Created during the Great Depression as a retirement safety net, Social Security now covers an estimated 96% of Americans. These days, a record high of around 167 million people are working and paying into the system that provides benefits for over 63 million people.1 In fact, the majority of retirees get more than half of their income from Social Security.
Social Security can be complicated to navigate at times, but since it’s so vital to your retirement income plan, it’s important to make wise decisions and create strategies to optimize your benefits. Too often, I’ve seen clients losing out based on how they take their payments. Before you start taking your Social Security payments, consider these strategies first.
1. Delay Benefits
Social Security benefits are calculated using complex actuarial equations based on life expectancy and estimated rates of return. Deciding the best time for you to claim your benefits depends upon how you compare to the averages. As of today, a man turning 65 is expected to live until age 84.3 and a woman of 65 until age 86.6.
If, based on your health and your family history of longevity, you believe you will live much longer than that, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid 80’s, you would receive a greater lifetime benefit by taking it sooner, even though it is a smaller monthly payment.
Several helpful calculators are available on the Social Security Administration website. With the Retirement Estimator at www.socialsecurity.gov/estimator, most people can receive an estimate of their benefit based on their actual earnings record and manipulate the numbers to reflect different strategies. They also have Social Security Benefits Calculators that can be used to calculate future retirement benefits.
2. Research Investment Opportunities
If you are in a position where you will not be reliant on Social Security to cover your basic needs in retirement, you may be better off claiming early and investing your benefit amount in an effort to earn better rates of return. In this way, although you’d start with a smaller monthly payment, you may end up with more money than if you had waited to receive the Social Security Administration’s increased payment due to the growth from your investments.
3. Coordinate with Your Spouse
If you are married, you have the choice to receive your own benefit or a spousal benefit of 50% of your spouse’s benefit. By coordinating properly, married couples can increase their total monthly benefits.
The Society of Actuaries recommends that the lower-earning spouse begins collecting benefits early while the higher-earning spouse waits as long as possible. That way, you can make use of the lower benefit while maximizing the higher benefit. In most situations, it is the husband with the greater benefit and the wife with the lower one. Women also tend to live longer than men. By following this strategy, you not only maximize the husband’s retirement benefit for use while he is alive, but it also maximizes the wife’s survivor benefit when he passes away.
4. Consider the Effect of Additional Income on Your Benefits
Once you reach full retirement age (FRA), having earned income will have no effect on your Social Security benefit payments. However, if you begin receiving benefit payments before FRA, your earnings will decrease your payments.
Income Earned Prior to the Year You Reach FRA
Any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2018, the limit is $17,040. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn. For example, if you earn $20,040 in 2017, you have earned $3,000 more than the limit and will, therefore, receive $1,500 less from Social Security.
Income Earned the Year You Reach FRA
The income restrictions change in the year in which you reach FRA. That year there is a higher limit; $45,360 for 2018. Once your income exceeds that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. For example, if between January 1 and your birthday you earn $48,360, you have earned $3,000 more than the limit. That $3,000 excess will reduce your Social Security payments by $1,000. As soon as you have your birthday and reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
Continuing to work into retirement may be beneficial even if your current benefits are reduced. If your income is within the top 35 years of your earnings, you will increase your AIME, which is the average used to calculate your benefit. By continuing to pay into Social Security as a worker, you can increase your retirement benefit even after you have begun collecting it.
5. Work with an Experienced Professional
A 2015 Voya Retire Ready Study found that those who consult a financial professional are more than twice as likely to have calculated how much income they need to live a rich life in retirement. Working with an experienced professional can help you navigate your Social Security options and optimize your total lifetime benefit. If you have any questions or would like to see how Social Security will impact your retirement plan, I am here to help. Call my office at (949) 221-8105 x 2128, or email me at [email protected].
About Mike Loo
Mike Loo is an independent financial advisor with more than 20 years of experience in the financial services industry. His mission is to make a meaningful impact on the lives of clients and the people they care most about, help them make educated decisions with their money, and build a strong financial foundation for both themselves and their next generation. Mike is committed to meeting a high standard of excellence, taking the time to listen to clients’ needs, and designing strategies that aim to help clients save money and reduce debt. He seeks to fit a client’s investments into their life and educate them so they’ll understand their investments. To learn more about how Mike may be able to help, connect with him on LinkedIn, call his office at (949) 221-8105 x 2128, or email him at [email protected].
Mike Loo is a registered representative for LPL Financial. Securities offered through LPL Financial, Member FINRA/SPIC. Investment advice offered through Trilogy Capital Inc., a registered investment advisor. Trilogy Capital Inc. and Trilogy Financial are not affiliated with LPL Financial.