As peculiar as such a statement may appear at first glance it is a question that I hear repeatedly from my clients when I do their social security income maximization planning. In order to do any type of retirement income planning you have to make a number of assumptions including expected rates of return on investments, cost of living adjustments (COLA), withdrawal rates, anticipated tax rates and of course life expectancy. How long do you and your spouse expect to live?
As it turns out, most American's "underestimate" how long they expect to live. In fact, four in ten underestimate their life expectancy by more than five years. Based on current mortality statistics, if a man reaches age 65 he can expect, on average, to live to approximately age 87. If a woman reaches age 65 she can expect to live, on average, to approximately age 89.
Clearly, your individual life expectancy is affected by your personal health, family history, lifestyle and numerous other factors. The implications of life expectancy on retirement planning, however, are significant. Mortality risk in retirement is not the risk of dying young and not being able to enjoy your money but rather the risk of living too long and outliving your money.
With respect to social security retirement income planning, faulty life expectancy assumptions can have a significant affect on deciding what would be the best age to file for social security benefits. By filing too early, you may significantly reduce your eligible social security income in retirement. For example, simply by deferring the start of your social security benefits from age 66 to age 70 you can receive a guaranteed increase in your social security income by 32% plus COLA, which has historically added an additional 2.5% per year to social security income. The compounded effect of COLA adjustments significantly increases your annual and cumulative benefits in retirement.
The effects of underestimating life expectancy, however, can be potentially devastating to your retirement plan. Most social security recipients who filed early say they regret that they did. Unfortunately, once you file, very few options are available to improve your benefits.
Most people approach retirement longing for the day that they can walk away from work for good and start enjoying life. However, when you stop working, not only does your paycheck stop but the likelihood of re-entering the workforce later on, in any meaningful financial way, becomes extremely difficult as well.
Many retirees regret retiring from work to early. They realize later on that a couple of extra years of work not only allows for additional savings it also shortens the number of years needed to finance retirement. It also allows you to defer the start of your social security benefits and therefore provides for a permanently higher lifetime benefit.
When reviewing your retirement assets and their ability to protect you against the risk of living too long, there are some fundamental risks inherent in these assets which are not shared by social security. For example, if you had a substantial balance in your 401(k) account, and it was invested in a diversified portfolio of stocks and bonds, you have to make a number of assumptions regarding that portfolio's performance over the life of that investment. Looking at historical average rates of return is not enough to identify the likelihood that these assets will last a lifetime.
For example, one factor that must be considered is "sequence of return risk". Simply put, if you start your retirement in a period when the stock market experiences a sharp decline then you run a much greater risk of outliving your money. Say you retired in 2008 and your account value fell by 50%. To bring your account value back to it's original value you would have to have a 100% increase in your account. That's because your account is now worth half of what it was. Furthermore, you are now retired and drawing down monthly on this account value in order to provide income in retirement. That will put added pressure on the ability for your portfolio to recover.
This however highlights yet another advantage that social security provides that many other retirement assets do not. Social security is a pension plan that's guaranteed to pay you for as long as you live, insulated from the risks of the stock market. In addition, the COLA adjustments built into the program help provide for protection against inflation in retirement.
As such, it may be prudent to consider drawing down on other retirement investments in order to delay the start of social security thereby increasing this guaranteed lifetime income check. Social security may provide one of the strongest hedges against longevity risk when compared to your other retirement assets. Certainly you should consult with your financial advisor regarding other investments such as SPIA's (single premium immediate annuities) and other annuities which may also provide guaranteed lifetime income.
The many risks that individuals face in retirement (market risk, inflation, health issues, interest rates etc.) are all magnified by longevity risk. As modern medicine continues to improve at an increasing rate, the likelihood is that life expectancy will also continue to increase. With that, we have to be even more diligent in managing and structuring our retirement assets to meet the financial challenges of living a long life. A properly designed social security income maximization plan can provide a strong foundation on which to build your overall retirement.
Today's retirement income landscape is precarious indeed, if not a crisis. In addition to economic and demographic changes, public and private employers have systematically shifted the risk and responsibility of planning and preparing for retirement from themselves to the individual. Most workers are indeed ill equipped to manage these responsibilities due to, among other things, lack of education in financial planning, insufficient savings habits and an increasing cost of living (especially in health care and education). In fact, research indicates that over half of retirees are at risk of being unable to maintain their pre-retirement standard of living.
There are, however, a number of tools available to deal with this growing retirement crisis. One of the most effective strategies is to work longer than what is often considered the target retirement age of 65. Planning to retire at this relatively "young" age may no longer be economically viable nor, many would argue, beneficial from the standpoint of keeping your mind and spirit healthy.
Extending your working years even by a few years, perhaps into your late sixties or to age seventy, can have an enormous economic impact in reducing your risk of outliving your money in retirement. Studies have shown that the fear of outliving your money is greater than the fear of dying so addressing this issue is critical.
The additional income provided by extending your working years can not only provide additional savings but it can also allow your current savings to continue to grow. It will also shorten the number of years that you will need to provide retirement income without having the benefit of a paycheck.
Social security, already a critical component of retirement income, can play an enormous role in addressing the concerns surrounding the issue of outliving your money. By delaying the start of social security benefits your monthly retirement benefits can be increased significantly. By working a few more years, you may now be able to afford the option of delaying the start of social security benefits. This will allow you to maximize your social security benefits which, for most people is the only pension plan that they will have in retirement.
If you delay the start of your social security benefits from age 62 to 70 you can increase your guaranteed monthly lifetime income payments by 76% plus cost of living adjustments (COLA). If you reach age 66, by delaying the start of benefits from age 66 to 70, your benefits can increase by 8% per year (guaranteed) plus COLA. That could amount to as much as a 40% increase in your social security retirement check (assuming a 2% annual COLA) in just 4 short years. Since your social security benefits are based on your highest 35 years of averaged indexed monthly earnings, the opportunity to permanently increase your lifetime retirement check by 40% is an enormous opportunity at a time when few such options are available.
Not only will social security guarantee income for as long as you live, it increases your benefits with COLA, which is so important in helping to protect you from the ravages of inflation. Since we have been experiencing a protracted low interest rate environment for the past seven years, many people have forgotten how devastating inflation can be to their cost of living. The effects of inflation can be especially acute in your retirement years which makes the social security COLA benefit even more valuable.
For couples, by delaying the start of the social security benefits for the spouse with the higher benefit amount (typically the husband) you also therefore increase the "survivor benefit" for the spouse with the lower benefit amount (typically the wife). This is a critical consideration since women typically live longer than men and, as a widow, they will then be living on just one social security check and not two. It is also important to note that the survivor check is protected by COLA.
In summary, as life expectancies continue to increase and retirement years turn into retirement decades, the importance of maximizing retirement income is more critical than ever. Social security is uniquely designed with features and benefits to help protect you from many of the financial risks inherent in retirement. It's a complex system for sure but, by working with a social security income specialist, you can navigate your way through the system and design a plan to maximize your benefits and integrate these benefits with your other retirement assets in a tax efficient manner. You can then enjoy your hard earned retirement years with greater financial security and peace of mind.
Many people race in as early as age 62 to file for their social security retirement benefits. After all, they surmise, this is the smartest thing to do, right? Sure, most financial advisors encourage people to defer taking benefits up to as late as age 70, if they can afford to, in order to maximize their benefit payments. Nevertheless, many people have opinions such as "I paid into this system my whole life and I want my money back as soon as possible". "What if I die young and I don't get all the money I paid in back"? "What if social security goes bankrupt"?
Then, a few years go by and they realize "maybe I jumped the gun". My spouse and I might have a 20-30 year retirement and maximizing our guaranteed lifetime social security benefit payments may have been a better decision. Although they are concerned that social security may go bankrupt they reassess this view and decide that it probably won't happen in their lifetime. More than anything, however, they may now be more acutely concerned about the risk of outliving their money.
So now what? Is there anything they can do?
Well, once you file for benefits there are few options available to remedy your situation. This is why it is so important to review as many possible options available to you BEFORE locking yourself into what may be a sub-optimal filing strategy.
One example of this was a couple who were referred to me a year ago. They had both filed at age 62 and we're both now age 66. They realized that by filing so early they had left tens of thousands of dollars in eligible benefits on the table. In addition they could no longer take advantage of some potential spousal benefits, other little known filing strategies available to increase retirement benefits and other "free money" available in the social security system to maximize lifetime income.
Nevertheless, I was able to share one strategy with them that was now available since they had both obtained their full retirement age (FRA), which for them was age 66. Even though they had filed early and taken reduced benefits, they could each now opt to suspend receipt of their benefits up to age 70 if they chose. By doing so they would each be eligible to receive an 8% guaranteed annual increase in their benefits from age 66-70, plus any cost of living adjustments. Once they reached age 70 they could once again resume receipt of their benefits which would have increased by 32% plus COLA.
This strategy was definitely worth considering. Then the husband shared a very personal health matter with me. He had been diagnosed with cancer and was undergoing chemotherapy and radiation treatments to hopefully put the cancer in remission. Now what should I do, he asked?
He had liked my suggestion that they suspend their benefits in order to increase their payout amounts at age 70 and thereafter. He said he was going to tell his wife to suspend her benefits to allow them to increase and he was going to continue to receive his benefits. Actually, I said, you are better off doing the exact opposite. I suggested that his wife continue to receive her benefits and he should suspend his benefits. This is because his benefit amount was higher than hers. By letting his benefits grow to age 70 he would not only maximize his own benefit but, by doing so, he would also be maximizing her survivor benefit. Since she was statistically likely to outlive him, she would eventually switch from her own lower benefit to his higher benefit, assuming he pre-deceased her. He liked the idea and set out to do just last. Knowing that she would receive maximum survivor income in retirement helped to put his mind at ease.
In summary, the best way to determine which social security filing strategy would be most suitable for your own situation would be to work with a social security specialist who will do, among other things, review all your available options. That review should include a detailed "break-even analysis" and also a "tax minimization analysis". In addition, by co-ordinating your social security benefits to suit your individual situation, you can obtain a customized filing strategy that addresses all your specific needs and circumstances.
Early filers should note that it may not be too late to revisit your social security options and identify possible strategies to further maximize your benefits. The impact of a few potential adjustments to your filing strategy could result in an increase of tens of thousands or even hundreds of thousands of dollars in increased lifetime social security benefits and a filing strategy that best suits your needs and objectives.
When most people approach retirement and take inventory of their "retirement assets" they are sure to include their IRA's, 401(k), stocks, bonds and mutual funds etc. Remarkably, however, they tend not to include what is arguably (for the majority of retirees) their largest retirement asset. That "asset" is their social security retirement benefit. It typically accounts for 30-60% of a retiree's retirement income and yet little attention is given to it's features and benefits and optimal ways to maximize the value of this critically important federally guaranteed retirement asset.
Most retirees today do not have a traditional pension plan provided by their prior employer(s). These types of pensions have typically been replaced by 401(k)'s and IRA's. But for those who do have such a pension plan they are certain to know all the details of their plan. They are generally clear on how much they will receive, when payments will begin, what happens to their benefit if they pre-decease their spouse etc..
You may not have one of these corporate pensions but you likely do qualify for a valuable pension plan that you have probably given little thought to as yet. That pension plan is called social security. This ubiquitous retirement program is rich in benefits, is guaranteed by the federal government, provides lifetime income which increases with inflation and yet most people know very little about it nor how to maximize benefits. Social security is often overlooked when detailing one's assets on a household balance sheet but it certainly shouldn't be.
One reason it tends to be excluded is that, as a guaranteed income stream that cannot otherwise be liquidated or reinvested, it doesn't have the characteristics of other retirement assets. It is, however, every bit as valuable (perhaps even more valuable) an "asset" as an IRA or 401(k).
Social security, unlike traditional retirement assets, is uniquely impacted by it's assumptions. For example, it's value can increase in a high inflation environment due to available cost of living adjustments which will permanently increase monthly benefit payments. Unlike other assets, it's lifetime value can be significantly increased if you know how to maneuver through the 2,700 rules which govern this program. In fact, knowing how to maximize benefits can add tens of thousands or even hundreds of thousands of dollars in additional lifetime benefits. Seeking out a social security specialist may be critical in order to find out just how to obtain all the benefits you are entitled to.
Assuming a typical couple enjoys a 20 year retirement, and they know how to maximize their available benefits, they can expect to receive as much as $1 million (or more!) in lifetime benefits. How is it possible then that people would exclude a million asset from their household balance sheet?
One reason may be that the characteristics of this "asset" differ significantly from other retirement assets. These differences, however, should not only be embraced but they should be leveraged. Social security benefits are uniquely capable of hedging many risks in retirement that traditional portfolios cannot. For example, you could potentially outlive your 401(k) or IRA assets but you can't outlive social security. The cost of living adjustments available with social security benefits provide a meaningful hedge against inflation. Maximizing the value of this guaranteed payment stream (through sophisticated filing strategies ) and co-ordinating a drawdown strategy of your other retirement assets with social security payments can help to ensure a healthy retirement income.
It's time to take a closer look at what may arguably be your largest and most valuable retirement "asset". It's not just a static number on a government generated statement that you scan once a year and discard. Social security is a complex retirement income program rich in features and benefits which, if maximized, can enhance your retirement income and is uniquely capable of hedging risks in retirement that your other assets cannot.
Ash Ahluwalia, NSSA, CCSCA, MBA