As Featured in 
For many people, Social Security will be their largest retirement asset. Most people have never analyzed It, and the truth is, they don’t know how. In fact, people often underestimate the value of their Social Security benefit. When we do workshops, we ask: Who thinks their benefits will represent $250,000 or more over their lifetime? Quite a few raise their hands. Who thinks it will be more like $1 Million? Few raise their hands, and in fact we get some chuckles! How about $2 Million?
As hard as it may be to believe, the $2 million scenario is likely for successful and healthy married couples. It is worthy of your attention, whether you need it as a monthly income or not.
Most have heard the news: The Social Security fund is in trouble and changes are needed. However, we believe we will see legislation to fix this; neither political party wants to be the one who fails to shore up this beacon of American retirement security.
There are several options available to lawmakers if they get their act together! One way to build up this fund is to increase the taxable wage base. A second way is to increase the age of Full Retirement, and lastly, the benefit may be means tested, (like Medicare is), meaning the highest net worth folks may get less of their benefit (could Warren Buffet survive if he only receives 80% of his promised benefit? We think he’d be fine!) The takeaway here is that any one of these, or some combination, will shore up the trust fund. We believe, and Social Security experts who know a lot more about this also believe, that although it may look a little different in the future, Social Security will be there for anyone reading this article.
Now, back to the premise that most people do not understand the value of their benefit nor give Social Security the attention it deserves. In fact, this inattention means that most people claim it wrong. And by wrong, we mean not optimized for their unique situation. You cannot depend on the fine folks who work at Social Security for optimization strategies. SS agents sometimes don’t know their own rules and exceptions (the code section is 1,200 pages long), and they should not, and cannot, offer advice as to the best claiming strategy for everyone’s unique situation.
Optimizing for Spousal Situations
As I was getting ready to teach a Social Security webinar and inevitably address the “breakeven” conversation, I realized I had never asked what my parents’ Social Security strategy was. Now I was curious. It turns out that my dad, the higher wage earner, claimed at age 62, meaning he locked in a reduced benefit for the rest of his life. At that time, when my mom questioned him, he told her he was claiming early because that’s what his father did. Sadly, my dad passed away at age 67. Now the breakeven analysis would have you believe he made the right call! Had he waited to claim later at his full retirement age of 66, he would have only received Social Security for one year, vs. the 5 years of reduced benefits. He won, right?
No; one of my dad’s biggest concerns was making sure my mom was financially secure when he was no longer here. When my dad passed away, my mom lost her lower SS benefit and collected her survivor benefit, which was the benefit my dad was collecting at his death. In choosing to claim at age 62, my dad locked in a 30% reduction of his benefit for the rest of his life as well as for the rest of my mom’s life. Now, at age 88, Mom has been claiming Dad’s reduced benefit for 22 years and counting. By my rough calculations, this one decision may have cost my mom more than $250,000. When making a claiming decision in a spousal situation, the higher wage earner should take two lifetimes into consideration.
Knowing the Rules to Optimize Social Security
We had a client who was faced with an unplanned early retirement. Due to her sudden job loss, she had some outstanding bills that she had planned to have paid off prior to retiring. After doing some analysis, we recommended this claiming strategy. As she had reached her Full Retirement Age of 66 and 7 months she had some options. We told her she could claim now and back date the application 6 mos. She would then receive approximately $23K up front, enabling her to pay off her outstanding debt. As she had enough assets on hand to create the income she needed in the short-term, we then recommended suspending the Social Security benefit, allowing it to continue to grow with delayed credits, and we would then turn it back on in 2 years. In this situation, she would give up approximately $119 per month for the rest of her life, but she had a lump sum available to her to pay off some high-interest-rate credit card debt immediately. In this situation, the lump sum today made more sense than maximizing the benefit.
Leveraging the Benefit
Not everyone needs their Social Security benefit for retirement income. For some high-net worth individuals, what is a strategy to consider?
We recently met with a prospect like this. During our discovery meeting we learned he was a successful 75-year-old and still working in his business. “When did you claim Social Security?” we asked. “Oh, I didn’t. I’m still working, and I don’t need it.”
“What? Do you realize you have probably left about $400,000+ on the table? We understand that you do not need the income, but there are ways to leverage this benefit.” Now we had his attention. Had he been our client over the last 10 years, we may have recommended claiming Social Security early and using the benefit to fund a life insurance policy inside an Irrevocable trust. (ILIT) The trust’s beneficiaries could use the life insurance to help offset the taxes upon his death. Although he doesn’t have an income problem now, at death he is expected to have an estate tax problem. He is now our client and implementing this strategy! Better late than never!
Longevity Insurance
There are many considerations to strategizing and optimizing your Social Security benefit. You will need to understand how your claiming decision will impact not only your retirement income, but also your investments and your tax bill.
For more than 25 years, we have worked with clients who are looking to have us solve for their retirement income puzzle. We know that for most, there is one prevalent concern: “Will I have enough money to maintain my lifestyle?” Social Security will play a much larger role in your retirement income, investment and tax planning than most people realize and many fail to do the proper analysis it warrants.
This is how we look at it: Social Security is longevity insurance. The real question is not “where is my break-even point?”, but “what if I (we) live much longer than I think?” Maximizing a guaranteed, inflation-adjusted stream of income for as long as you live may be the best “insurance” you have ever purchased.
Your unique situation should drive your Social Security analysis, not common myths or misconceptions. There are ways to claim it “best” and ways to claim it wrong, and without good analysis, you could be leaving hundreds of thousands of dollars on the table. If you want to begin the process of seeing how your Social Security benefit will fit into your overall retirement income planning, download our complimentary Starter Pack today.