Recently I had the privilege of presenting at the Michigan Association of CPA’s continuing education conference on the topic of Maximizing Social Security benefits. Social security is an important source of income for most of the estimated 58 million people who receive benefits. Over my 22 years as a practitioner, I have tried to counsel clients to be sure to coordinate social security retirement benefits with their overall retirement plan. As pensions (not just the City of Detroit) continue to become more obsolete, social security remains one of the few, if not only, guaranteed income sources for future retirees.
Following Ida Mae Fuller’s Lead
Before getting to how to maximize social security retirement benefits – how about a little fun social security history? Do you know Ida Mae Fuller? She is the first reported person to receive social security retirement benefits. Apparently Ida went into the SS office after contributing a total of $24.75 over three years in payroll taxes and told the staff that she was retiring and didn’t expect to receive anything – but thought she might as well check. She ended up collecting $22.54/month and lived to age 100 – not a bad return on her contributions!
When to Begin Collecting Benefits
A traditional breakeven analysis works pretty well for single folks. One of the best research articles that I have come across was in the Journal for Financial Planning and written by Doug Lemons. Mr. Lemons outlined three main variables in the breakeven analysis: inflation/cost of living, income taxes, and time value of money. Mr. Lemons’ research addressed multiple variations and combinations. The general rule based on his research is:
- The breakeven between taking at age 62 and 66 (assume full retirement age) is roughly age 78. Meaning, you need to live past age 78 to be better off by waiting until age 66.
- The breakeven between taking at age 66 and 70 is roughly age 83. Meaning, you need to live past age 83 to be better off.
Social Security Analysis for Couples
The breakeven analysis breaks down a bit for couples (two life expectancies vs one). I have written about spousal benefits in the past. In this post I’d like to provide two strategies for couples to consider.
File & Suspend Strategy
June Cleaver: As you may know, June Cleaver of the “Leave it to Beaver” show was the classic stay-at-home mom. Her husband Ward, who sometimes was known to be a “bit too hard” on their son the Beaver, was the sole income earner. If June and Ward were close to retirement today, their respective social security benefits at full retirement age might be $2,000/month for Ward and $0 for June. How can they maximize benefits? At full retirement age (assume 66) Ward files for social security retirement benefits but then immediately suspends. This allows June to begin receiving a spousal benefit (assuming she is at full retirement age) which is $1,000/month or 50% of Ward’s benefit. Then, when Ward turns age 70, Ward may elect to begin receiving his own benefit ($2,640 in this example) that has increased 8% per year from age 66-70 thanks to “Delayed Retirement Credits”. Assuming average life expectancy, this combination will provide June and Ward the maximum benefit. What if Ward passes away at age 75? June will receive the higher of her benefit or Ward’s as a survivorship benefit - $2,640 in this example.
Claim Now, Claim More Later
Elyse Keaton: Elyse Keaton of “Family Ties” was played by Meredith Baxter (and mother of Michael J. Fox in the show). Elyse, unlike June Cleaver, had income of her own as an architect. Elyse and her husband Steven Keaton had similar earnings. If Elyse and Steven were close to retirement today, both of their social security benefits at full retirement age might be $2,000/month. Rather than “filing & suspending” like June and Ward, the Keatons might consider another strategy to maximize their total benefits. At full retirement age Elyse should consider taking her own benefit or $2,000/month. Steven, at full retirement age, may choose to restrict his benefit to a spousal benefit only (50% of Elyse’s benefit) or $1,000/month. This allows Steven to collect some benefits now while allowing his own benefit to grow at 8% until age 70. At age 70, Steven may elect to begin receiving benefits based on his own earnings – or $2,640/month. Note that the survivor benefit for each of them now becomes $2,640. The election to “restrict” to a spousal benefit can only be done at full retirement age or later.
So, are you more like June or Elyse? If your situation is more like June’s then consider the “File & Suspend” strategy. If your circumstances are more like Elyse’s then consider the “Claim Now, Claim More Later” strategy. Do you have a social security question? Let us know – we love to research and help you maximize the benefits.
Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing information is accurate or complete. Any information is not a complete summary or statement of al available data necessary for making a decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James. The examples provided are for illustrative purposes only. Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation. Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation. Guarantees are based on the paying ability of the issuer. #C14-000038
