By Reid Hartsfield, CFP®

Social Security Claiming Strategies Feature BB&T Perspectives

For years, wealthy clients have discounted or even minimized the benefits of Social Security in their long-term financial plans. That is no longer the case, as financial-planning professionals have come to realize that Social Security and the timing of claiming benefits can significantly impact a client’s financial lifestyle in retirement.

If one looks at the last decade of low interest rates and the amount of capital required to replace the level of income Social Security provides, it is apparent these benefits can be a cornerstone for financial security. In 2015, the average monthly retirement benefit paid from Social Security is $1,328 per month ($15,936 per year). If you factor in the rate on the 10-year Treasury is only about 2.3 percent, it would take $686,897 to generate the same income stream and about $1,377,414 to generate the highest monthly benefit of $2,663 ($31,956 per year).

Claiming Benefits Early

Full retirement age depends on birth year. Workers can elect to start taking payments as early as age 62. However, if Social Security benefits begin before full retirement age, monthly benefits will be reduced. To illustrate, if full retirement age is 67, the benefit amount will be about 30 percent less at age 62 than the benefit at age 67.

Claiming Benefits Late

Workers may also choose to defer benefits past their normal retirement age to receive an even larger amount in the future. Delaying benefits may result in an 8 percent increase for every year the worker waits. Working past your full retirement age also allows you to increase your Social Security earnings record and potentially allows you to receive a higher benefit when you do retire, especially if your earnings are higher than in previous years.

Claiming Strategies

The biggest question for most retirees is “When should I begin taking benefits?” The answer depends on many different variables, such as your marital status, work status, income history, spouse’s work history, your health and your spouse’s health. If you are single, it could be as easy as a simple break-even analysis. For married couples it gets a bit more complex. “File and Suspend,” “Claim Now, Claim More Later” and “Start, Stop, Start Again” are some examples (detailed below) of strategies. Oftentimes, the key for a married couple is maximizing benefits for the survivor. Usually this is accomplished by delaying the higher earning spouse’s benefit as long as possible.

Here are some of the strategies wealthy families use:

  • File and Suspend
    Spouses cannot receive spousal Social Security benefits until the worker files for benefits. At full retirement age, the worker can file for benefits and suspend those benefits. This way the spouse can claim spousal benefits and the worker can earn delayed retirement credits until age 70.
  • Claim Now, Claim More Later
    A high-earning worker may claim a spousal benefit after the spouse has filed, and then take his or her own benefit at age 70, taking advantage of the delayed retirement credits. This strategy is helpful when the lower-earning spouse’s benefit at full retirement age is more than half the higher-earning spouse’s benefit. This strategy can be used in conjunction with the file-and-suspend strategy.
  • Start, Stop, Start Again
    If the worker has started receiving benefits before full retirement age, and subsequently realizes the advantages of delaying the benefit, he or she has a few choices. If the realization comes within 12 months of starting the benefit, he or she can pay back all of the benefits received (including any family benefits) and start over with no reductions in future benefits. If it is past the first 12 months or the worker does not want to pay back the benefits, he or she can wait until full retirement age and suspend benefits at that time. The benefit would still be reduced, but the worker will earn the delayed retirement credit on the benefit.

Lump Sum Benefits

If a worker is past full retirement age, and has a sudden need for cash, he or she may request a lump sum of up to six months of benefits. Ongoing benefits would be calculated based on the earlier date resulting in permanently reduced benefits. Additionally, if the worker filed and suspended his or her benefit at full retirement age and needs cash, he or she can retroactively claim the benefit from the day benefits were suspended in exchange for a lump-sum payment. This payment may total as much as four years of Social Security benefits – albeit at the price of a permanently reduced benefit. The best option for claiming benefits may not always be clear. It can be easy to make a claiming mistake that may reduce the lifetime family benefit significantly. It is important to work with your Wealth advisor and financial planning team to evaluate and understand the various filing options.

BB&T-Perspectives-Social-Security-Strategy

By Reid Hartsfield, CFP®

Social Security Claiming Strategies Feature BB&T Perspectives

For years, wealthy clients have discounted or even minimized the benefits of Social Security in their long-term financial plans. That is no longer the case, as financial-planning professionals have come to realize that Social Security and the timing of claiming benefits can significantly impact a client’s financial lifestyle in retirement.

If one looks at the last decade of low interest rates and the amount of capital required to replace the level of income Social Security provides, it is apparent these benefits can be a cornerstone for financial security. In 2015, the average monthly retirement benefit paid from Social Security is $1,328 per month ($15,936 per year). If you factor in the rate on the 10-year Treasury is only about 2.3 percent, it would take $686,897 to generate the same income stream and about $1,377,414 to generate the highest monthly benefit of $2,663 ($31,956 per year).

Claiming Benefits Early

Full retirement age depends on birth year. Workers can elect to start taking payments as early as age 62. However, if Social Security benefits begin before full retirement age, monthly benefits will be reduced. To illustrate, if full retirement age is 67, the benefit amount will be about 30 percent less at age 62 than the benefit at age 67.

Claiming Benefits Late

Workers may also choose to defer benefits past their normal retirement age to receive an even larger amount in the future. Delaying benefits may result in an 8 percent increase for every year the worker waits. Working past your full retirement age also allows you to increase your Social Security earnings record and potentially allows you to receive a higher benefit when you do retire, especially if your earnings are higher than in previous years.

Claiming Strategies

The biggest question for most retirees is “When should I begin taking benefits?” The answer depends on many different variables, such as your marital status, work status, income history, spouse’s work history, your health and your spouse’s health. If you are single, it could be as easy as a simple break-even analysis. For married couples it gets a bit more complex. “File and Suspend,” “Claim Now, Claim More Later” and “Start, Stop, Start Again” are some examples (detailed below) of strategies. Oftentimes, the key for a married couple is maximizing benefits for the survivor. Usually this is accomplished by delaying the higher earning spouse’s benefit as long as possible.

Here are some of the strategies wealthy families use:

  • File and Suspend
    Spouses cannot receive spousal Social Security benefits until the worker files for benefits. At full retirement age, the worker can file for benefits and suspend those benefits. This way the spouse can claim spousal benefits and the worker can earn delayed retirement credits until age 70.
  • Claim Now, Claim More Later
    A high-earning worker may claim a spousal benefit after the spouse has filed, and then take his or her own benefit at age 70, taking advantage of the delayed retirement credits. This strategy is helpful when the lower-earning spouse’s benefit at full retirement age is more than half the higher-earning spouse’s benefit. This strategy can be used in conjunction with the file-and-suspend strategy.
  • Start, Stop, Start Again
    If the worker has started receiving benefits before full retirement age, and subsequently realizes the advantages of delaying the benefit, he or she has a few choices. If the realization comes within 12 months of starting the benefit, he or she can pay back all of the benefits received (including any family benefits) and start over with no reductions in future benefits. If it is past the first 12 months or the worker does not want to pay back the benefits, he or she can wait until full retirement age and suspend benefits at that time. The benefit would still be reduced, but the worker will earn the delayed retirement credit on the benefit.
Lump Sum Benefits

If a worker is past full retirement age, and has a sudden need for cash, he or she may request a lump sum of up to six months of benefits. Ongoing benefits would be calculated based on the earlier date resulting in permanently reduced benefits. Additionally, if the worker filed and suspended his or her benefit at full retirement age and needs cash, he or she can retroactively claim the benefit from the day benefits were suspended in exchange for a lump-sum payment. This payment may total as much as four years of Social Security benefits – albeit at the price of a permanently reduced benefit. The best option for claiming benefits may not always be clear. It can be easy to make a claiming mistake that may reduce the lifetime family benefit significantly. It is important to work with your Wealth advisor and financial planning team to evaluate and understand the various filing options.

 

BB&T-Perspectives-Social-Security-Strategy

About the Author

Reid Hartsfield, CFP®, MBA

Reid Hartsfield, CFP®, MBA

Vice President, Financial Planning Strategist, North Florida

Reid has more than 15 years of experience in wealth management and an extensive background in a range of financial areas. He conducts CPE seminars for CPAs on estate planning, business succession planning, market volatility, retirement plans, retirement planning, and asset protection. Reid is a past president of the board of the Financial Planning Association of Northeast Florida. He holds a bachelor’s degree from Excelsior College, and an MBA from The University of North Florida.