07/15/2015 00:14
What You Need To Know To Maximize Your Retirement Income
Do you wonder whether Social Security will be there for you when you’re ready to retire? If you’re a Baby Boomer, join the club.
Boomers want to know how much they can expect to receive from Social Security, but most don’t know when they should apply or how to maximize their benefits. More importantly, Boomers also wonder whether Social Security benefits will be enough to live on during retirement.
Read on, so you can stop wondering and start planning.
THE VALUE OF SOCIAL SECURITY
Before we discuss strategies, it’s crucial to understand the value of Social Security and what it can mean for you.
Social Security basically offers a stream of income that you cannot outlive and it offers annual inflation adjustments, familiarly known as COLAs (Cost Of Living Adjustments).
For example, if your monthly Social Security income today is $2,000 and the annual COLAs are 2.8%, in 20 years your monthly Social Security benefit will be $3,474.
Besides the monthly benefit you may be entitled to, based on your own work records, Social Security also offers survivor benefits. To illustrate, if a married woman receiving a monthly benefit of $2,000 dies, her surviving husband, who only had a monthly benefit of $1,200, can now step up and begin receiving his deceased wife’s $2,000 monthly benefit rather than his own.
Will Benefits Be Available When I Need Them?
The top concern in most Boomers’ minds is whether Social Security will be there for them to collect when they need it. With so many Americans approaching or beginning their retirement years, the concern is based on the fact that not enough money is being paid into the Social Security trust fund. In response to this concern, reform proposals are currently being studied to avert this potential disaster.
To restore solvency to the Social Security system, there is talk about increasing the “normal” retirement age (currently 66) and lowering the Social Security benefit for future retirees. Reducing the COLAs is also something to consider as well as increasing the maximum earnings that are subject to Social Security taxation (currently $106,800). That said, Boomers are not likely to be impacted by Social Security reforms, since they would not apply retroactively.
How Much Will I Get?
The amount of Social Security to which each Baby Boomer is entitled depends upon their individual earnings over their respective working careers. Your monthly benefit will also be affected by the age at which you choose to apply for your benefits. Social Security is calculated by looking at your highest 35 years of earnings. Any “missing” years count as zeros.
Your earnings are then indexed for inflation and averaged (referred to as Average Indexed Monthly Earnings, or AIME). A formula is applied to your AIME to calculate your individual primary insurance amount (your PIA). The PIA is the amount you will receive at your full retirement age, which is 66 for Baby Boomers.
Your monthly benefit is then increased each year based on COLAs. Of course, if you apply for your Social Security benefits early, your monthly benefit will be lower. If you choose to apply for your Social Security benefits after your full retirement age, then you will earn delayed credits. For example, if you apply at age 66 and your PIA is $2,230, you will receive 100% of that PIA benefit. If you wait to apply until you turn 70 (assuming the same $2,230 PIA) you will receive 132% of your PIA benefit without factoring in any COLAs.
This chart illustrates an example of what hypothetical Social Security retirement benefits look like, assuming a PIA of $2,230 and annual 2.8% COLAs.
SPOUSAL BENEFITS
There are rules regarding Social Security spousal benefits that some Baby Boomers may not be aware of. A spouse will receive the higher of his or her own benefit or their spousal benefit. The spousal benefit is 1⁄2 of the higher-earning spouse’s benefit.
To claim the spousal benefit, however, the higher earning spouse must have applied for his or her benefits and the lower-earning spouse must be at least age 62 for a reduced benefit, or 66 to receive a full benefit. There are no delayed credits on spousal benefits after age 66.
Here’s an illustration: Let’s say Harry’s benefit is $2,000 and Callista’s benefit is $800. That means Callista’s “spousal benefit” would be $1,000. She can receive her spousal benefit instead of her own, since the amount is higher than her individual benefit.
What If I’m Divorced?
The divorced spousal benefit is the same as the benefit for married spouses, as long as the marriage lasted at least 10 years and the ex-spouse receiving the spousal benefit has not re-married.
The interesting part here is that more than one ex-spouse can receive spousal benefits on the same worker’s record! Any spousal benefits paid to one ex-spouse will not impact any benefit payments made to the worker, the worker’s current spouse or other former spouses. The minute an ex-spouse re-marries, the divorced spousal benefits stop and cannot be reclaimed even if the new marriage doesn’t last. On a side note, workers are not notified when an ex-spouse applies for spousal benefits as a matter of public policy to avoid potential conflicts.
SURVIVOR BENEFITS
What if your spouse passes away? How will it impact your Social Security benefit?
If your spouse dies, you will be able to collect the higher of your own benefit or your deceased spouse’s benefit. The rules for survivor benefits are as follows: the couple must be a legally married man and woman; common law marriages will only be recognized under specific circumstances. Unless the death was due to a genuine accident, the couple must have been married for at least 9 months and the survivor must be at least 60 years old to be eligible for the reduced benefit (age 50 if disabled).
For example, Jack and Jill are married, but Jack dies in a hiking accident (it was a steep hill). Jack’s benefit is $2,000 and Jill’s is $1,200. Jill’s survivor benefit kicks in and her benefit automatically gets replaced with his $2,000 benefit because it’s higher. In the event of the death of a divorced spouse, the survivor benefit will only be available if the marriage lasts at least 10 years.
WHAT IS THE BEST TIME TO APPLY?
There is no catch-all “best” age to apply for Social Security benefits, since it varies based on individual circumstances.
Some factors to consider:
- your life expectancy based on your individual health status
- your need for income during your retirement
- whether you intend to work during your retirement years
- whether you anticipate any survivor needs
The most obvious perk of delaying your benefit is that you will have an opportunity to collect more money. If you apply early, your benefit not only starts lower, but stays lower for the rest of your life—it does not increase when you turn 66. Remember, COLAs will increase your benefit and the longer you expect to live, the more beneficial it is for you to delay your Social Security benefits. Also keep in mind that your decision will impact survivor benefits, so it’s an important consideration in planning your strategy, since a delay will increase survivor benefits as well.
WILL SOCIAL SECURITY BE ENOUGH TO LIVE ON?
The real challenge is to determine whether your anticipated Social Security income stream will be enough for you. If you are still able to work, you can maximize your benefits by improving your earnings record.
If you’re not sure what to expect, look at your last Social Security statement and see what your estimated benefit is, whether it is accurate, whether there any years missing, and whether you’ll be able to improve your benefit by working longer and delaying retirement.
If you are married, be sure to coordinate spousal benefits so that you can both maximize your collective benefits.
There is also a “file and suspend” strategy that you and your spouse may elect to implement. At full retirement age, a higher-earning spouse can apply for Social Security benefits and later ask that the claim be suspended. In the meantime, the lower-earning spouse applies for a spousal benefit. The higher-earning spouse then re-claims the benefit at age 70. This creates an opportunity for a lower-earning spouse to receive higher benefits while the higher-earning spouse continues to earn delayed credits, thereby increasing the higher-earning spouse’s benefit after it is “switched” back on at age 70.
The precise application language for the file-and-suspend strategy is to say that the higher-earning spouse is “restricting” his or her application to his or her spousal benefit. Also, only one spouse may do this—both spouses are not permitted to use a spousal benefit on each other. Be aware that you cannot implement a file-and-suspend strategy before full retirement age!
Minimizing Taxation
Social Security benefits are not tax-free. There are ways to minimize taxation of your benefits, such as reducing other income with tax-advantaged investments.
It’s important to emphasize that municipal bonds will not result in minimizing taxes on Social Security benefits—other tax-advantaged investments must be used to help reduce other income.
If you have an IRA, you need to take into consideration your “required minimum distribution” (RMD) and how it may increase your tax bracket.
5 KEY RETIREMENT POINTS TO REMEMBER
When you are deciding when you should begin your Social Security benefit based on your personal circumstance, there are some important things to keep in mind.
- Develop an overall retirement income plan: consider your life expectancy/health, projected income needs, whether you plan to continue working, and possible survivor needs.
- If you apply for your Social Security benefit early, your benefit will not only start lower but it will stay lower for the rest of your life. Contrary to a myth circulating out there, your Social Security benefit does not go up when you reach age 66. COLAs will magnify the impact of your early or delayed retirement and the longer you expect to live, the more beneficial it is to delay your benefits.
- If married, you need to coordinate your spousal benefits to maximize your benefits.
- Your decision to start your Social Security benefit impacts survivor benefits as well—delaying your own benefits may give survivors more income.
- If you do not think your Social Security benefits will be enough to live on, consider other strategies that you may need to explore to supplement your projected benefit.
Need Help Forming a Plan?
A spousal planning analysis can help you and your spouse determine which of the various Social Security strategies may work best for you in your particular circumstance. Your overall retirement income plan should consider Social Security in the context of pensions, IRAs and 401(k)s, your investment portfolio and work-related issues in order to maximize your retirement income.
If you’d like to learn more about any of these strategies or get an evaluation of your retirement situation, talk to the professionals at Ben Guillory Insurance. Let us help you protect your nest egg and maximize your retirement income!