Maximize Social Security Income
One of your baby boomer clients' top concerns is outliving their retirement savings.
The decision about when to collect Social Security retirement benefits is a key
factor in creating a successful retirement strategy.
Understanding all the rules behind Social Security (SS) benefits can be a difficult task. Fortunately, you do not have to be an expert to help your clients tackle the tough decisions of when and which benefits to collect. Having a few of the right conversations can help your clients determine optimal strategies that increase their retirement income.
Start with the Facts
Take some time to review your to benefits, the statements also record their earnings history. Use these records to understand your clients' savings patterns and lifestyle - this can be a huge help in retirement income planning.
Gather some basic information from your clients before beginning the SS discussion. Ask your clients to send you a copy of their SS statements, which include a few important numbers you need to analyze. You will need their:
- Benefit amounts at age 62, their Full Retirement Age (FRA) and age 70
- Birth date
If your clients do not have statements, direct them to the Social Security Administration (SSA) and ask them to use the Retirement Estimator.
If your client is married, get the same information from his or her spouse. You will need to combine the two spouses' information to create an overall strategy for the couple.
Talk About When to Collect
Deciding when to collect benefits should be one of your clients' largest concerns. It will determine the size of their monthly benefit and, ultimately, the amount of SS income they collect over their lifetime. Take the time to walk your clients through some of the basic concepts so that they are well-equipped to make this decision.
Your clients' benefit amounts are based on their Primary Insurance Amount or PIA (the monthly benefit they are eligible to receive at FRA). Make sure they are familiar with this number (located on page 2 of the SS statement).
|Full Retirement Age (FRA)|
|Year of Birth||FRA|
|1937 or earlier||65|
|1938-1942||65 + 2 months for every year after 1937 until 1943|
|1955-1959||66 + 2 months for every year after 1954 until 1960|
|1960 and later||67|
Your clients may begin collecting as early as age 62—but with a consequence. Collecting before FRA means your client locks in permanent reductions to their monthly benefit amount. At 62, a client would lock in a PIA reduction of 25% (assuming a FRA of age 66, the most common right now). This reduction will decrease for each month he or she waits after age 62, up until FRA.
On the other hand, SS benefits will increase for every month your client waits to begin collecting beyond FRA and until age 70. These monthly increases are Delayed Retirement Credits (DRCs) and equal 8% yearly (assuming the client was born in 1943 or later). If the client waits to collect until age 70, his or her individual benefits would max out at 132% of PIA.
If your clients plan to begin collection after FRA, they should consider to "file and suspend" with the SSA at FRA. In short, they are filing for benefits but opting to defer their checks to a later date.
Why should your clients file and suspend? First, if they suddenly need income before their planned collection age, they can call the SSA and request back payment of all the checks they would have received if they started collecting when they filed. These benefit amounts and future benefit amounts will be based on collection at the filing date. Second, filing and suspending may allow your clients' spouses to collect spousal benefits at an earlier date (see more on spousal benefits below).
For most clients, determining the "best" time to collect benefits will require weighing higher benefits against near-term income.
For single clients who have never been married, focus on expected longevity by discussing family health history and life expectancy. The average "break even point" between collecting reduced benefits at age 62 and waiting until age 66 to collect is about age 78 (for those with a FRA of 66). If clients are likely to live beyond age 78, they will receive higher lifetime benefits by waiting until FRA to collect. The average break even point between collecting at age 66 and age 70 is about age 82.5 (for those with a FRA of 66). If clients believe they will live beyond age 82.5, waiting until age 70 to collect will increase lifetime income.
For married couples and certain divorcees, there are other factors that should be considered when making decisions.
Make it a family discussion
For married couples, the decision to collect SS benefits should be made together. Married clients may be eligible to collect benefits based on their spouses' benefits and may be impacted by when their spouses began to collect benefits.
At FRA, a married client may be eligible to collect spousal benefits equal to 50% of his or her spouse's PIA. If your client is also entitled to individual benefits, your client will receive his or her own PIA plus an adjusted spousal amount. At FRA, the total amount your client could receive is his or her own individual benefit or 50% of the spouse's PIA, whichever is greater.
Make sure your clients are aware that:
If both spouses' PIAs exceed one half of the other spouses' PIA, see Strategies for Two High Wage Earners for other spousal benefit options.
- They cannot collect spousal benefits unless their spouse has filed for benefits.
- Their spousal benefits are impacted by when they choose to take spousal benefits, not when their spouse collects their individual benefits.
- Spousal benefits have the highest reduction factor for collecting before FRA.
In the example below, $1,000 of spousal benefits available ($2,000/2) is adjusted to $200 because the wife is also eligible for $800 of her own PIA. The $200 (adjusted) spousal benefit available to the wife at FRA would be $140 at age 62 (a 30% reduction) while her individual benefit would be reduced from $800 to $600 (a 25% reduction). At age 62, she would be eligible for a total sum of $740 of monthly benefits.
- Spousal benefits do not grow after FRA.
In the example below, the $200 (adjusted) spousal benefit is reduced to $0 at age 70. That is because the wife's individual benefits at age 70 ($1,056) exceed the spousal benefits at age 70 ($1,000), and the spousal benefit is adjusted to $0.
|Husband's Benefits||Wife's Benefits||Adjusted Spousal||Sum|
|Age 66||$2,000||$800||$200||$1,000 (Half of the husband's PIA)|
If your client's spouse passes away, he or she may be eligible to collect benefits off of the deceased spouse's earnings history. Unlike spousal benefits, which are at most 50% of the spouse's PIA, survivor benefits are usually equal to the benefits the deceased spouse had been receiving. Therefore, your client's survivor benefits will be impacted by when your client's spouse collects benefits. This is one of the main reasons why married couples' strategies should account for the life expectancies of both spouses.
If one spouse has a high likelihood of outliving the other for a substantial amount of time, the couple's best overall strategy may involve maximizing survivor benefits.
If your client is at least FRA when he or she starts collecting survivor benefits, your client would be entitled to the greater of:
- 100% of the deceased spouse's benefits.
- 82.5% of the deceased spouse's PIA. This option only matters if the deceased spouse had collected benefits early and faced a reduction of more than 17.5%.
If your client starts collecting survivor benefits before FRA, the benefits may be reduced by up to 28.5%. The reduction is prorated monthly between age 60 and FRA. In the case of early collection, the SSA compares the following three amounts and, depending on how they compare, will pay either the lowest or the middle amount.
- The individual benefits the deceased spouse was collecting.
- The deceased spouse's PIA (recalculated at the time of entitlement) reduced by up to 28.5% for early collection.
- 82.5% of the deceased spouse's PIA (recalculated at the time of entitlement).
Additional Discussion Opportunities
Help clients understand and prepare for the new world of retirement with our extensive client-approved resources.
While the above information should allow you to work through many of your clients' questions and scenarios, there are a number of items that may signal a need to dig deeper. Here are some common signals that you may need more information:
Pensions: Government pensions (i.e., pensions from work where your clients did not pay into the SS system) can impact your clients in two ways:
- Reduction of individual benefits due to the Windfall Elimination Provision (WEP). This reduction will not be reflected on your client's SS statement. To get an accurate estimate of your client's SS benefits, use the "WEP Calculator" from the SSA
- Reduction of spousal or survivor benefits due to the Government Pension Offset (GPO). Under GPO, your client's spousal and survivor benefits will be reduced by two-thirds of the client's government pension.
Divorce: Divorced clients may be eligible to collect spousal or survivor benefits. If your client was married for at least 10 years, is currently unmarried (or the client's current marriage started after reaching age 60), the client is at least age 60 and the client's ex-spouse is deceased, your client is likely eligible for divorced spouse and/or survivor benefits. The same reductions apply for early collection as they do for regular spousal and survivor benefits.
Working while collecting benefits: Clients who collect benefits before FRA but continue to work will be subject to an annual earnings test and may have some or all of their benefits withheld. In its basic form, the earnings test allows clients to earn up to $14,160 before the SSA starts to withhold $1 of benefits for every $2 above $14,160. There is a different test applied in the year your client turns FRA and in the first year of collection. All forms of the test apply to earned income only.
Minor children: Children under age 18 (age 19 if still in high school) are eligible for benefits once one or both of their parents have filed for benefits.
Dependent parents: Parents who are dependent upon your client for at least 50% financial support at the time of your client's death are entitled to survivor benefits.
Disability: There are a lot more rules to explore if one or both spouses also qualify for disability benefits. We recommend setting up a call with your client and the SSA to discuss all their options.
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