The conventional wisdom is that Social Security benefits are insignificant to anyone who can afford a financial planner, but, according to senior financial planner Christin Fahlund, “there’s a lot more money at stake than most people realize.”
She works with T. Rowe Price Group Inc. in Baltimore, and urges advisers to talk with their clients about when and how to apply for Social Security to boost their retirement income.
Few clients or advisers appreciate the advantages of delaying a Social Security application, Ms. Fahlund said. If a client was born between 1943 and 1954, for example, the full retirement age is 66. If they take Social Security at 62, the benefit is permanently reduced by 25% and they will forfeit $1 of their benefits for every $2 they earn over an annual earnings cap until the year they turn 66 (in 2009 the cap is $14,160).
But if the client postpones the application, their benefit is increased by 8% for each year of delay between ages 66 and 70 — and that bonus doesn’t include Social Security’s annual inflation adjustments. Thanks to yearly inflation adjustments and the effect of compounding, a four-year delay actually increases a client’s monthly benefit by about 36% rather than 32%, Ms. Fahlund said.
Taking those factors into account, she crunched numbers for a 66-year-old client eligible to collect a $2,000 monthly benefit in 2008. To estimate how much the client would gain by postponing his application until he turned 70, Ms. Fahlund used Social Security’s actual 2009 inflation adjustment (5.83%) and assumed a 3% annual inflation adjustment thereafter. If the client lives past 78, she said, he gains by the delay. By age 80, the postponement will have boosted his monthly benefit by $1,100. If he’s married to a non-working spouse who collects a benefit based on his record, the delay will yield an extra $1,700 a month by the time he’s 80, Ms. Fahlund said.
STRATEGIES FOR TWO-CAREER COUPLES
Two-career couples are seldom aware that they can maximize their benefits by coordinating Social Security applications. (Moreover, the Social Security Administration said its own offices aren’t always up to speed about the options available to these couples, who are currently a minority of Social Security recipients.)
Take a husband and wife who will both reach full retirement age at 66. The husband is four years older and earns more than his wife. At 62, the wife can take a reduced benefit based on her own work record. Her husband can then wait until he is 70 to apply for a benefit based on his work record. The wife can then file for a spousal benefit based on her husband’s work record (you can’t file for a spousal benefit until your husband or wife has applied for Social Security). She is eligible for her own (reduced) benefit, plus the difference between that amount and her spousal benefit, said Jane Zanca, a Social Security Administration spokeswoman.
Or let’s assume the same couple are both high earners, each eligible for a $2,000 monthly benefit at 66. At 62, the wife can take her own (reduced) benefit of $1,500. At the same time, the husband can file for a spousal benefit based on his wife’s work record. Because the husband is 66 and reached his full retirement age, he can exclude his own work record from that application. That’s necessary to keep his own benefit growing, said Ms. Zanca (if you file for a spousal benefit before reaching your full retirement age, you’re deemed to be applying for your own benefit at the same time).
The husband’s spousal benefit is $1,000 a month — 50% of his wife’s $2,000 full retirement benefit — because he reached his full retirement age before he applied for the spousal benefit. And because he is 66, there is no annual cap on his earnings. At 70, he can then switch from his spousal benefit to his own benefit, now worth about $2,720 a month.
The strategy can also work for a divorced client. If you’re married, you’re ineligible for a benefit based on your spouse’s record until that spouse files for Social Security. But if you’re divorced, were married at least 10 years and haven’t remarried, you’re eligible at 62 for a benefit based on your former spouse’s work record, whether or not he or she has filed for Social Security. If the couple in the example is divorced and the wife meets those requirements, at 62 she can file for a benefit based on his work record. If she waits until she’s 66, she can exclude her own record from that application and can then collect her maximum spousal benefit, not subject to any earnings cap, while her own benefit grows 8% a year for four years.
