Social Security – It’s about Time and Money

social security time and moneyWill you run out of money before running out of time?  Your social security strategy can be the difference!  If you are reading this, chances are your BIGGEST concern in regards to retirement income planning is outliving your money in retirement.  Having counseled and advised thousands of retirees and pre-retirees around the country I can tell you without a shadow of a doubt you are not alone.  In this second part of our four part series on social security and it’s impact on retirement income planning we will look into how your life expectancy and other circumstances can dictate when you should retire as well as when you should begin collecting benefits. In the last article we learned the vast majority of retirees are dependent on Social Security to meet their everyday needs.  Therefore, your social security strategy can be the difference between retirement success and failure.

Assessing your current situation

Part of assembling a great retirement game plan is assessing your current situation.  One of the first things we consider when creating a retirement plan for our clients is their life expectancy.  The good news is people are living longer lives. The bad news…. people are living longer lives.  The new mortality tables released in October by the non-profit Society of Actuaries show the average life expectancy of a 65-year old woman in the United States has increased to 88.8 and males are now expected to live to 86.6.  The average 65-year-old couple now has over a 50% chance of one person living past 90. Your personal life expectancy can and should be determined based on your age, personal health, habits, and family history.  This new retirement reality means that the vast majority of retirees are spending at least 20 years of their lives in retirement.  It is now more important than ever for you to consider this new reality and it’s impact on your retirement plans and income strategy.  Why?  Because a greater amount of resources are needed to avoid running out of money before running out of time!

Exploring the options for you

This need for greater resources coupled with potential changes in social security benefits means we need to learn how to maximize those benefits.  In order to do that we first need to explore our basic options.  Although you can begin taking benefits as early as age 62 you will receive a reduced amount.  In the near future this amount will fall to just 70% of what you would collect if you waited until full-retirement age.  Full-retirement age is currently between the ages of 66-67 and is dependent on the year you were born. By delaying benefits up to age 70 you can receive a higher benefit amount due to delayed work credits.  Every year you delay collecting benefits beyond your full retirement age can increase your Social Security check by about 8%.  Currently there are no further benefits for delay beyond age 70.

The shorter your life expectancy the more likely you would benefit from taking benefits earlier.  The longer your life expectancy the more likely it would benefit you to wait.  Why? Every year you delay receiving benefits is a years’ worth of benefits that have to be made up with higher payouts in future years. Another consideration is the returns that are sacrificed on the money that has to be withdrawn from investment assets while waiting to take benefits.   This rate of return will vary according to your plan allocation. You need to run calculations for each option until you find the one that results in the greatest net lifetime payout for your life expectancy.

If you are considering taking benefits prior to your full retirement age and you plan on working part-time or full-time you need to also be aware of the penalties for doing so.  For every $2 you earn above certain limits (the income level in 2014 is $15,480) your social security benefits will be reduced by $1.  In the year you reach full retirement age, benefits are reduced $1 for every $3 above a higher income threshold, which is $41,400 in 2014.  Once you reach full retirement age there are no further deductions.  Therefore, it is very important to factor this into your calculations as the impact from these reductions prior to full retirement age can certainly alter which strategy is best for you.

Exploring the options to include your spouse

Up until now everything discussed has been based on looking solely at your benefits and basic options.  When you add a spouse, their life expectancy, and their earnings history into the mix things become a little more complicated.  For example if your social security benefit is expected to be double the benefit of your spouse and your spouse is expected to live several years beyond the end of your plan (nice way of saying your death) delaying your benefits may be the best decision.  Why? Because when you die your spouse gets the greater of the two benefits for the rest of his/her life, which can make a huge difference in total payouts over your combined life expectancies.  In the process of comprehensive retirement planning, it is not uncommon for us to uncover more complex strategies for couples resulting in over $100,000 in additional lifetime social security payouts paying for their plans several times over.   I have seen on more than one occasion where these more complex strategies, also known as social security maximization strategies have literally made the difference between a couple’s probability of success or failure in retirement.  In my next post I will touch on some of these strategies.

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