FINANCIAL LIFE | FALL 2011 EFFECTFour Strategies—and Sacrifices—
for Maximizing Lifetime Social Security Benefits
by Matt MaunuMy clients are concerned about Social Security—and understandably so. When President Obama suggested benefit checks might bounce in August without a debt deal, many were struck by the potentially imperiled state of their retirement. The Social Security Administration has provisions, however, that are structured to induce retirees to file later in life. This prodding to delay collection of benefits won’t solve our nation’s long-term budget challenges, but for now it affects the way you might design your personal finances. To maximize your lifetime benefits, you should be aware of these incentives and the implications they have on your retirement planning.
“Redo” option rules tightened
The Social Security Administration has long offered a “redo” option, permitting recipients to pay back all prior withdrawals and re-file for increased benefits at any time after they begin collecting. Last year it limited this option’s availability to within 12 months
of initially filing. With the “redo” window closing after one year, maximizing what you collect is now a little trickier.
Here are four strategies to consider when weighing your social security payout options. It’s essential to understand these four approaches to securing your greatest social security payout—and knowing the sacrifices necessary to get it.
Strategy one: work longer
You don’t really want to play golf every afternoon or kick back in the tropics anyway, right? “Early retirement” has gone the way of daily newspapers and analog television, and that’s a reality we all need to square with. The Social Security Administration determines what they call your primary insurance amount (PIA)—or benefit payment—based on your highest 35 years of earnings, up to the taxable maximum. In other words, the more years you have with higher income, the bigger your Social Security check. Extending your working years beyond the baseline 35 could give you a greater average income and drive up your benefits figure.
Similarly, if you have fewer than 35 years of taxable Social Security wages, continuing employment will increase benefits by replacing $0 income years with taxable wage years.
Sacrifice: Punch the clock for a while longer.
Payoff: Increase your base monthly social security payment.
Strategy two: get your timing right
The earlier you draw social security benefits, the lower they will be. Full benefits are available to eligible individuals between ages 66 and 67, depending on date of birth. You may begin collecting as early as age 62, but you’ll only receive 70 to 75 percent of the amount you’d get if you waited until your full retirement age—and that rate is permanent. If you wait it out, that additional percentage could make a big difference in your lifestyle and security.
Another timing option is to begin drawing benefits after the full retirement age to earn delayed retirement credits (DRCs). If you wait until age 70 to collect, you’ll accrue DRCs at the rate of 8 percent each year on your monthly benefits (24 to 32 percent total), taking a $1,000 monthly check to between $1,240 and $1,320. No DRCs are earned after age 70, so benefits should not be deferred past then. Of course, no one can predict life expectancy, but this is an especially wise strategy for those who are confident of their longevity.
Sacrifice: Wait longer to receive your social security benefits.
Payoff: Add significant dollars to your base payment.
Strategy three: coordinate spousal benefits
If you have filed for your own benefits, your marriage partner can file for spousal benefits between ages 62 and 66. At age 62, spousal benefits are 35 percent of yours, and at age 66 they rise to 50 percent. (There are no DRCs for spousal benefits, so the latest anyone should collect is age 66.) Your husband or wife can receive his or her spousal benefits while you both earn valuable DRCs on your primary benefits.
Let’s consider the following: say you and your spouse are the same age and are both eligible for full monthly benefits at age 66: you at $2,000, and your spouse at $1,000. In one scenario, you each take your own benefits at age 66.
In a second scenario, you file for your own benefit but defer payments until age 70, earning DRCs. Meanwhile, your husband or wife files for spousal benefits (50 percent of yours) at age 66 and defers his or her own to age 70. At age 70, your spouse switches to his or her own deferred benefit, and you begin drawing yours.
Total Benefits Collected by Couple
| Age |
Scenario #1 |
Scenario #2 |
| 70 |
$191,129 |
$97,724 |
| 75 |
$412,700 |
$357,582 |
| 80 |
$669,561 |
$658,830 |
| 85 |
$967,333 |
$1,008,059 |
| 90 |
$1,312,534 |
$1,412,910 |
While initially you’d both earn more together in the first scenario, in the second scenario you’d have collected $100,000 more in combined benefits by age 90.
Sacrifice: Make do with less in the earlier years of retirement.
Payoff: Have more to live on in your later years.
Strategy four: maximize survivor benefits
This one isn’t easy or fun to think about, but everyone dies, and we must plan for that eventuality. Social security is essentially a lifetime annuity indexed for inflation and backed by the U.S. government, so you need to consider what happens if your spouse outlives you. If you are the higher earner and you pass on, your spouse will discontinue collecting his or her benefits and will receive survivor benefits instead (100 percent of yours).
With this in mind, it may be advantageous to try to maximize the payout for the higher earning spouse in order to provide the surviving partner with the most lucrative benefits for the remainder of his or her life.
Sacrifice: Delay receipt of benefits for highest wage earner.
Payoff: Leave your loved one with greater means after you’re gone.
In light of recent changes, you should carefully consider all available options. With proper planning—and a few sacrifices—you can increase your lifetime social security benefits by tens to hundreds of thousands of dollars. Using the incentives to put off collecting until a little later can help maximize your retirement benefits.
One should not rely on this information for the primary basis of investment, tax or financial planning. General market information does not take into account such factors as an individual’s goals, objectives, risk tolerance, tax situation, age, or time frame. We believe the information obtained from third-party sources to be reliable, but neither LarsonAllen Financial, LLC nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions, and estimates herein are subject to change without notice at any time in reaction to shifting market conditions. Tax laws change and investments in the stock market entail risk and potential loss of principal. This material may not be republished in any format without prior consent.