Tuesday, September 21, 2010

Tuesday Q&A Series – Boosting Your Social Security Income Through Planning

This week’s question comes from Robert and Natalie, married clients who are wondering if there is anything that they can do to increase their Social Security income. Robert, who will turn 66 soon, is a full-time employee that contributes to Social Security, and Natalie, who will be 62 in a few short months, is currently a full-time employee, but she is thinking of retiring. Full Retirement Age (FRA) for each is 66.

Q. We have been trying to understand the best way for us to receive current and future income from Social Security. We are both in great health, so are there different strategies for us to employ?

This is a very good and very tricky question. Most people simply take Social Security as soon as possible since they want to make sure that they receive every penny, but for each year you delay Social Security, your benefit grows between 7-8%. If one or both spouses are in poor health, taking the benefits sooner may be the best choice, but there are others to consider if you are looking for increased income later and are in good health.

  • Suppose that Robert had started receiving Social Security (SSA) benefits when he turned 62, but now he wanted to increase his benefit. Robert could essentially ask for a “do-over.” In this case, Robert would have to pay back all of the money he had received from SSA, but there is no penalty or interest charged. Plus, Robert would get a credit or deduction on the tax he paid on those benefits.

    The upside is that Robert’s benefit would be calculated on his current age instead of his previous age. If he waits until his FRA, this would be a 33% increase in benefits. The downside is that Robert would have to make a lump sum payment to the SSA now for the do-over, so it would be costly in the short term.

    Note: There have been discussions of closing the “do-over” loophole or reducing it to just 12 months from the beginning of your benefits. If this is something you want to consider, it is best to look into it now.

  • A different strategy that has been popular is where one spouse was the majority breadwinner. In this scenario, Robert was the majority breadwinner and Natalie was a homemaker. Robert files for benefits at FRA (as long as Natalie is 62 or when she turns 62). Natalie immediately files for spousal benefits, then Robert suspends his benefits. Natalie starts receiving her spousal benefit while Robert continues to work and his benefit grows. At age 70, Robert starts receiving his increased benefit which is probably 35% or so higher than it would have been at FRA.

    Note: If Robert were to die, Natalie would start receiving the larger benefit.

  • One last strategy that is frequently used fits Robert and Natalie fairly well. In this scenario, Natalie retires at age 62 and starts drawing her SSA benefit. Since Robert is at FRA (66), he then files for spousal benefits on Natalie’s benefit while he continues to work. His benefit continues to grow while Natalie receives her benefit and Robert receives half of her benefit. At age 70, Robert files for SSA benefits where he receives his full benefit.

    Note: If Robert dies, Natalie would receive his higher benefit
Obviously, these are complex scenarios that should be well researched before being implemented, but you start to see the various options that a couple like Robert and Natalie have to choose from before filing for SSA benefits.

Robert and Natalie, I hope the answer above has shown you some of the various options that we research and consider when advising you on your retirement income planning.

We encourage our clients and readers to send us questions for our Tuesday Q&A series at contact@rollinsfinancial.com. And as always, we hope you will keep Rollins Financial in mind when seeking professional advice on financial planning and investing.

Best regards,
Robby Schultz

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