January 31, 2013
January 31, 2013
Attorneys have several retirement plan options ranging from SEP IRAs for solos, and 401(k) and defined benefit plans for larger practices. Yet, Social Security is often overlooked as a retirement resource. Did you know that one of your largest assets may be your Social Security benefits, worth up to $875,000 for a couple retiring in 2013? While it may be tempting to draw upon Social Security retirement benefits at the earliest possible age of 62 (and over 50%* of those eligible do), by selecting a permanently reduced benefit, you may be leaving money on the table. Depending on when and how you start your benefits, you could gain (or lose) up to 20% of their value. This may sound too good to be true, but it’s possible to maximize your Social Security retirement benefits by utilizing a few solid strategies.
Three Retirement Benefit Streams
Social Security retirement benefits are divided into three separate but related income streams (worker, spouse and survivor). You likely know about the worker’s retirement benefits, which are based on covered earnings over a career. Forty quarters of work are needed to qualify. In addition, a husband or wife (or ex-spouse) can collect a spousal benefit of up to 50% of a worker’s benefit. Finally, a widow(er) can receive the higher of his/her worker benefit or his/her spouse’s worker benefit as a survivor’s benefit. Married couples can receive more benefits over their lifetimes by integrating all three streams.
Check Your Social Security Records
Make sure the Social Security Administration has an accurate record of your lifetime earnings, as all benefits are based on them. To check your covered earnings and obtain an estimate of your future benefits, go to www.socialsecurity.gov/mystatement. If the Social Security Administration’s records are incorrect, you may not receive all the benefits to which you’re entitled.
Good Things Come to Those Who Wait
This old adage applies to deciding when to start receiving your Social Security retirement benefits. For most Baby Boomers the full retirement age (when unreduced benefits are first available) is age 66. Benefits are reduced to 75% of the amount at full retirement if you start collecting at age 62. Yet, you can earn benefit increases equal to 8% a year for each year you delay your benefits from age 66 to age 70. So, your retirement benefit will be at least 76% higher by waiting to collect at age 70 versus beginning at age 62 (132% vs. 75%). Given the Federal Reserve’s pledge to keep interest rates low until 2015, an 8% per year delayed credit is an attractive option. Concerns that Social Security will not be able to honor its current obligations fully are real, but most experts predict that needed changes to the program will largely impact younger workers versus those approaching retirement today.
Social Security as Longevity Insurance
A critical financial objective is to prevent outliving your assets, and delaying receipt of Social Security payments can help. Married couples can coordinate their claiming strategies to use Social Security for longevity protection and to maximize the benefits they receive over their joint lifetime. ‘Claim and Suspend’ is one valuable strategy that allows couples to take advantage of spousal benefits and delayed credits while maximizing survivor’s benefits at the same time. Here’s an illustration. Jill, a managing partner of a large firm, is the higher-earning spouse. She files and immediately suspends collecting her monthly Social Security benefits equal to $2,000 at age 66, her full retirement age. Jack, her husband, is a part-time marketing administrator and is also age 66. He can receive spousal benefits worth $1,000, which is 50% of Jill’s benefit. The spousal benefits are higher than what Jack would have received based on his own monthly benefits of $750. At age 70, Jill begins to receive her benefits which are now 32% higher ($2,640) than at age 66. Further, if Jill dies at age 71, Jack starts receiving survivor’s benefits equal to $2,640. If Jill did not file and suspend, Jack’s survivor’s benefits would have been $2,000 (Jill’s amount at age 66) versus $2,640 (Jill’s amount at age 70).
‘Claim and Suspend’ is one of several effective claiming strategies. A couple’s respective ages, health, life expectancies and cash flow needs are several factors to consider when determining the best strategy to pursue. Each client’s situation is unique. Before filing for Social Security, review your options with an expert advisor to identify a personalized strategy.
* Are People Claiming Social Security Benefits Later?, Dan Muldoon and Richard W. Kopcke, June 2008, Number 8-7, Center for Retirement Research at Boston College