Social Security strategies boost income

Financial advisers are taking advantage of several Social Security strategies that can boost baby boomers' annual income dramatically. One of the simplest strategies is to defer collecting Social Security benefits until 70. Since every year past 62 that is deferred adds about 7% to 8% to a client's eventual monthly benefit, waiting until 70 can add substantially to retirement income. “As advisers, we must challenge our clients' assumptions that they should collect Social Security at age 62,” said Jim Weil, an adviser with Financial Strategy Network LLC, which manages $600 million in assets. “We need to be prepared to politely and professionally challenge clients about the assumptions they've built up over a long period of time.”

HEALTH A KEY FACTOR

Instrumental in deciding when to start collecting benefits is a client's health, said adviser Tim Conti, a financial adviser with Wealth Solutions of Central Florida, which manages about $50 million in assets. One of Mr. Conti's clients, retired professor John Santosuosso, 71, remembers being torn over whether to collect at 62 or wait till 70. He split the difference and collected benefits at 651/2, which was full retirement age for him. “My crystal ball is cracked and cloudy, and I have no idea how long I'll live,” he said. “I thought collecting at age 62 might be too early.” Strategies other than delaying the start of benefits are complicated and may disappear as Congress makes changes to Social Security in the coming years. In fact, time could be running out for one strategy dubbed a Social Security “do-over,” said Kenn Beam Tacchino, director of the New York Life Center for Retirement Income at The American College. A do-over occurs when an individual who began collecting Social Security benefits early decides to defer any further payments until a later age. Doing so can increase income by as much as $1,000 month when benefit payments resume. Do-overs require that clients pay back all Social Security income they have received from the time they started receiving benefits. While that can be a sizable lump sum, the government charges no interest or penalties. As a bonus, those who repay benefits can claim a credit or a deduction — whichever results in a bigger tax break — for any income taxes paid on the benefits received. But the rules could change. The White House Office of Management and Budget is reviewing proposed regulation that would limit do-overs to the first 12 months of collecting benefits. Mr. Tacchino said advisers who have clients in their late 60s who began collecting benefits at 62 should consider a do-over now before the rules change. “It's ridiculously cheap when you compare a do-over to any annuity,” Mr. Tacchino said. “If I have a 69-year-old client, I'd have them do over their Social Security rather than buy an annuity. It's a much better deal.” Kevin Reardon, a certified financial planner with Shakespeare Wealth Management Inc., agrees. He completed a do-over for a risk-averse client a few weeks ago. The man started collecting Social Security at 62 and was receiving monthly payments of $1,098, or $13,176 a year. He completed the do-over at 67 paying back about $50,000. His benefit is now $1,518 a month, or $18,216 a year. A downside to this strategy is that if both spouses die shortly after paying back the benefits, the money paid into Social Security is gone. Mr. Reardon said his clients were OK with that possible outcome. “This decision is based more on their joint lives,” he said. “The overall objective is to increase their monthly income.” Another strategy that can boost clients' monthly income and is successful for couples where one person was the majority breadwinner is called “file and suspend.” For example, at full retirement age, a husband files for his benefits, and his wife files for spousal benefits. The husband then requests a suspension of his benefits, but the wife continues to get the spousal benefits. The husband's benefit continues to grow until he chooses to begin taking payments — usually at 70. If the husband dies, the wife would then collect the larger benefit. “Most people don't realize the options available to them as planning tools,” said Sharon Lacy, an adviser with Bedrock Capital Management Inc., which manages $130 million in assets. “You really have to coordinate both spouses' benefits carefully.” Ms. Lacy also uses the “collect now and collect more later” strategy, which she says is best-suited for dual-earning couples. Here is how it works: A wife stops working and collects Social Security benefits based on her work history. Her husband is still working and hasn't begun collecting Social Security. As long as he is at full retirement age, which is currently 66, he can start receiving spousal benefits based on his wife's Social Security amount. This means that he would get half his wife's Social Security income each month while still allowing his own benefits to accrue. At 70, he would stop receiving his spousal benefit and file for full Social Security benefits. When the husband dies, the wife will collect his higher benefit because he delayed his Social Security until 70. Despite their complexity, these Social Security strategies should be part of an adviser's tool chest, said Ron Myers, an adviser with Associated Financial Consultants Inc., which manages nearly $500 million in assets. “These issues come up every single week,” he said. “I do a lot of retirement planning, and this is an integral part of it.” E-mail Lisa Shidler at lshidler@investmentnews.com.