What's Your Social Security Strategy?
I'm sure you've heard the cautionary tale that your Social Security benefits likely won't be sufficient to wholly support you in retirement. But don't make the mistake of disregarding Social Security's importance to your post-retirement income portfolio. It can be one of your most reliable income streams—and one well worth thinking about before you reach retirement.
While the premise of getting a monthly check in retirement may seem pretty straightforward, Social Security can be one of the trickiest assets to manage. There are a number of Social Security strategies individuals approaching retirement need to consider and factor into their financial plan—or risk shortchanging themselves over the long haul.
A key part of my role as a financial planner is to advise pre-retirees on these strategies and help them evaluate the costs and benefits of different Social Security scenarios. As with most financial decisions, there are trade offs and uncertainties to consider—but together we can identify the strategies that make the most sense for your personal situation.
The Social Security Administration's website is also a good resource to consult for guidance in sorting out your Social Security options. You can also visit a local Social Security office and meet with an advisor who can help you find the best way to optimize your benefits. [Note: There is actually a Social Security office very close to my office if you'd like to schedule a portfolio review with me in conjunction with your appointment there.]
While the many different Social Security scenarios are too complex for us to cover in detail in this newsletter, here is a high-level overview of the kinds of strategies that pre-retirees may want to consider.
Social Security Timing Strategies
How you time your Social Security benefits can have a significant impact on how much money you'll receive over your lifetime. We've all heard about value of delayed gratification; Social Security offers a good example of how waiting a little bit longer to take benefits can pay off over the long run.
You may start taking Social Security benefits as early as age 62 (with the amount of benefits potentially subject to an earnings test if you continue to work). However, in doing so, your monthly benefits will be reduced by up to 30% compared to what you would receive by waiting until "full retirement age." Depending on the year you were born, "full retirement age" will fall somewhere between 65 and 67.
If you wait even longer to start taking Social Security benefits—up to age 70—there is an additional "delayed retirement credit" that can add up to 8% annually for each year of delay. Plus, when you postpone benefits, you will receive the compounded value of any Cost-of-Living Adjustment (COLA) applied to Social Security benefits during this period.
Finally, delaying Social Security can be beneficial from a tax perspective. This is based on how Social Security income is taxed versus the tax on IRA withdrawals.
Of course, forgoing Social Security income for a number of years in order to boost your long-term income stream may create a short-term income gap. However, there may be other sources of "bridge income" to help provide consistent cash flow during this period.
Social Security Coordination Strategies for Married Couples
Married couples have even more decisions to make about how they time and structure their Social Security benefits. In addition to each spouse's own "worker" benefits (if both have been employed and contributed to Social Security), the lower-earning spouse who is 62 or older may also qualify for "spousal" benefits—which can be up to 50% of the higher-earning spouse's benefits at full retirement age. For spousal benefits to go into effect, the higher-earning spouse must file for his or her worker benefit.
Other factors to consider include the age differential between spouses and the anticipated life expectancy for each spouse. The different scenarios can get complicated, which is why it is helpful to consult a financial advisor or your local Social Security office on the best Social Security strategy for your family.
Social Security Strategies in the Event of Divorce or Death
Life is not always predictable. Divorce and untimely death are two events that can destabilize a financial plan. Social Security may provide options for additional financial support.
A divorced spouse who was married for at least 10 years, has been divorced for at least two years, and has not remarried has the same rights as a married spouse to a spousal Social Security benefit. You become eligible once your former spouse reaches eligibility age, regardless of whether he/she has filed for benefits. You may also be eligible for a survivor benefit if your former spouse passes away.
If you are a widowed and entering retirement, you may be eligible for a survivor benefit, which unlike the spousal benefit, is calculated at 100% of your deceased spouse's benefit (at full retirement age). As with a spousal benefit, there are different timing strategies to consider for optimizing the total amount of your combined worker and survivor benefits.
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