Social Security is an income stream that few can afford to waste. Fifty percent of couples and 71 percent of unmarried retirees rely on it for half of their income or more.
Yet 83 percent of married women file for benefits too early -- often along with their husbands. And in so doing, they forfeit tens or even hundreds of thousands of dollars in lifetime benefits.
Filing early puts any retiree in a tough spot, but it can be particularly hard on women. Outliving men by five to eight years, they’ve got more life to fund, and expenses – particularly healthcare – will only grow with age. Up to 70 percent of a woman’s Social Security benefit, in fact, can be dominated by healthcare costs if she files early.
Still, many women file early – not out of necessity, but simply because they don’t know the benefits of delaying, nor have they been informed of the strategies available to maximize their benefits. If you can clear up the confusion, lay out the numbers and point these clients in the right direction, you’ll provide true service that furthers your reputation as a trusted advisor.
What clients stand to gain (and lose)
“In my experience, both women and men are often completely mystified about the best strategies for Social Security,” says Sandra McPeak, managing director of investments for Wells Fargo Advisors. “The inclination is to start benefits early because they don’t understand how much of a haircut they’ll take.”
How much of haircut? For a woman retiring today with a full retirement age of 66, collecting at age 62 reduces lifetime benefits by 25 percent. Waiting until age 70, on the other hand, nets a 32 percent lifetime gain. That’s a whopping 76 percent difference between the two options.
Today, a 65-year-old woman can expect to live past 86. Given an average full retirement age benefit of $1,163 for women, collecting at age 62 can decrease monthly checks to $872 and lifetime benefits by at least $73,332, before accounting for the cost of living adjustment. Waiting, however, would result in a $1,535 monthly check and at least an additional $71,455 in lifetime benefits.
“To emphasize its importance, Social Security really is an inflation-adjusted annuity that can be a good foundation for your future financial independence,” says Mary Evans, senior client advisor at TFC Financial.
Another point many retirees miss: One spouse can piggyback on the other’s benefit. While some loopholes and special strategies have gone by the wayside, anyone can collect 50 percent of their higher-earning spouse’s benefit, assuming they’ve reached their FRA (and assuming said spouse is also collecting, themselves).
For women born on or before Jan. 1, 1954, the “restricted” application is also still available – a top choice for high-earning couples. Assuming that one spouse has started to collect, the other can file for that 50 percent spousal benefit while allowing her own to grow. At age 70, she can then switch to her own benefit, which will have accrued the 32 percent delayed retirement credit.
These options are open to divorcees, as well.
“A lot of times, women don’t understand they can claim benefits on an ex-spouse’s record as long as they didn’t get remarried,” adds McPeak. “It doesn’t impact his benefit or his new wife’s benefit at all, but it could be a great source of income for the divorced spouse.”
Widows are also entitled to benefits, even if they remarried in retirement.
“I had a client who’d been widowed at a young age, and her current marriage was her second,” says Evans. “She was stunned to see the facts and figures around her husband’s earning record and how much money was available to her.”
All in all, Social Security should be a team decision for married couples. What one does can dramatically impact the other’s lifetime benefits, and if at least one spouse has a long life expectancy, it’s almost always a safe bet for both to delay filing.
With so many other assets on which to rely in retirement, why should an affluent client bother to maximize her Social Security benefits?
“I’ve actually found, in my practice, the wealthier the client, the more keenly interested they are in this topic,” says Rob Arthur, J.D., first vice president and managing counsel for Wells Fargo Advisors’ Federal Benefits Consulting Group.
“Wealthy, successful women are often like the CFOs of their families,” echoes McPeak. “They’re not just thinking about what’s smart for their own benefit, they’re thinking about their children and grandchildren.”
From vacations, homes and other major purchases to inheritances, college funds and charitable contributions, there are a variety of retirement goals that Social Security can help protect. A tax-advantaged, lifetime, inflation-adjusted income stream, it’s an indispensable part of a legacy plan.
Will the system last?
Of course, all these considerations only apply if Social Security sticks around – an uncertainty for many Americans. In fact, nearly 20 percent of early collectors and over 40 percent of Americans say Social Security won’t be there for at their full retirement age.
“I do think this is an important factor for everyone, and women in general have longer lifespans and lower savings,” says Evans. “The fact is in the latest Trustee Report, the exhaustion date of the trust fund was projected to be 2034 with no changes – but it’s fixable.”
Increases in the full retirement age, FICA cap and payroll tax have all been proposed, among other solutions, and it’s reasonable to expect at least a few of them will pan out.
“Everybody understands what a Social Security cut would mean on an individual level, but think about what it would also mean to the overall economy,” says Arthur. “The vast majority of people who take it turn around and spend it, and it’s a tremendous portion of our overall GDP.”
Between marital status, income and retirement goals – not to mention the future of the program itself – there’s a dizzying array of considerations to take into account with Social Security. How should a client make her choice?
“I’ve got five factors I consistently address,” says Arthur. “They’re personal health, family medical history, other sources of retirement income, market conditions and laws pertaining to benefits.”
In particular, the tremendous disparity between a reasonable expected rate of market return and Social Security’s guaranteed 8 percent make delaying to age 70 a safe bet – at least for now.
“Put Social Security as an agenda item on the annual review,” Arthur recommends.
It’s a tough sell for clients to pass up a check in the here and now, particularly when it means drawing down their other retirement assets first. Year after year, however, they’ll see how much their potential benefits are growing compared to their other assets – and delaying will become an easier choice.