Retirement Planning Series, Part IV
In our previous newsletter, we continued the Retirement Planning section of our financial literacy series by discussing how to estimate your retirement expenses and budget. Today, we will aim to provide some strategies around the most prominent component of retirement planning for most Americans: Social Security. Despite Social Security’s seemingly straightforward process, many Americans are unaware of the ways in which their decisions around this topic may be hampering their future retirement.
The first strategy to consider around Social Security is the way in which you can do your best to maximize your benefit through your income. The way that Social Security benefits are calculated are relatively simple, as they plug in your 35 highest earning years into their formula to produce your expected benefit at each retirement age.
However, it is important to note that, if you do not have a work history of 35 years, any years in excess of your number of years worked to 35 will be listed as a zero in the Social Security formula. In other words, if you only have 25 years of work history, you will have 10 years of zeroes in your Social Security formula.
To avoid this problem, delaying your Social Security claim through something as simple as a part-time job can add an additional year to your work history and remove one of the zeroes. On the flip side, those with more than 35 years of work history will simply have their 35 highest earning years factor into the formula, meaning any lower earning years in excess of the 35 years will not be considered.
The second strategy to consider around Social Security is delaying your claim of the benefit. While it can be tempting to claim Social Security as soon as it is available to you, it can have a significant impact on your future earnings through retirement, especially as average life expectancies continue to rise. If you were to claim Social Security at age 62 instead of at 67, you will lock in a reduced monthly income of 30% for the rest of your retirement when compared to 67.
One way to rectify this mistake would be to cancel your claim, as you are able to cancel your Social Security benefits once in your lifetime within 12 months of receiving your benefits. You must repay any benefits you have received, as well as any amount your spouse or a family member received based on your benefit. However, by cancelling your claim, you will allow your benefits to grow again until a later date and avoid locking in a notably reduced benefit for life.
On the other hand, delaying your Social Security claim from 67 to 70 can have a significantly positive impact on your Social Security benefits. For each year that you delay your claim between 67 and 70, you will receive an additional 8% bonus to your Social Security benefit, and that isn’t even including Cost-of-Living-Adjustments, or COLAs. In short, delaying your claim from 67 to 70 means that you will receive 24% more in monthly income for the rest of your retirement. In fact, the difference between claiming at 62 versus delaying until 70 is roughly 77%.
If you are unable or do not want to work until 70 but would still like to delay claiming Social Security, there is a strategy known as the “retirement bridge” strategy. In short, this strategy involves living off of your retirement accounts, such as a 401(k), for those few years between retirement and claiming Social Security.
However, withdrawing from your retirement accounts early may impact how much they compound and grow moving forward, so it is best to speak with a financial professional regarding whether this strategy would be worth it given your own, personal financial situation.
A third strategy available to some retirees is the ability to claim spousal benefits. If you were married for at least 10 consecutive years, have not remarried, and are at full retirement age (67), you will have the option to claim a spousal benefit. To put it simply, individuals in this situation will have the option of choosing between their own Social Security benefits or a benefit amount equal in value to either 50% of their ex-spouse’s benefit at full retirement age or their personal insurance amount, whichever is greater.
The good news is that anyone seeking to make a spousal claim does not need their ex-spouse to be involved in the process, so it does not matter what current relationship or lack thereof exists between both ex-spouses. Also, if you are the ex-spouse who is having their ex-spouse make a spousal claim on your benefit, do not worry, as their claim has no material impact on your own benefits.
While the process of claiming Social Security may seem cut and dry, these strategies may help you to do your best to maximize your potential benefits in retirement. As always, it is recommended that you discuss these strategies with a financial professional to weigh the opportunity costs of each strategy. However, by following some of these tips, it is our hope that you will be able to have a more fruitful and secure retirement.
Despite Social Security’s seemingly straightforward process, many Americans are unaware of the ways in which their decisions around this topic may be ham-
pering their future retirement.
The first strategy to consider around Social Security is the way in which you can do your best to
maximize your benefit through your income. The way that Social Security benefits are calculated
are relatively simple, as they plug in your 35 highest earning years into their formula to produce
your expected benefit at each retirement age. However, it is important to note that, if you do not
have a work history of 35 years, any years in excess of your number of years worked to 35 will be
listed as a zero in the Social Security formula. In other words, if you only have 25 years of work
history, you will have 10 years of zeroes in your Social Security formula. To avoid this problem,
delaying your Social Security claim through something as simple as a part-time job can add an
additional year to your work history and remove one of the zeroes. On the flip side, those with
more than 35 years of work history will simply have their 35 highest earning years factor into the
formula, meaning any lower earning years in excess of the 35 years will not be considered.
The second strategy to consider around Social Security is delaying your claim of the benefit.
While it can be tempting to claim Social Security as soon as it is available to you, it can have a
significant impact on your future earnings through retirement, especially as average life expec-
tancies continue to rise. If you were to claim Social Security at age 62 instead of at 67, you will
lock in a reduced monthly income of 30% for the rest of your retirement when compared to 67.
One way to rectify this mistake would be to cancel your claim, as you are able to cancel your
Social Security benefits once in your lifetime within 12 months of receiving your benefits. You
must repay any benefits you have received, as well as any amount your spouse or a family mem-
ber received based on your benefit. However, by cancelling your claim, you will allow your bene-
fits to grow again until a later date and avoid locking in a notably reduced benefit for life.
On the other hand, delaying your Social Security claim from 67 to 70 can have a significantly
positive impact on your Social Security benefits. For each year that you delay your claim between
67 and 70, you will receive an additional 8% bonus to your Social Security benefit, and that isn’t
even including Cost-of-Living-Adjustments, or COLAs. In short, delaying your claim from 67 to 70
means that you will receive 24% more in monthly income for the rest of your retirement. In fact,
the difference between claiming at 62 versus delaying until 70 is roughly 77%. If you are unable
or do not want to work until 70 but would still like to delay claiming Social Security, there is a
strategy known as the “retirement bridge” strategy. In short, this strategy involves living off of
your retirement accounts, such as a 401(k), for those few years between retirement and claiming
Social Security. However, withdrawing from your retirement accounts early may impact how
much they compound and grow moving forward, so it is best to speak with a financial profession-
al regarding whether this strategy would be worth it given your own, personal financial situation.
A third strategy available to some retirees is the ability to claim spousal benefits. If you were
married for at least 10 consecutive years, have not remarried, and are at full retirement age (67),
you will have the option to claim a spousal benefit. To put it simply, individuals in this situation
will have the option of choosing between their own Social Security benefits or a benefit amount
equal in value to either 50% of their ex-spouse’s benefit at full retirement age or their personal
insurance amount, whichever is greater. The good news is that anyone seeking to make a spousal
claim does not need their ex-spouse to be involved in the process, so it does not matter what
current relationship or lack thereof exists between both ex-spouses. Also, if you are the ex-
spouse who is having their ex-spouse make a spousal claim on your benefit, do not worry, as
their claim has no material impact on your own benefits.
While the process of claiming Social Security may seem cut and dry, these strategies may help
you to do your best to maximize your potential benefits in retirement. As always, it is recom-
mended that you discuss these strategies with a financial professional to weigh the opportunity
costs of each strategy. However, by following some of these tips, it is our hope that you will be
able to have a more fruitful and secure retirement.
