three key levers in your social security plan

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By Jason Stipp | 08-19-2010 03:11 PM

Three Key Levers in Your Social Security PlanMorningstar's Christine Benz highlights the importance of coordinating

benefit timing, do-overs, and spousal benefits to maximize your

payout.

Jason Stipp: I'm Jason Stipp from

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Morningstar. Your Social Security

benefit compared to your investment

portfolio may seem like the easier piece

of your retirement puzzle to manage,

but Morningstar's Christine Benz

recently dug into some of the issues

with Social Security and some of the

options, and she found there is actually

a lot for you to pay attention to you as

you're managing your Social Security

benefits. She is here to tell us a little bit about what she found.

Christine, thanks for joining me.

Christine Benz: Jason, nice to be here. I told you I had to take a couple of Advil

during the writing of some of these articles because there are a lot of different

variables to think through.

Stipp: But some very interesting scenarios. So, first things first, for folks who

maybe haven't dug into all of these details yet, there are some really high level

things that they absolutely just must keep in mind. So, what are some of the

gains, and a reviving housing market

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things that if you have nothing else taken away from this discussion, you really

need to know about?

Benz: The one thing I would say, Jason is wait longer, if you possibly can, because

you really do see an appreciable step up in the benefit you'll receive, if you wait,

not just to your normal retirement age, but ideally even beyond, if you can.

And the key consideration there is what your own longevity will be if you have

health issues or have reason to believe that your longevity will be less than

average, that might be an argument for taking it as soon as you possibly can. But

if you have longevity on your side, you want to wait, because you will see a big

step up in the benefit.

Stipp: So, again, what are the age ranges where you have the opportunity to take

it, and then also if you wait, when would you be taking at that point?

Benz: Well, 62 general ly is the first point at which someone could file, and then

the next age bracket that you'd want to be thinking about is what's called your

normal retirement age and what that is will depend on the year in which you were

born. It's anywhere from 65 to 67 for most people who are looking toward

retirement today.

Stipp: Okay. Christine, so the first key important lever to keep in mind is when

you take the benefits, and whether you should wait or not wait. So, the second

piece is another concept, another option that you should think about as you're

thinking about your Social Security is the notion of a do-over. Can you explain how

that works?

Benz: Well, it's complicated, Jason, but the basic idea is that you begin filing when

you are first eligible, so age 62 for most people. Then at a later date, you actually

withdraw your application for benefits and then begin taking benefits when you're

somewhere between the age of 66 and 70. So, the idea is that by filing at 62,

you're ensuring that you're at least getting some benefit during your lifetime, if

you were to die prematurely, so you've gotten something back from what you've

paid in. Then the benefit of waiting later, though, and so refiling later on, is if you

do make it beyond age 66 or anywhere from 66 to 70, you'll be able to get a

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higher payout at that point, and your spouse will also be able to get a higher

payout. So, that's the key advantage there.

Stipp: So, it's really a way to sort of hedge your bet, so that you have that little

bit of extra time, but I guess the important piece here is knowing that you really

can't just go out and spend that money that you start to collect when you're 62

because you may decide, hey, I'm pretty healthy, I'm feeling pretty well, I might

want to refile for those higher benefits. But you'd have to pay all that initial benefit

back?

Benz: You do. That's an important consideration, Jason. So, I typically say this

strategy is best suited to the healthy and wealthy, so people who think that they're

going to live a good long time, this will make sense for. Ideally, if someone is in a

position to save the benefits that they've received maybe in a short-term bond

fund or something like, they'll be able to pocket that interest, because when you

pay the IRS back assuming you've filed all the right tax documents, you will not

owe interest on that money.

Stipp: Okay. So, two key options here; the first one is, when you take it; the

second one is deciding if a do-over is right for you. A third very important way of

optioning your Social Security is thinking about your spouse and how you decide to

take your benefits as a couple. Can you explain a little bit about that?

Benz: Right. So, this compounds the headaches really because you've got two

people maybe with two different age bands as well as two different earnings

histories. But one common strategy that you hear couples using is, where thelower earning partner files for benefits when he or she is first eligible, and then the

higher earning partner at that point receives the spousal benefit, based on the

lower earning partner's benefit. And then when the higher earning partner hits

normal retirement age, 66, 67 something like that, he or she fi les for benefits and

then both partners' benefits step up. So, the lower earning partner bags his or her

own benefit, and gets into the spousal benefit and that ensures a higher payout

during both partners' lifetimes.

Stipp: So, it certainly sounds like it's good to know your options but there are

also lots of different combinations to think about here. As you're trying to figure

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out what's best for you, for your individual situation, how would you recommend

going about arriving at that best solution?

Benz: Well, two key pieces of advice. First of all, a lot of financial advisors are

very well schooled in the ins and outs of Social Security and can help you figure

out how to maximize your payout given your personal situation. And the other

thing I will say is that having played around with the Social Security website tools

over the past few weeks, they've got some good stuff there and some good ways to

calculate benefits given various scenarios. So, I would urge people to hop on the

site. There's also a lot of good free information. Hop on the site and see what you

can do there.

Stipp: Well, certainly a very complicated topic, but it's at least good to know the

basics of what your options are. Thanks so much for joining me, Christine.

Benz: Thank you, Jason.

Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.

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bobk47

Aug 21 2010, 10:17 AM

Is it possible to do the "do over" at anytime or would you have to

wait until your full retirement age? The reason I ask is following up

on Killer454's comment. What is to prevent the government from

eliminating the "do over" option? If that is one of the

recommendations that come out of the study on social security, will

you be able to do the do-over immediately so you can get at least

some of the stepped-up increase? I lean toward the option of taking

the lower-earning spouse claiming at age 62, but I'd hate to lose the

opportunity to get the higher payout later which would provide

longevity insurance.

bavan

Aug 21 2010, 4:17 PM

A few learning points from Christine's suggestion:

1. Apply and Take benefits when we reach 62.

2. Try to Maintain our health by eating moderately (Cutting Fats and

Eating more Organic Farm-fresh Vegetables and Fruits), exercising

more and doing meditation techniques using Yoga or Taichi.3. Work part-time for some, full-time for some or just start our own

business for some in order to generate cash-flow that will take care

of our day-to-day expenses so that our social security benefits will

not be touched at any cost.

4. Sack the full social security benefits by investing partly in

short-term Govt. bonds to protect principle and partly in

international stocks to generate moderate growth.

5. Start filing an application to withdraw the benefits at age 70 and

pay all the social security which we have received for the past 8

years. By luck or by sheer fortune, we might have generated

additional income through investing in the form of interest, dividendor stock growth.

6. Start filing a new application for higher benefits starting at age 70

as IRS allows us to file as we have already paid the full social

security benefits. We will have to work out of taxation during the 8

years which I am not sure and hope Christine will address it.

The above strategy sounds good as we are missing the benefits at

early age and at the same time protecting our benefits in case if

some things negatively happens in our lives.

awalton I always advise anyone under the age of 45 to assume no SS

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Aug 21 2010, 4:56 PM benefits when doing retirement planning. The consequences of

counting on SS benefits and then getting little or nothing are far to

great. Rob Arnott pointed out in a previous Morningstar video that in

the next 10 to 15 years it will be a political impossibility not to

radically change SS.

SS was not originally intended as a retirement stipend. It was

intended as a safety net for those who outlived their savings.

Therefor the age to receive benefits was set at approximately the

average life expectancy. It is most likely that we'll return to that

mode, so the eligibility age will be substantially increased.

SocialSecAdv

Aug 21 2010, 4:58 PM

In response to bobk47 - You can initiate a "do over" at any time.

In response to bavan - If you take early retirement benefits you can

only make $14,160 before Social Security starts reducing your

benefits.

gchayden

Sep 15 2010, 8:33 AM

My wife and I are both 62. She applied for SS benefits (lower

earner). When I attempted to apply for spousal benefits, the SSA

told me that I could not receive them, as I was the higher earner. I

would have to apply for my own benefits (at the reduced rate). Has

anyone follow Ms. Benz' suggestion and able to receive spousal

benefits for the higher earner?

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