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Social Security serves as a foundational element in many retirement plans, and understanding how to strategize for maximum benefits is crucial. With increasing life expectancies, retirement can last between 20 to 30 years, making Social Security planning more critical than ever. This blog explores the strategies for optimizing Social Security benefits, helping ensure a financially secure retirement.
The Social Security system in the United States is designed to provide financial support to individuals in their retirement years. The amount of benefit one receives is based on their 35 highest-earning years of work. The full retirement age (FRA) – the age at which one is eligible for full benefits – varies from 66 to 67, depending on the birth year.
The age at which you start claiming Social Security benefits significantly impacts the amount received. Claiming benefits at the earliest age of 62 results in a reduction of at least 25% compared to waiting until the full retirement age. Conversely, delaying benefits past the FRA up to age 70 leads to an increase in benefits, with a maximum increase of 32% at age 70.
For example, if the retirement income at age 66 is $2,000 per month, retiring at this age versus waiting until age 70 can mean a difference of over $200,000 over a lifetime. This stark difference underscores the importance of timing in Social Security planning.
Couples have additional strategies available. Spouses can claim benefits based on their work record or receive up to 50% of their spouse’s benefit at full retirement age, whichever is higher. Coordinating the timing of benefit claims can maximize total household Social Security income. For example, the lower-earning spouse might start benefits earlier, while the higher-earning spouse delays benefits to increase the survivor benefit.
Working while receiving Social Security benefits before reaching the full retirement age can temporarily reduce your benefits. Understanding these rules is vital for those planning to work part-time in retirement. After reaching the full retirement age, however, earnings do not affect Social Security benefits.
Up to 85% of Social Security benefits can be taxable, depending on your total income. Planning for tax implications is essential. Strategies like Roth IRA conversions or timing the withdrawal of retirement accounts can impact the taxation of Social Security benefits and overall retirement income.
Repositioning assets to reduce taxable income can lead to more tax-efficient retirement income. This might involve shifting from taxable accounts to Roth IRAs or employing tax-loss harvesting strategies. This repositioning can influence the taxation of Social Security benefits, potentially leading to lower overall tax liabilities.
With over 500 possible combinations of factors affecting benefits, consulting a financial advisor who specializes in Social Security planning is highly recommended. An advisor can offer customized strategies based on individual circumstances and help navigate the complex rules of the Social Security system.
Social Security planning should be a personalized process, reflecting individual work histories, health status, family circumstances, and retirement goals. The decision on when to claim benefits is a pivotal one, with long-lasting financial implications.
Understanding the nuances of the Social Security system and employing strategic planning can make a significant difference in retirement income, ensuring a more secure and comfortable retirement phase.
As retirements grow longer, the importance of maximizing Social Security benefits cannot be overstated. It's not just about when to start claiming benefits but how to integrate them with other retirement income sources, tax planning, and spousal benefits. Informed decisions and strategic planning in this arena are invaluable for achieving a financially stable and fulfilling retirement.
Why? Because the "File and Suspend," Social Security claiming strategy, which allowed a retiree to take benefits off of a spouse’s record while deferring his or her own record, has been eliminated.
I believe this decision was based on one paragraph of the 2015 federal budget proposal. The graph said the budget proposed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.”
The veracity of this statement depends on what you mean by the words “upper income.” Means testing to obtain Social Security benefits could have the largest impact on the people who work hardest and provide the most jobs of any sector of the economy: small business owners. And though no one knows assuredly if means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.
In 1934, President Franklin D. Roosevelt addressed the Social Security founding committee and said that, “It takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.”
In short, he said taxpayer-paid retirement benefits should go only to those who really need them.
Pundits are already exploring what means testing to obtain Social Security income might look like. Under one recent plan posed by David John of the conservative Heritage Foundation, for the AARP Public Policy Institute, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see their monthly benefits reduced. For every $1,000 of income they have over $55,000, their Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, their benefits would be reduced by 18 percent.
In another means testing scenario posited by John, couples could see reduced benefits if they had non-Social Security income equaling $110,000. They would receive no Social Security benefits if income was over $165,000.
This plan reduces benefits for about 4.5 percent of retirees and eliminates benefits for another 4.5 percent, according to John. Keep in mind that the top 20 percent of wage earners who make more than $134,000 per year pay 84 percent of all U.S. taxes.
Business owners can implement strategies to implement to prevent this loss of future income they have paid for and planned for during their retirement lifetimes. The number-one strategy that needs to be implemented is a well-designed pension or Defined Benefit plan.
Unlike IRAs and 401(k)s, which allow business owners to invest up to $23,000 annually, these specialized Defined Benefit plans-- if properly structured-- can significantly increase contributions and reduce taxes 50 percent in some cases, a double benefit. Additionally, these unique, fully-insured plans can create guaranteed lifetime income streams of well over $100,000 per year.
In your 30s, contributions can equal over $125,000 per year; in your 40s, nearly $200,000; and in your 50s to 60s, well over $300,000 per year.
An additional benefit is that these plans are creditor-proof from legal liability and bankruptcy. WealthManagement.com has reported that O.J. Simpson, who has a $33 million civil judgment against him and is serving a prison term for armed robbery, still receives hundreds of thousands of dollars per year from his pension or Defined Benefit plan.
The bottom line is, we don’t know if and when means testing will occur. But this has been an option from the day the Social Security program was enacted.
Business owners should be prepared and proactive. The elimination of File and Suspend could be the beginning of means testing for Social Security for those of us younger than 66-- which includes the majority of people in the workforce today.
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David Reyes is founder of Reyes Financial Architecture of La Jolla, a Registered Investment Advisory firm that acts as a fiduciary and specializes in portfolio risk management strategies, retirement income distribution and Social Security planning. He has been named the National Social Security Advisor of the Year, an annual award given to professional advisors who are knowledgeable and passionate advocates for Social Security education.
Those of us who counsel clients on Social Security understand firsthand the long-term effect of Congress’ recent elimination of the File and Suspend and Restricted Application claim strategies. That change means fewer claim strategies for retirees seeking to maximize Social Security income, effectively cutting $100,000 of lifetime benefits from a married couple’s retirement portfolio.
I believe the Congressional decision to eliminate these strategies was based on one paragraph of the 2015 federal budget proposal, which aimed to eliminate “aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement.” The truthfulness of this statement depends on what you mean by the words “upper income.” Means testing to obtain Social Security benefits could have the largest impact on the people who work hardest of any sector of the economy: middle-class professionals and small business owners. And, though no one knows definitively whether means testing will become a reality, there’s enough discussion nationwide now that the subject needs to be explored.
In 1934, President Franklin D. Roosevelt addressed the Social Security founding committee and said it “takes so very much money to provide even a moderate pension for everybody, that when the funds are raised by taxation only, a ‘means test’ must necessarily be made a condition of the grant of pensions.” In short, he said taxpayer-paid retirement benefits should go only to those who really need them.
I beg to differ. Retirees of all income levels have already paid for these options. The middle class used these claiming strategies and is the one class who needs them most. Plus, even if every Social Security beneficiary took advantage of these so-called “aggressive” claiming strategies, it would affect our federal budget by less than one-quarter of 1 percent.
According to the Natixis Retirement Savings Study, baby boomers aged 51 to 69 have saved only 20 percent of the funds they need to retire. This means a married couple has saved an average of $185,000 when spouses will need at least $1 million to carry them through the next 30 years. Thirty percent of Americans from the ages of 65 to 69 are still in the workforce, according to the U.S. Census Bureau, which likely means Medicare and Social Security are not covering basic living expenses for our older population.
Baby boomers are part of the “Sandwich Generation,” too. They still support millennial children, whose college costs rose more than 1,000 percent since 1980 and who are faced with a difficult job market. On the other end, boomers also often support aging parents with long-term health care costs or daily expenses. Twenty-one percent of U.S. seniors over age 75 still carry a mortgage, compared to 6 percent back in 1989. And after these fiscal responsibilities are over, boomers will need to take care of themselves.
Pundits are already exploring what Social Security means testing might look like. Under one recent plan posed in 2012 by David John, then of the conservative Heritage Foundation, high-income couples or individuals earning more than $55,000 in non-Social Security retirement income would see monthly benefits reduced. For every $1,000 of income they have over $55,000, Social Security benefits would be reduced by about 1.8 percent. So, if non-Social Security retirement income equaled $65,000, benefits would be reduced by 18 percent. In another means testing scenario posited by John, couples could see reduced benefits if they had non-Social Security income equaling $110,000. They would receive no Social Security benefits if outside income was over $165,000.
Don’t forget that by 2033, the Social Security program will be underfunded. If no action is taken before then, Social Security beneficiaries will take a 23 percent benefit cut. For some retirees, 85 percent of those benefits are already taxable. The Society of Actuaries reports that only half of Americans meet with a financial advisor. Those without a professional to guide them into retirement will either have to become experts on investing and tax law or watch in dismay as their nest eggs shrink over time.
The bottom line is, we don’t know if and when means testing will occur. But this has obviously been an option from the day the Social Security program was enacted. Don’t allow your clients to feel like the last one standing at musical chairs. Keep counseling them to earn, save, protect assets and invest.
David Reyes is founder of Reyes Financial Architecture of La Jolla, Calif.
