But how can advisors help clients think about Social Security in a strategic way?
1. Don’t panic over reports that Social Security is going Bankrupt
People who warn that the Social Security Trust Fund is projected to run out of money sometime after 2033 often neglect to say that even then, current workers’ FICA taxes would cover 78% of retiree benefits. And meanwhile, with that date still two decades away, there is plenty of time to fix any shortfall. Example: Eliminating the cap on income subject to the FICA tax.
2. Don’t take Social Security benefits too early
The Social Security Administration reports that 76% of retirees these days are opting to start collecting benefits from the program at age 62. This is tossing away a huge amount of income.
As Alicia Munnell, director of Boston College’s Center for Retirement Research notes, delaying collecting Social Security until age 66, or better yet, 70, is the best single investment an ordinary person can make, since the benefit amount keeps rising each year you wait so that the benefit at 70 is 76% higher than at 62.
Example: A $12,000 benefit at age 62 would be a $16,000 benefit at 66 (not counting annual inflation adjustments), and if taken at age 70 would be $21,120 a year (also not counting inflation adjustments). Munnell argues that even if you need the money, it would generally be better to draw down your IRA or 401(k) balance in order to allow you to postpone collecting Social Security benefits.
3. Social Security benefits are not just for you
Contrary to a common misconception, there is no “marriage penalty” with Social Security. Both spouses can collect their full benefits. There is, however, often a better alternative if one spouse earned a lot more than the other, and has a much higher Social Security benefit coming: the spousal benefit amount is set at 50% of the higher spouse’s benefit amount. Thus if a high earning spouse is getting $30,000 a year in Social Security benefits, while the low-earner’s own earnings only resulted in a $12,000 annual Social Security benefit, that spouse could take a spousal benefit instead of $15,000 a year.
4. Social Security has a death benefit, which makes waiting to collect all the more important
When a higher-earning spouse dies, the surviving spouse starts receiving a “widow’s benefit” that is 100% of the deceased spouse’s Social Security benefit. That’s a good reason for the higher earning spouse to wait until age 70 to start collecting benefits. Where else can you get an annuity like that with an inflation clause linked (so far at least), one-to-one to the Consumer Price Index?
There is a 50/50 chance that one spouse, usually the wife, will live to be 90, so this is an important point to consider.