It’s commonplace to dismiss Social Security as a fairly straightforward retirement benefit. But making that assumption can be costly.
While payments vary according to earning history and how long you live, individuals often collect hundreds of thousands of dollars in Social Security benefits over their lifetimes, and couples can rake in well over $1 million. That’s a lot of money. But getting your hands on it isn’t as simple as you may think. Maxing out on your benefits often means navigating a system that can be counterintuitive, confusing and sometimes downright byzantine.
Consider the case of one Massachusetts couple who got stuck in the system. A 67-year-old man followed his financial planner’s advice to file for Social Security and then immediately suspend those benefits. By filing, he made it possible for his 66-year-old wife to immediately claim spousal benefits of $1,065 a month, an amount equal to half of what he could collect at his full retirement age. By suspending those benefits until his intended retirement at age 70, he will boost his benefit by at least 32 percent. Even without factoring in Social Security's built-in inflation increases, the wife’s four years of spousal benefits alone add up to more than $50,000 of additional income.
But a supervisor at the local Social Security office didn’t understand the strategy and cancelled the suspension of benefits, says Barbara Nevils, the couple’s advisor. The husband started receiving checks, and it took several months and lots of patience to correct the mistake. The husband eventually managed to suspend his benefits after paying back the money already received.
As aging baby boomers start calculating their Social Security benefits, many are recognizing there’s more to it than simply filling out a form. They have to navigate through more than 2,700 rules governing its operations and thousands of more rules that attempt to explain the initial 2,700, says Laurence Kotlikoff, a professor of economics at Boston University. “It is an incredibly complex system.”
Here are three strategies to help insure that you don’t leave money on the table:
1. Wait until 70.
Making the most of your benefits depends largely on when people press that benefits start button. That’s because the size of the monthly check — which can start arriving when someone turns 62 — goes up steadily the longer a person waits to start collecting benefits, with the maximum benefit accruing at age 70.
Here’s how it works: At age 62, you’ll get only 75 percent of what you could collect at full retirement age, which is 66 for people born between 1943 and 1955, and gradually rises until it hits 67 for anyone born in 1960 or later.
Delay benefits beyond full retirement age and your monthly check will continue to grow. You get about 8 percent more for each year you wait until age 70. That’s a better return than many retirees are getting on their investments, and it comes with built-in inflation protection. “By waiting until 70 an individual can get almost twice the purchasing power,” says Christine Fahlund, a senior financial planner with mutual fund company T. Rowe Price.
Of course, not everybody can wait until 70. Current economic woes and high levels of unemployment are forcing many to start those Social Security checks as soon as possible. Others don’t actually need the benefits, but they file early because they figure they won’t live long enough to hit the break-even point; others fear that the system will run out of money before they get to collect their share. And that, says Boston University’s Kotlikoff, misses the point.
Government actuarial tables show that a 65-year-old person today has a life expectancy of 83.4 years. But those tables are just averages, says Kotlikoff. “We are not all going to die on time,” he says, noting that people need to focus on their maximum life span instead of their life expectancy. That’s why the Social Security software that he developed uses a default age of 100. Kotlikoff says it makes more sense to view Social Security as a longevity insurance policy that locks in the highest level of monthly income for life. “Even someone who is a high-wage earner is very dependent on Social Security,” he says.
2. If you’re married, max out on spousal benefits.
Under certain conditions a husband or wife can claim benefits through their spouse. Spousal benefits were originally designed to provide a non-working spouse who stayed home and took care of the kids with a source of retirement income. But today, two-income spouses can use these rules to bring home additional income while waiting until age 70 to claim their own benefits. Then, too, there are survivor benefits, which hit their maximum if the first-to-die spouse waited until 70 to claim benefits, and if the survivor makes that claim at full retirement age or older.
The Social Security decisions that couples make are particularly complex, since they need to take into account not only spousal benefits but also the benefits available to the surviving spouse. And different strategies can produce very different results.
Consider a couple, both age 61, where the wife earns $53,000 and the husband earns $84,000. The wife lives to age 95, while the husband dies at age 80. If the couple both took Social Security at age 62, the two would collect $1.24 million over their lifetimes, says T. Rowe Price’s Fahlund. But if one of them delayed the start of their benefits to age 70, the value of their combined benefits would jump to $1.79 million. And if the couple used the file-and-suspend strategy so that the wife could qualify for spousal benefits at age 66 while claiming her own benefits at 70, the total would jump to $1.93 million. The difference: nearly $700,00.
3. Hit the reset button.
What if you took your benefits too early and now wish you had waited? Another strategy calls for people who took benefits at age 62 to retroactively cancel that decision, instead claiming the benefits due to them at full retirement age or later. In order to do this, however, the recipient must pay back all of their Social Security benefits already collected, including the amount deducted for Medicare premiums. And people interested in this approach may have a limited window of opportunity, if Social Security eliminates this option, as some believe it will.
Do Your Homework
Such complicated strategies aren’t always a slam dunk, says Henry K. Hebeler, a retired Boeing executive who built a second career advising people about retirement planning. Well-meaning people at the local Social Security offices may not have encountered some of these strategies and may initially disallow them, he says. “You have to be persistent.” A good computer program that carefully calculates retirement, spousal and survivor benefits is one option, while hiring a skilled financial planner is another. People may balk at paying $500 or $1,000 for advice, but Hebeler sees it as a small price to pay given the potential return on the investment. “After all,” he says, “you are talking about a financial decision that’s huge.”