it's more complicated than you think optimising soc security

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Christine Benz is Morningstar's director of

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Optimizing Social Security: It's More

Complicated Than You Think

Working longer and managing spousal benefits are key variables when

factoring Social Security into your retirement plan.

By Christine Benz | 07-08-10 | 06:00 AM | Email Article

This article, one of a series about Social Security benefits written by Christine Benz,

was originally featured in 2010, but in case you missed it, we are re-featuring it as

part of our Retirement Portfolio Week.

Compared with managing your

retirement assets, your Social

Security benefits might seem

like an oasis of simplicity and

stability. Overseeing yourinvestment portfolio, even if

you choose to keep it fairly

simple, requires at least a

passing familiarity with asset

allocation, asset location, and

sequence of withdrawals, all of

which are complicated subjects unto themselves. The key decision about Social

Security, by contrast, is what date to begin using it. In the past, that decision

usually hinged on a person's retirement date: Those retiring early started receiving

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Social Security benefits as early as 62, while those retiring later waited to receive

benefits.

But an expanding body of research has highlighted the benefits of delaying receipt

of Social Security, showing that doing so can dramatically increase a person's

benefit during his or her lifetime. That, in turn, argues for making Social Security

benefit optimization as much a part of the retirement-planning discussion as is

whether to relocate, what investment assets to buy, or when to retire in the first

place.

Social Security planning is a complicated topic, but here are some of the key

variables to consider.

Desired Retirement Date/Income Needs

These two variables go hand in hand: The longer you continue to work, the higher

the Social Security benefit level you can expect to receive. For example, a T. Rowe

Price study that appeared in the June 2010 issue ofT. Rowe Price Investor

magazine compared the anticipated Social Security benefits for a married couple,

both 61 years of age. One spouse earns $53,000 and lives to be age 95, while the

other earns $84,000 and lives to age 80. The study showed that the cumulative

Social Security benefit would be more than $600,000 higher if the couple were to

defer receipt of benefits until age 70 versus beginning Social Security benefits at

age 62. (T. Rowe's assumptions deal with pretax dollars and include an inflationadjustment.)

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That big swing factor reflects the fact that you'll be penalized for beginning receipt

of Social Security prior to what's called your normal retirement age (66 or 67 for

most individuals of the baby boom generation) and you'll receive credit for

delaying.

Of course, many individuals don't have the luxury of delaying Social Security;

health problems or layoffs may require them to begin collecting Social Security

benefits as early as they possibly can. (The economic downturn has hit the over-55set disproportionately.) Another consideration is whether delaying Social Security

would require a person to draw heavily on his or her investment portfolio early on

in retirement, thereby running the risk of depleting it prematurely. Such a

scenario could offset any benefit the individual gained by waiting to take Social

Security.

But if your Social Security start date is at all flexible, it pays to consider pushing it

as far into the future as you can. The Social Security Administration's Retirement

Estimator can help you see, in dollars and cents, how your benefits will vary based

on different retirement dates. The annual Social Security statement you receive in

the mail will also show your expected benefit under three different scenarios: If

you begin to collect Social Security at age 62, if you wait until your normal

retirement age, and if you delay receipt until age 70).

Health/Longevity Considerations

The decision to defer receipt of Social Security benefits is particularly beneficial for

those who expect to live a long time. In exchange for waiting until normal

retirement age or beyond, such individuals can expect to receive a higher income,

and the benefit of that higher income is especially acute if it's stretched over many

years. So if longevity runs in your family, deferring receipt of Social Security

benefits until your normal retirement age or beyond likely would be a good move.On the flip side, if you've had significant health problems and have concerns about

your own longevity, you're better off taking Social Security sooner rather than

later.

One Life or Two?

While Social Security planning for one person is a fairly straightforward matter,

doing so for a married couple is a lot more complicated. The spouses are apt to

have different ages and different income histories and anticipated retirement

dates, as well as distinct health and longevity profiles. A further wrinkle is that

upon the death of the first spouse, the surviving spouse is eligible to receive the

deceased spouse's benefit rather than his or her own (assuming the deceased

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spouse's benefit was higher).

In an effort to maximize income for the lower-earning spouse, experts often

recommend that the higher-earning spouse defers his or her Social Security

benefits' start date until age 70 while the lower-earning spouse can start receiving

benefits at age 62. (You may see this strategy referred to as the 62/70 split.)

Alternatively, a spouse can claim a spousal benefit; doing so allows the spouse to

claim 50% of the partner's benefit instead of his or her own benefit.

Are your eyes glazing over yet? Obviously, this stuff can get complicated, so this is

one case where it might be beneficial to consult with a financial advisor who's

experienced in navigating the Social Security maze. The aforementioned T. Rowe

Price study also provides helpful examples of how married couples can maximize

their Social Security income over both lifetimes. (All of the scenarios show that

having at least one spouse delay receipt of Social Security until age 66 or

preferably even age 70 has a big impact on the couple's lifetime benefits.)

Work Plans

Given that today's retirees and preretirees are healthier than their forebears wereat the same age, as well as the fact many haven't saved enough, working at least

part-time is bound to be part of many individuals' in-retirement strategies. Doing

so can be highly beneficial in both financial and mental-health terms; it can also

help cover gaps in health insurance coverage for those don't yet qualify for

Medicare. But it's also worth noting the interplay between work and Social Security

benefits. Those who begin taking Social Security prior to their normal retirement

age will see their benefits docked significantly if their incomes rise above a certain

level; this publication discusses some of the specifics.


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Rathgar

Jul 8 2010, 6:31 AM

Flag

Good article. SS is one of the least understood assets of most

retirees. The income is guaranteed by the government and inflation

adjusted. Higher earners under 45 most likely won't get it since it

will have to means tested. For married couples, the higher earning,

mostly men, should take it at 70 since his wife, who typically will

live longer, and earned less, will get his higher benefit for her

lifetime. The wife takes her benefit at 62 and then jumbs up to his

upon his passing.

Darwinian

Jul 8 2010, 6:57 AM

Flag

A very good outline of a very complex decision. One point worth

adding is that if you do take early retirement, and later conclude

that this was a mistake, the government gives you an "undo"

option. Pay back the benefits you have received, and you can

re-apply to receive the higher payout for your current age. This

could be helpful in some situations; for example, if you receive an

income windfall that you don't immediately need, this may be an

excellent way to re-invest it. You don't even have to pay backinterest on the money you have received. And, I have read that you

can claim the payback as an itemized deduction on your taxes, or

you can re-submit your tax forms for previous years to recover any

taxes you paid on this SS income.

I hope this makes it clear that the most important advice in the

article is that "it might be beneficial to consult with a financial

advisor who's experienced in navigating the Social Security maze."

bluebonnets

Jul 8 2010, 7:33 AM

Flag

My "guarantee" of payment from the U.S. government is found in

the bold print below "Your Estimated Benifits" on page 2 of your

social security statement: "Your estimated benefits are based on

current law. Congress has made changes to the law in the past and

can do so at any time...." I believe our lawmakers.

trevor1953

Jul 8 2010, 8:19 AM

Flag

I though the incease in benefits by waiting was EXACTLY offset by

the shortened life expectancy. I would not delay filing for benefits

UNLESS you had a pretty good expectation of beating the life

expectancy tables

spowers597 There's another consideration in deciding whether delay social


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Jul 8 2010, 11:02 AM

Flag

that said I could retire at 66 (born in '44), and take the social

security check now at my current level. I can then pay back (to

Social Security) the amount I have received from age 66 to age 70

(interest free), and then collect at the higher level. Financially, I can

do that, having the use of the money until 70 - and at least getting

something, depending on what happens to SS. My wife is 11 years

younger than me and will be able to continue my benefits until she

dies.

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it's more complicated than you think optimising soc security

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