Social Security 1: Planning Is Crucial

The following is a guest post from Marotta Asset Management.

Social Security benefits can represent a big stack of cash. A typical monthly benefit of $2,200 has a present value well over $500,000. Consider all your Social Security options carefully to avoid making a costly mistake.

Like all government law, Social Security is not a simple piece of legislation. Since the Social Security Act became law in 1935, hundreds of amendments have added to the complexity. To make the best decision, you must consider health, income before retirement, income during retirement and taxes.

Retirees cannot rely on commonly held beliefs. Don't assume that simplistic rules such as "Always file for early benefits" or "You need to stop working to receive benefits" are correct. There are specific cases that break every rule of thumb. And these one-size-fits-all answers leave many retirees failing to maximize the benefits they have earned.

At least four methods are used when electing how to take Social Security. And if you are married, the two of you can mix and match these in more than 16 different ways. Each one results in a different cash flow. By using the cash flows and the time value of money, you can determine which method will result in the highest net present value and offer you the best maximum value.

These methods differ significantly. They depend on your historical earnings, marital or divorce status, continued work in retirement, longevity and rates of return. The choice may be worth $250,000 of income or more. Filing options include "early filing," "standard filing," "delayed filing," "file and suspend," and many combinations of these options for married couples. It is certainly worth careful study and analysis of each one. Yet a majority of Americans make their choice impulsively and emotionally.

The decision is even more critical for women. For 42% of single women older than 62, Social Security is their sole source of income. Women on average outlive men. Thus planning for retirement is much easier for men, who tend to have more assets and die young. Widows are twice as likely to live under the poverty line as men who have lost their wives. And the poverty rate for elderly single women is 23% compared with just 5% for retired couples.

Couples must take their joint longevity into account before either one files for benefits. The person with the longer life expectancy will inherit either a wise or a foolish decision that will last a lifetime. Given that a husband's benefits are often higher and the wife's life expectancy longer, each case needs to be analyzed carefully.

Unfortunately, many people file after considering only one or two options in isolation. The Social Security Administration's new online filing system enables quick decision making. People can easily submit their request without any professional advice or planning.

Before filing, then, you obviously should be informed about all the options. To begin, you need to know your personal Social Security earnings and the projected benefits for both you and your spouse. You can request an estimate at www.ssa.gov/estimator and then print the results. Or call the Social Security Administration at 800-772-1213. You can also get a copy of "Retirement Benefits" (Publication No. 05-10035) online.

Social Security planning is crucial for everyone. People with significant assets should carefully consider both the lifetime benefits and tax consequences of Social Security in light of their overall portfolio strategy. For the less well off, Social Security benefits will dictate their retirement lifestyle. Proper planning could well determine what they can afford to eat.

Click here to read part 2 of this series.

Comments

[Strick]

Most importantly don't use the local social security office as your main source of information or assume your benefits are calculated correctly. Of my (admittedly small) sample of parents and their 5 closest sets of friends, half have received incorrect checks or incorrect crucial information. Luckily my father knew enough to question, unluckily he knew more than everyone at the SS office, and it took a year and a half for everything to be corrected.

Do your parents a favor and be a little nosey about their benefits if you know they are not experts on this stuff.

[SJ@6bubbles]

"Thus planning for retirement is much easier for men, who tend to have more assets and die young."

This quote made me laugh inside... true but not happy reason =)

[indi500fan]

2200 bucks / month is hardly a "typical" benefit
it's the benefit a person like myself would get after earning the max amount for 40 yrs and retiring at age 66.

One important part of the law not widely known:
up to age 70 you can do a full reset of social security by paying back the amount you have collected to that point and starting over at a higher monthly amount

[melissa]

My mom ended up a widow at age 59 1/2 and just began receiving my dad's benefit at age 62. I have no idea what options she had if she any.... Does the reset at age 70 apply to her? Maybe we can help her at that time so she can draw whatever max she's entitled to.

[David]

If your Mom and Dad worked enough to qualify for benefits - SSA SHOULD HAVE given her reduced benefits on the account that would pay her the LESSER amount. Then at full retirement age she should recontact SSA and they will convert her to the HIGHER benefit at an unreduced benefit payment. This could increase her monthly benefit payment SUBSTANTIALLY. However, the field office may not have done this correctly - you should contact them and ask if they did.

If your Mom did not work enough to qualify for a benefit based upon her own earnings - then your Mom's benefit will NOT increase when she reaches full retirment age.

I work for SSA.

[c]

People definitely need more education about social security...Those coming of age...Babyboomers in this group for sure. Making sure you qualify at a younger age is really important. One of my favorite sites for learning about living and money is John Agno's blog...I highly recommend reading all he has to say about living well during retirement etc. Keeping as informed as possible makes life easier during these trying times.

[Mule Skinner]

If you are about to get divorced, be aware that 10 years of marriage is the threshold for claiming Social Security against an ex-spouse. There is a lady in the next block from me who divorced after nine and a half years and therefore cannot collect on the ex's account. She is now 70 and gets less than she would otherwise.

Note that there is no cost to the ex, even though I used the word "against" above.

[David]

Mule Skinner is correct - there is no penalty - 3 ex wifes and a current wife can all draw the same amount of a husband/exhusbands account and he will get the same amount whether all or none claim on his account. The ex wife/wife all get the same amount whether 1 or say 4 are claiming on his account.

[Ex-servicemen in chennai]

social security much important now a days... if divorced men can survive easily lady cant... some brave women can survive but some... not some but more women cant... who grow near mom... so social security much needed...

john

Ex-servicemen in chennai