Maximizing Your Clients’ Social Security
By Matthew Allen, CEO, Social Security Advisors
About 70 percent of Americans fail to make a smart Social Security decision and instead just guess or claim early. On average, this costs about $120,000 per couple and amounts to about $25 billion per year in lost benefits.
Why is this happening? Social Security is complicated. There are 2,728 Social Security rules, and there are over 9,200 strategies for the typical couple.
Why is it essential to maximize benefits for clients? They can:
1. Receive a higher Social Security benefit by pursuing a smart strategy.
2. Increase their standard of living and their financial flexibility.
3. Increase their retirement security, primarily because of the way survivor benefits work.
4. Increase the longevity protection for the survivor in a couple.
5. Receive an inflation-protected payment with automatic cost-of-living adjustments each year.
6. Have a consistent stream of income that is not market-dependent.
7. Get every penny they deserve – they deserve it.
Many people think they can just go to the Social Security Administration to get advice. Social Security is legally prohibited from providing advice. They also don’t have the tools available to be able to make a quality recommendation.
Claiming Social Security Benefits
Benefits are available for singles, spouses, divorced spouses, widows, and children as well in some cases. One’s Social Security benefit is based on their highest 35 years of earnings.
The earliest that anyone can claim a Social Security retirement benefit is at age 62, and they can earn delayed retirement credits for each year they defer, all the way up until age 70. In general, these delayed retirement credits accumulate at the rate of roughly 8% per year. Full retirement age is 66 for most people; it is also a bit of a magic age in the sense that it opens a variety of other Social Security options when someone reaches that age.
When your clients can claim Social Security is very different from when they should. The standard claiming ages on Social Security statements of 62, 66, or 70 are almost never the optimal times to claim.
Client’s can look for their full retirement age on their Social Security statement. For someone born in 1960 or after, their full retirement age of 67.
Social Security Claiming Strategies
Many folks do not take the time to think about or recognize that there are strategies for claiming benefits. Life expectancy plays a significant role.
It is crucial for married couples to pursue this decision as a team. They want to be functioning together and coordinating their benefits. The most significant mistake most couples make is they think about their situation without considering their spouse.
The Bipartisan Budget Act of November 2015 created two different buckets of beneficiaries; those born before January 1, 1954, and those born after. Those born before that date still qualify for some of the old Social Security rules, such as the Restricted Application, which gives someone the ability to claim a spousal benefit only, while they continue to accrue delayed retirement credits on their record.
An example is a married couple, John and Susan. John is 66 and Susan is 62. Both are entitled to a full retirement age amount of $2,000 a month.
Under the restricted application, Susan would file on her own record first in order for John to file for the restricted application, because a spouse cannot get a spousal benefit until the primary worker files. Susan’s benefit of $2,000 would then be reduced to $1,500 because she filed early.
John is at full retirement age. He would be able to get $1,000 with the restricted application, or 50 percent of Susan’s full retirement age amount. At age 70 he can switch over to his own record that will be $2,640 per month, or 32 percent higher than his full retirement age amount. He also will have collected $48,000 in spousal benefits at no cost to him or negative impact to Susan, resulting in an extra $161,000 over a longer life expectancy.
The Deemed Filing Rule is when someone files for their Social Security before their full retirement age, Social Security looks at the highest record available to them and pays out on that higher record. For example, if John filed a restricted application at age 65 instead of waiting until his full retirement age of 66, Social Security would have paid him based on his record. He would have missed the spousal benefits, and he also would have missed the delayed retirement credits.
Social Security Strategies for Couples
There are rules of thumb for couples with significant earnings discrepancies. In general, the lower earner should file early, and the higher earner should file later, ideally at age 70 in many cases (but not all cases). Also, the lower earner can start receiving Supplemental Spousal Benefits when the higher earner files in many cases.
For couples who have similar earnings histories, the general rule is that both the higher earner and the lower earner should delay, allowing them to accumulate additional retirement credits. However, if they were born before 1954, they should pay attention to that ability to use the restricted application, because coordinating benefits often works out best.
There is an ability to suspend benefits for anyone who has already achieved their full retirement age. Let’s say someone started benefits at 64. Whether they made a mistake or didn’t know any better at that point, once they reach their full retirement age they can suspend their benefits. That restarts the ability to get additional delayed retirement credits at 8% for each year until age 70.
Divorced Spousal Strategies
There are similar strategies for divorced spouses as for married couples, with additional qualifications. The divorced spouse needs to have been married for at least ten years. Once they have been divorced for at least two years, they are “independently entitled.”
That is important, because unlike married couples where the spouse needs to wait for his or her spouse to claim on their own record to get the spousal benefit, by being independently entitled, the divorced spouse does not need to wait for the ex to claim to get a spousal benefit. For divorced spouses born before 1954, the restricted application can be used in a very similar way to the married couple and can give the divorced spouse 50% of the ex’s benefit.
Let’s say they got divorced five years ago and someone’s ex had not claimed a benefit yet. They can claim the spousal benefit if they are at least full retirement age to use the restricted application, and they can let their benefit continue to grow. The general rule of thumb here is that if they qualify for it, they should be taking advantage of it. They do need to be careful, though, of the deemed filing rule. If they try to file the restricted application at ages 64, 65, or 62, they are just going to get paid benefits on their own record in most cases, as opposed to as a spousal benefit.
Moving back to our example, let’s say John and Susan are now divorced and are the same ages and have the same monthly benefit amounts: $2,000 and $2,000. Susan does not file, but John files a restricted application. That allows him to get the $1,000 a month based on 50 percent of Susan’s benefit. At age 70 he will want to switch over and claim benefits on his record at the now higher rate of $2,640 a month (due to delayed retirement credits). By doing this, John will get about an additional $62,000 more over an average life expectancy; and over a longer life expectancy about $104,000 more.
Survivor Benefit Strategies
Survivor benefits for couples are incredibly important. When a spouse has passed away, and if the survivor is under 70 years old, they are in a position of what’s called “dual entitlement.” They can elect to claim either a survivor benefit or claim based on their own record. When a spouse passes away, the survivor gets the higher of the two benefits, and the lower one drops off.
Survivors can claim a survivor benefit as early as 60, two years earlier than a retirement benefit. It is critical to consider which record to claim on, and when, for a survivor.
They can claim early as a survivor, as an example, and then switch to their own benefit later; or they can claim their own benefit early and switch to the survivor benefit later. There are reductions occasionally just like there are for retirement benefits. There are reductions for benefits on claiming a survivor benefit before full retirement age. If someone claims at age 60, the benefit will be about 71% percent of what they would otherwise be eligible.
Let’s say John and Susan were married, have the same benefit amounts, and John passes away. Susan files for the survivor benefit; in this case at age 60, and then switches to retirement benefits on her record at age 70. She will receive $1,437 per month from ages 60 to 70 years old, and then $2,640 per month at age 70 because of switching to her benefit. Doing this will total about $221,000 in additional benefits over an average life expectancy and nearly $270,000 extra over a long-life expectancy.
Social Security Strategies for Singles
Singles do not have as many Social Security strategy options available to them; it is more of a breakeven analysis. There is something crucial that singles need to pay attention to called “Social Security rat holes.”
A rat hole happens when the 8 percent delayed retirement credit for singles is not calculated evenly between the ages of 62 and 70. There are some dips during that period with how Social Security calculates the Primary Insurance Amount for a person. This creates suboptimal time periods for singles to claim. For someone who has a full retirement of 66, the rat holes occur:
- Between ages 62 and 63 and 11 months
- Between 65 and four months and 66 and eight months.
If someone claims during these rat holes, it permanently reduces their Social Security benefit over their lifetime. If singles can wait and continue to get delayed retirement credits, they can increase their benefit by about 76 percent.
Social Security Strategies for the Self-Employed
Self-employment allows a unique planning opportunity especially if both spouses work in the business. One of the reasons is because of the financial flexibility that many self-employed people have in structuring their income (salary versus profits), and how much as a result they are paying into Social Security.
It is important to work with clients to develop an optimal amount of contributions that they should make to Social Security, because there are three different bend points, referring to that primary insurance amount formula. Social Security is a progressive governmental system. With these three bend points, you get the most amount of credit for the money you put in at the first bend point. By the time you get to the third bend point in the formula, you only get about $.15 for each dollar of additional contributions. By working with those who do have some flexibility on how they structure their income, the idea is to come up with the ideal amount that’s subject to FICA taxes and structure it to maximize their benefits over the long term.
If someone is already receiving benefits and thought they made a mistake or is having second thoughts, often it does make sense to at least revisit the issue and consider suspending benefits to get those additional delayed retirement credits. They can resume benefits anytime before 70; they do not have to wait for 70 when benefits automatically resume.
Costly Social Security Myths or Misunderstandings
There are some costly Social Security myths and misunderstandings upon which folks mistakenly focus.
- Claiming benefits before the “system runs out of money.” Some of these concerns are unfounded.
- Many people just don’t think it matters when they claim benefits and that it is all going to equal out, and that could not be further from the truth.
- They fail to recognize that while they work and collect Social Security, they think they can get a full benefit. With the earnings test, that is not the case. They can be penalized as a result.
- They look at their Social Security benefits statement and think they only have three choices: ages 62, 66, or 70.
- Social Security will help them figure everything out.
- Divorced spouses mistakenly often think that they are in a position where they cannot collect on an ex-spouse.
- Singles think there’s no optimal claiming strategy for them; most people are not aware of the rat holes.
- They also think that if a worker delays claiming until 70, the spouse will receive 50% of the increased benefit at age 70; that is not the case. The spousal benefit is always based on the full retirement age amount.
- They fail to recognize that a Social Security decision cannot be undone, except for a one-year period where a Social Security decision can be adjusted.
- They fail to work for 35 years, so their non-working years count as zeros. That lowers their average income. Working after collecting a Social Security benefit can be a way to increase a Social Security benefit. Many people think once they begin Social Security, that is it; it is entirely locked in and even if they work, it is never going to increase because of that work. That is not the case. Social Security continues to provide for additional credit if someone is working, and that the new earnings are within their highest 35 years.
- Taxes can often reduce Social Security benefits by up to 30% in some cases. That is called the “Social Security Tax Torpedo.”
- Having errors on a Social Security record is more common than people think. When someone has a Social Security statement that has an error, he or she only have about three years, three months and 15 days to correct that record. After that time, it becomes difficult to correct, and you generally must have firm evidence that it was a Social Security Administration mistake to get the record corrected. For your clients, pay attention to the earnings history; make sure it is accurately reflected.
- Another mistake made is not minimizing the damage of having claimed early. One of the ways to do this is to suspend benefits, or at least consider it, and accumulate those additional delayed retirement credits, or possibly to withdraw an application entirely. To do that, they file a form called Form 521, which is a request for withdrawal of an application. In this case, they repay all the benefits that have been received to date. They can only do this once in their lifetime.
- Underestimating life expectancy is one of the more frequent things people do. Since Social Security is a lifetime benefit, it is generally more conservative to be planning for a slightly higher life expectancy than what might otherwise be the case.
Coordinating Social Security Benefits with Other Retirement Assets
More frequently than not it makes sense for clients to tap into other retirement vehicles first and delay their Social Security. One of the reasons is the 8% percent per year increase in the benefit they get from continuing to defer their Social Security.
From a risk profile perspective, comparing the 8% benefit increase to Treasury rates and the interest rate environment today, deferring Social Security and taking benefits from other assets can extend the portfolio longevity.
One thing you should also be aware of for clients is the ability to receive retroactive Social Security benefits. Anyone after their full retirement age can receive some benefits as a lump sum. The general rule on retroactivity is six months. Let’s say someone is 67 years old and has not yet claimed; they could elect to go back to claim at 66 and six months when they file. They would receive a lump sum benefit up front, and then the monthly benefits would start after that.
The Social Security Earnings Test
The earnings test is important from a planning perspective. It comes into effect when someone claims a Social Security benefit before reaching his or her full retirement age, and they are still working. If they are in that position and they are earning more than $16,920 per year (2017), Social Security is going to start to withhold some of their benefits.
The higher earnings test limit of $44,880 comes into play the year that someone reaches their full retirement age, so there is a little bit more flexibility that year. The earnings test disappears at full retirement age. Someone could make $1 million a year and collect their Social Security at full retirement age and have no problems. When someone does run into the earnings test, and he or she are making more than that limit of the $16,920, Social Security withholds $1 in benefits for every $2 they are over that limit. For example, Social Security is going to withhold $5,000 if they are $10,000 over.
It is important to recognize that the benefits are not lost entirely. They are credited back to that person’s account at full retirement age. It does not come back as a lump sum though; Social Security calculates their life expectancy and they return it in the form of credits. A person might see a $10, $20, $30 a month increase in their monthly benefit, depending on the amount of benefits that were withheld.
Being subject to the earnings test can reduce other Social Security options in the future, especially for a spouse. It is very important to try to keep clients away from the earnings test, and it becomes a bureaucratic hassle if they get involved in that as well. A general rule of thumb is that if a client knows they are going to be working and exceeding the earnings test, not to claim benefits.
Social Security Disability Benefits
The Social Security Administration also can pay a disability benefit through a payroll tax-funded program to assist those who are disabled. To qualify, a person must have worked in a job covered by Social Security, they must have a medical condition that qualifies as a disability, and they must be in a position of being unable to work for one year or more.
The advantage of qualifying for a disability benefit is that it is paid at the 100 percent rate of the full retirement age. For example, if Susan’s full retirement age benefit is $2,000, she would be able to get that $2,000 at age 50 as a disability benefit. At her full retirement age, it automatically converts to a retirement benefit.
Tips for Filing for Social Security Benefits
Here are a couple of tips here when filing as well as things to be careful of.
- If someone is filing before their full retirement age, often what’s asked is whether they would like to file for all the benefits they are eligible for. They do want to be in a position of knowing exactly what they want to be filing for, not claiming too early, not missing those delayed retirement credits, and not being subject to the deemed filing rules. They need to be aware of those things at that point.
- Divorced spouses are often asked if they are applying for all benefits. Folks that are divorced do need to recognize they do have those options in many cases, and timing is important. If someone just answers the question generically, they are going to be subject to that deemed filing rule in most cases, and that can eliminate future options for them.
- The same applies to survivors under age 70 because they have dual entitlement.
There are four principal areas to consider before claiming:
- Life expectancy
- Financial need (whether they have other assets or savings that they can tap into), and
- Coordinating with their spouse.
If you have a client who is on the fence about whether to file, or you are not sure of the timing, you might want to consider using a Protective Filing Statement. It creates a reservation with Social Security and provides a six-month window to go back and use the original date. If someone did this in January, and then let’s say they get to May and they thought it really would have been smarter to take the benefits in January, even though they are filing in May, they can go back to that January date and lock in that date. It can often be a valuable tool to use.
Suspending benefits even after someone has filed should not be overlooked as part of your planning arsenal because of being able to accumulate those delayed retirement credits. Regarding doing the actual suspension, it is a pretty simple matter sending a form to Social Security called a Statement of Claimant. The wording on the form does have to be specific to make it happen correctly, but it is painless from the client’s perspective. Clients may want to consider withdrawing an application entirely if it is within the one year that they are allowed to do that. That can help them reset the situation in terms of making a better decision going forward.
If someone is filing on their own record, there are four ways to do it:
- Doing it themselves online.
- Calling the Social Security Administration
- Visiting in person at a local office
- Using a professional filing service.
The fourth option, given our experience, is the one to be focusing on, because it is way too easy to make a mistake. Social Security has been having tremendous issues with staff unfortunately providing wrong advice, even though they are not supposed to provide any advice. There’s also the wait times; it is about 45 minutes on the phone to get through, and in person, it is a multiple-hour wait. There are easier ways of going about it.
Matthew Allen, CEO, Social Security Advisors:
Matthew Allen is the Co-Founder/CEO of Social Security Advisors and creator of the new course Maximizing Your Social Security produced in conjunction with Weiss Educational Services.
As a serial entrepreneur who is driven by a passion for providing industry-leading advice to his clients, Matthew has been at the forefront of financial services for over a decade. He has helped thousands of seniors maximize their Social Security benefits and avoid costly mistakes when filing.
In working with his clients, he realized that there was a major education and advice gap when it came to Social Security and was determined to fill this void by co-founding Social Security Advisors.
Having performed countless hours of client-focused research, Matthew applies this powerful knowledge and expertise by bringing insightful product vision, finance, and leadership skills to Social Security Advisors.
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