Social Security: Still Reason to Plan
by Kevin Lawson
Now that Social Security claiming strategies are on the way out, is there even a need to do any planning around that decision?
In 2015 Congress did pass a law that both limited and eliminated several Social Security planning strategies that were especially popular among high income earners. The “File and Suspend” strategy is closed for new applicants whereas the “Restricted Application” available to spouses is only available to those who turn 66 before January 2, 2020.
In spite of the changes, we still believe that there is significant value in analyzing the various Social Security claiming options, especially for a married couple. By understanding the Social Security rules that may apply to you and factoring in external assumptions, we consistently find that taking time to analyze the claiming decision has been beneficial.
To begin with, it is important to understand a few key items related to Social Security benefits:
FRA and DRC
First, know your Full Retirement Age or FRA and understand what happens if you claim your benefit either before or after that date. Your FRA will be between age 66 and 67 depending on when you were born. Anyone born in 1960 or later will have 67 as their FRA – see the chart for more details.
Your Social Security Statement will show three amounts: your benefit at FRA, your benefit at the earliest claiming time (age 62) and your benefit at the latest claiming time (age 70). For every year you delay your benefits beyond FRA, the monthly amount will increase by 8%; this is known as Delayed Retirement Credits (DRC). Additionally, for every year that you claim prior to FRA, your benefit is reduced, which can potentially leave you with about 70% of your FRA amount, depending on your age.
Spousal benefits formed the basis of the creative planning strategies that are being phased out, but the underlying principle of them still allows for increased benefits for spouses in certain situations. Essentially, an individual is entitled to their own benefit, or one half of their spouse’s benefit (at FRA), whichever is greater. This can allow for a spouse who has limited work history to end up receiving much more than their Social Security Statement is showing. In fact, it can even make sense for a spouse to claim early, taking a reduction in his or her benefits, and collect benefits for a few years before having their Social Security amount increased at the point the spouse begins to claim.
When one spouse dies, the surviving spouse is entitled to the larger of the two benefits. This means that while overall Social Security benefits will go down at death as only one person will be receiving them, it is reassuring to know that the surviving spouse will have locked in the higher benefit for the remainder of his or her life. This provides added incentive for one spouse to wait until age 70 to claim in order to maximize one of the Social Security benefits.
Don’t Forget the Kids
If you have minor children at the point you claim Social Security, they may also be entitled to a benefit based on your record. There is a cap on the maximum family benefit that can be paid out, but it can be advantageous for a person with kids to claim their benefit early in order to receive additional funds for other family members. This benefit can even be extended to grandchildren in situations where they are actual dependents of the Social Security recipient.
Social Security Optimization
Once you understand some of the basic principles of the Social Security benefit options that we’ve discussed, you will need to consider some external assumptions to create a plan that is optimized for your own situation.
Life Expectancy– How long you (and your spouse) live makes a difference in the anticipated cumulative lifetime Social Security benefits you’ll receive.
Cost of Living Increases (COLA) – Future COLA adjustments to your Social Security benefit can add up over time, creating higher monthly benefits.
Rate of Return– If you intend on saving and investing your monthly payment instead of spending it, factoring in a rate of return on those investments can show a more accurate break-even point.
These three factors can help determine the optimal claiming strategy for your situation. Since each factor can make a significant difference in the results, we find it helpful to compare multiple scenarios using a variety of assumptions to help determine the best plan. We have found that initial assumptions that people have regarding the age they intend on claiming their Social Security benefit do not always line up with the scenario that produces the largest lifetime benefit once all the external factors are considered.
That said, it isn’t always about maximizing your lifetime benefit. You can have an optimized Social Security plan on paper, but if you will need, or want, to rely on the additional income that Social Security can provide, the optimized strategy may not make sense for you. Often, the decision comes down to cash flow planning given your other income, expenses and available assets. Perhaps you want to retire early and use your Social Security income as a partial replacement to your paycheck or you want to delay taking distributions from savings or investment accounts until a later time. These are both options in which claiming earlier than your “optimized” time might make sense.
The final claiming decision is usually a balance of the income needs you have and the potential opportunity to maximize the benefits that you are entitled to and is specific to your own situation.
While some creative Social Security planning strategies have been eliminated, there is still great value in spending the time to review and analyze your options for claiming your Social Security benefit. By combining the information from your Social Security Statement with your assumptions regarding the external factors it is possible to put a plan together that will help meet your goals in an efficient way. If you would like to discuss your Social Security planning options, including various scenarios to optimize your benefit, contact us to schedule a discussion about your specific situation.
Kevin is a Senior Wealth Management Advisor with QA Wealth Management and holds the Certified Financial Planner ™ and Certified Trust and Financial Advisor designations.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner ™, CFP® (with plaque design) and CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.