Looking forward to Social Security for retirement used to be pretty simple. You reach a certain age, you retire, you go file for your social security. But just as overall planning for retirement has drastically changed over the years, so has planning for how and when to start taking your Social Security – especially for married couples – in order to maximize your benefits. This process is called “optimization.”
The Plan
No longer is Social Security a primary source of income for retirement. In fact, it was never meant to be. Instead, it’s just a piece of your overall retirement plan which could include 401k plans for you and your spouse, IRA accounts, and a wide variety of other investments that make up your portfolio. Today, we look at Social Security from a perspective of how to best leverage it for retirement income in the context of your particular situation, taking the following factors into account:
- When will you NEED the money? If you retire at 62 (the minimum age to begin taking Social Security) you may need those benefits to live on. Or, you may have other forms of income from your investments, allowing you to wait another year or two – or maybe even up until you’re 70, which is the maximum age to start taking Social Security. Waiting gives you more flexibility, and increased income potential from Social Security.
- How long can you defer? Social Security benefits increase by 8% each year, from your full retirement age to age 70, if you wait to start taking your benefits. That’s not an estimated scenario, or a figure that’s dependent on market performance. It’s an 8% year-to-year increase.
- When do you qualify to receive distributions from other investments? In most cases, each investment in your portfolio can carry a unique rule about when you can begin to withdraw from it. In addition, some investment vehicles like 401ks and traditional IRAs contain pre-tax investments; while others such as Roth IRAs contain dollars on which you’ve already paid taxes. You’ll want to create an overall strategy for when and how all these monies will become available to you, and at what tax rate, when determining your strategy for taking Social Security.
- What do you anticipate your income and expenses to be in retirement? What each person wants in retirement varies widely. Some may want to downsize, while others want to travel or buy a vacation home. Regardless, you’ll need to look at what that looks like financially, and create your overall plan (Social Security included) to accommodate this.
- How will your spouse’s benefits and eligibility impact the overall potential income? Perhaps both you and your spouse both worked throughout your entire careers, or perhaps one of you stayed home for periods of time to raise children. Regardless, you’ll want to factor this in when determining your strategy for when and how both of you begin taking benefits. I’ll describe some of those scenarios and potential strategies later in this article.
- Are you in good health? Life expectancy is a major consideration for every portion of your financial plan – Social Security planning included. If your health is good and you don’t need the money immediately, you may be a candidate to defer your benefits to a later date. On the flip side, if you’re not in good health, you may want to consider taking it as soon as you’re eligible.
Optimization Strategies
Once you’ve considered the points above, you can begin creating a strategy to optimize your Social Security, leveraging your timeline and personal situation to maximize the income. Consider the following common scenarios that many Americans may find themselves in, and what strategies may be appropriate for maximizing their benefits:
- Both Spouses Work and Qualify for Benefits: Once the lower-earning spouse reaches full retirement age, he or she may file for full benefits while the higher earning spouse delays receiving benefits as long as possible, preferably age 70.
- One Spouse Works while the Other Has Little to No Employment History: The spouse who has been the primary earner may choose to file at full retirement age, which allows the stay-at-home individual to file for spousal benefits, which is 50% of the primary earner’s benefits. The primary earner then has the option to either take his or her full retirement age benefit or “suspend” it, thus delaying taking Social Security as long as possible to allow for the 8% jump in benefits each year up to age 70.
- Both Spouses Work, One Earns Substantially More: In this case, the couple may opt for a file and suspend similar to the scenario outlined above. The higher-wage earner files at full retirement age, allowing the lower-wage earner to begin receiving the spousal benefits of 50%. Both parties then suspend taking their own Social Security benefits as long as possible, allowing for that 8% jump in benefits each year.
- You’re Single: Strategies for optimizing Social Security for those who are single are limited. If you’re single, plan early so that you can wait to claim Social Security benefits as long as possible.
- You’re Divorced or Widowed: While there aren’t really optimization strategies for those who are divorced or widowed, many people forget that you may be eligible for your deceased or ex-spouse’s Social Security benefits under certain conditions. Be sure to talk with your financial advisor to see if you may qualify.
These are just some of the common scenarios you may find yourself in. As you can see, there are many different strategies you can follow to maximize your Social Security benefits, and it’s in your best interest to analyze what makes best sense for your particular situation and plan for the long term. A financial advisor will be able to look at your situation holistically and help you arrive at a plan that’s most appropriate for you.
