Security should be taken.
- Age 62
According to a study conducted by the Center for Retirement Research at Boston College, in this situation the first source of Social Security that should be considered is the amount based on the wife's own earnings, and at the earliest opportunity (usually when she turns 62 years old).
That is, as long as her own benefit is at least 40 percent of what she would receive from the spousal checks based on her husband's earnings. Any less, and the study found it's probably better for her to wait.
Why? Because taking her own benefit early may diminish the eventual spousal benefit to which she will eventually switch (see below).
- At age 66
Once the husband reaches “normal retirement age” (66 years old for those born between 1943 and 1954), he should employ a perfectly-legitimate strategy known as “file and suspend.” In effect, he files to receive his benefits, yet doesn't actually take them.
He files so that his wife becomes eligible to receive her spousal benefits, which are based on his earnings and are likely to exceed what she had been getting from her own earnings history.
But he “suspends” his benefits so that what he eventually receives can continue to increase at a rate of 8 percent for each year he waits, assuming he was born in 1943 or later. This annual bump for delaying the gratification occurs until he turns 70 (more on that later).
For better or worse, waiting to initiate the wife's spousal benefits won't provide any further increase after normal retirement age, so it's wiser for her to take those checks when she hits 66, as her spousal benefit is at the most it will ever be (inflation adjustments notwithstanding).
- At age 70
The husband should initiate his benefit payments by the time he turns 70, since the incentive increases awarded for waiting cease at that age. Meanwhile, his wife can continue to receive the spousal benefit she started at age 66.
Delaying his way to the highest possible amount has an obvious advantage while he is alive and kicking and cashing the checks. But there is an extra boost if he dies before his wife (at least, for her).
In that event she can switch over to the payment that he was receiving, and the bigger amount will last as long as she does. On the other hand, if she dies before he does, her spousal benefit check will end. But he will continue to receive his maximized monthly amount.
Let's say that, based on the respective earnings of the husband and wife, at age 66 she is scheduled to get $600 per month, and he is due to receive $2,000 per month at the same time.
If she initiates her benefits at 62, she will receive 75 percent of what she would have received if she had waited until her normal retirement age of 66, for a monthly check of $450.
Upon reaching age 66, he files and suspends, so that she can receive her spousal benefit based on his earnings. Usually that would be 50 percent of his benefit, but because she filed for her benefit before reaching normal retirement age, her spousal benefit will be reduced to $850, according to our calculations.
When he finally reaches 70, he can begin receiving his own enhanced benefit of $2,640 per month: the $2,000 he would have received at normal retirement age, with a 32% increase for waiting until 70 (four years at 8 percent per year).
And if he dies after reaching 70 but before his wife passes away, she would of course lose her check, but be able to take over the $2,640 per month her now-departed husband was receiving.
Running the numbers
It's unlikely that many or even any of your clients will fit into the nice, neat parameters of the hypothetical couple described above. But you can calculate some personalized scenarios for a particular client with tools provided by the Social Security Administration (www.ssa.gov/planners/morecalculators.htm).
One answer that those calculators won't provide is the one that is the most crucial: how long your clients will live. The higher the number, the better off they will be delaying Social Security as long as possible.
However, combine concern over their own mortality with the precarious condition of the Social Security program, and you can bet most people would prefer to get at least some of their money as soon as possible.
And that's no stereotype.
CFP© is Principal/Owner of McKinley Money LLC, an independent registered investment advisor. He is also the author of the book Make Your Kid a Millionaire (Simon & Schuster), and provides speaking and consulting services on family financial planning topics. Find out more at www.advisortipsheet.com.