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Beyond Social Security: Planning for Soon-to-Be Retirees

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Social Security may be on shaky ground and it will certainly have to undergo reforms in the future, but the program is here to stay. And, even if Congress does follow through with its proposed changes to the cost of living adjustment, collection age and benefits taxation, those alterations will have little effect on current and soon-to-be retirees.

It’s therefore crucial that advisors organize not just their clients’ Social Security collections, but their entire portfolios, to maximize their spending power for decades to come. While the program’s benefits are primarily based on recipients’ lifelong work histories, the amount of money any individual can draw is hardly set in stone.

The Collection Age: Who Should Wait?

“By far the biggest mistake people make with Social Security is to just coordinate their benefits with their actual retirement dates,” said Joe Lucey, President of Secured Retirement Advisors. While the Social Security Administration’s full retirement age is 66 for people born from 1943 to 1954, recipients can actually postpone and grow their annual benefits until the required distribution age of 70. A delay of just one year yields an 8 percent increase in monthly benefits, while waiting the full four years will result in a whopping 32 percent increase for the rest of a recipient’s life.

Whether they’re retiring early or still working part-time, some recipients are also rushing into early distribution at age 62. “People are rushing to get Social Security because they think it won’t be there in the future,” Lucey said. “They’re willing to take fewer dollars now because they think the money won’t be there later on.” While this strategy may be necessary for truly cash-strapped seniors, it yields sizable lifelong reductions. Collection at 62 entails a 25 percent reduction, and collecting even one year early means 6.7 percent less money per month. Given current inflation rates and the rising costs of healthcare and long-term care, advisors would be wise to steer retirees towards more conservative collection strategies – as well as higher rates of saving and lower rates of spending while they’re still working.

And, while early collection may seem like a better idea for people who want to keep working and earning, this option actually carries an additional downside. Workers still receive the same lifelong reductions for collecting early, and if they make enough money, those benefits are diminished even further. For every two dollars over $15,120 an individual makes per year, his yearly benefits are reduced by one dollar. The SSA does allow early collectors to change their minds for up to a year after they begin, but they have to pay back all of the benefits they’ve received so far in a lump sum. This may be feasible for well-off recipients who come to understand the flaws in their strategies, but it’s an unlikely option for those who needed the money quickly, or who spent more to increase their living standards while they continued to work. Because it’s so difficult to reverse these kinds of decisions once they’re set in place, advisors should help their clients adjust their standards and spending years before retirement – not months.

Of course, advisors know that not every family or individual should postpone collection as long as possible. “Our philosophy is that it’s great to maximize, but some people may have very different goals for Social Security income, and those goals may not require maximization,” said Christine Fahlund, Senior Financial Planner at T. Rowe Price. As lucrative as postponement can be, many seniors don’t want to wait, or don’t have the means to wait, until age 70 to activate a new stream of income, she said.

Marriage and Divorce

Couples have even more options for maximizing their benefits, though far too few take advantage. “People don’t usually realize that there are potential spousal benefits, even if you’re no longer married to that person,” according to Fahlund. At any time past age 62, either spouse can draw upon his or her own benefits or collect half the benefits of the other spouse. If one spouse takes this option, their benefits can continue to grow until age 70. For clients who can afford to live on smaller checks early in retirement, this is a great strategy to maximize income in older age.

When one spouse has significantly higher lifetime earnings than the other, the couple may realize even greater savings with a “file and suspend.” The high-earning spouse goes to the Social Security office, claims benefits and immediately suspends them. Those benefits will continue to grow, but the lower-earning spouse can immediately draw upon half of them, while their still-untouched benefits grow, as well. Once the higher-earning individual reaches the age of 70, both can collect their own benefits in full.

Provided a couple remained married for at least 10 years, these strategies are still possible in divorce. While the “file and suspend” scheme may require more cooperation than divorced clients are willing to offer, one ex can draw upon half of the other’s benefits without their consent or knowledge, and without affecting that person’s collection in the slightest. Remarriage before age 60 will make this impossible, however. “If you do want to remarry, and your new spouse is a starving artist, and your prior spouse was an executive, you might want to wait until after age 60,” said Fahlund.

These spousal strategies are complex, but couples can’t expect any help from Social Security workers themselves. “The Social Security administration is prohibited from giving financial advices,” said Gary Marriage, founder and CEO of Nature Coast Financial Advisors. Ultimately, couples, divorcees and widows who want to capitalize on their spouses’ earnings will need to consult experienced advisors before they make their decisions.

Assets, Retirement Accounts and Tax Liabilities

Aside from proper collection timing and spousal strategies, retiring clients should protect their Social Security benefits—and their overall spending power—by carefully allocating and spending their other assets. Up to 85 percent of Social Security benefits can be taxed for couples who earn $44,000 or more per year, and that combined income includes their gross earnings, their nontaxable interest and half of their Social Security benefits.

To minimize overall tax liability, pre-retirees will want to withdraw from or use their tax-deferred accounts before they start collecting Social Security. The same goes for contributions and transfers into the tax-free Roth IRA, since those funds can’t be deducted from gross annual income. Ideally, clients shouldn’t be paying taxes on interests and dividends once they start collecting, nor should they have to worry about bumping themselves into higher tax brackets when they draw upon their savings.

Still, for families holding off on Social Security as long as possible, even an early (and taxed) IRA withdrawal can be better than early benefits collection. “People forget about how tax-efficient Social Security is,” said Lucey. Since Social Security taxes are still capped at 85 percent, “A dollar from Social Security is actually worth more to you than a dollar from your IRA.”

Future Changes and Long-Term Planning

Although Congress’s potential Social Security reforms may not affect the currently retiring Baby Boomers directly, inflation will likely impact their long-term spending power. “The cost of living adjustment is only half the rate of inflation, and I don’t see the government increasing it in the future,” according to Marriage. “Inflation could be a big issue, especially for retirement accounts and Social Security benefits.”

Because of a widespread lack of savings, rising healthcare costs and the ever-increasing demand for long-term care, Boomers also won’t be able to rely on Social Security as much as generations past. “The biggest danger is the expenses you never anticipated,” said Fahlund. “A good rule of thumb is to assume your Social Security is going to contribute 20 to 25 percent of what you’ll need in retirement. Your withdrawal from your portfolio will contribute another 50 percent of what your salary used to be.”

Marriage agreed, saying that “People can’t be looking at Social Security as a one-stop shop. They say they can’t save now, but it’s going to be even harder to put money away when you’re no longer working.” Even the most robust set of benefits won’t be enough to cover massive and unexpected expenses such as long-term care, price increases and catastrophic medical bills. As resistant as people can be to reducing their expectations in retirement, advisors will need to encourage most clients to save more  and earlier than they had previously planned.


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