For a large number of Americans, Social Security represents nothing more than an unavoidable payroll deduction. Particularly among affluent individuals, Social Security may seem unnecessary, or too cumbersome of a claiming process for a small payout. They may have the perception that Social Security is of secondary or even tertiary importance in retirement.
However, Social Security may pay out higher than expected because the benefit depends on earned income levels. It is one of the few benefits that is guaranteed for life, receives preferential tax treatment, is indexed to inflation, offers spousal and survivorship benefits, and can significantly contribute to your retirement income. Among retirement income sources for the mass affluent, Social Security accounts for 32%, second only to pensions at 38%. In comparison, personal assets and retirement plans contribute 16% - half of what Social Security provides.1
At Engaging Women in Wealth, many of our clients are affluent women who are approaching retirement and may not be aware of the many ways they can benefit from Social Security. The truth is, what you don’t know about Social Security could cost you. Take a look at a few of the little known facts about Social Security:
There are Important Different Claiming Strategies
A common misconception about Social Security is that you simply file when you retire and start to receive a monthly check. However, there are strategies that can help you maximize your total lifetime benefit. Take Jim and Linda, a 62-year-old married couple, as an example. Jim’s Social Security benefit at full retirement age is $2,300 per month and Linda’s is $1,200. If the both file for Social Security at age 62 and live to an average life expectancy, their cumulative benefit is $973,428; but if they delay their benefits, their cumulative benefit would rise to $1,273,620.2 By filing early, they would lose $300,192. The government penalizes those who start taking benefits early. If you are relatively healthy and expect to live for a long time, it pays to delay claiming.
Spousal and Survivor Benefits
Through advanced filing strategies, a couple can maximize the benefits the surviving spouse receives after the death of one partner. Let’s look at Jim and Linda again. At age 66, Jim files and suspends while Linda files for spousal benefits. Her monthly payment based is $1,269. At age 70, both Linda and Jim switch to their own benefits with credits for delaying. Jim’s monthly benefit is now $3,698 and Linda’s has increased to $1,929. At age 83, Jim passes and Linda starts survivor benefits as Jim’s spouse. Her monthly benefit is $5,097 - more than double her previous benefits of $1,929. Over the course of these years, the cumulative Social Security benefits reach $1,273,620, a considerable portion of their retirement income.
Social Security Can Be a Family Benefit
When you start receiving Social Security, other family members may also be eligible for payments. A spouse (even if he or she did not have earned income) qualifies for benefits if he or she is age 62 or older, or at any age if he or she is caring for your child (the child must be younger than 16 or disabled). Benefits may also be paid to your unmarried children if they are younger than 18 or between 18 and 19 and enrolled in a secondary school as a full-time student, or the child is age 18 or older and severely disabled.
A Divorced Spouse May Be Eligible for Benefits
If you are divorced, you may qualify for Social Security benefits based on your ex-spouse’s work record, even if your former spouse has remarried. To be eligible for benefits, your ex-spouse must have reached the age at which he or she is eligible to begin receiving benefits. There are several qualifications, including being unmarried, having been married to your ex-spouse for at least 10 years, having been divorced two years or longer, and more.
If your former spouse is deceased, you may still receive benefits as a surviving divorced spouse (irrespective of the age he or she died), assuming that your ex-spouse was entitled to Social Security benefits and that you meet qualifications. If you remarry before the age of 60, you will lose the ability to receive a survivor benefit from your deceased ex-spouse. The maximum amount that you are eligible to receive is 50% of what your former spouse is due at full retirement age.3
These are just a few of the many strategies for claiming your Social Security benefits. It’s important to work with an experienced financial advisor to understand all of your options and which strategies are right for you. At Engaging Women in Wealth, we offer a complimentary illustration of your Social Security benefits and opportunities, offering insight on when to start claiming and how much you can receive. To receive your sophisticated analysis, or to learn more about how we can answer your Social Security questions, contact our office today.
1LIMRA Retirement Income Reference Book, 2012; “Sources of Retirement Income study,” LIMRA, 2011
2Assumes average life expectancy of 83 for men and 86 for women and 2.5% annual cost-of-living adjustments (COLA).
3 Social Security Administration, September 2014.