Social Security is all too often dismissed as a serious source of retirement income. How often do you hear someone say they just assume it won’t be there for them so they ignore it? But the fact it is, the program will be fully funded until 2033 even if no changes are made. And changes, both big and small, will likely happen along the way making the program a viable source of income for generations.
So even while the big picture has some question marks, suffice it to say that any client over the age of 40 will see Social Security as an important source of retirement income. So advisors can take steps now to help their current clients.
We asked regular magazine contributor Dave Lindorff to research and compile a set of tips for advisors. Yesterday, we presented the first four. Today, we have the next four. And check back as we continue to roll them out.
1. It’s possible for a lower-earning spouse to collect early, and then switch to a higher benefit later. Here’s how.
Say you are the lower-earning spouse. Your wife or husband, the higher earner, can file for benefits at 66 but then opt not to receive them. That allows this spouse to have the benefit amount continue to rise right up to age 70 and to continue to work and earn a high income without any penalty. Meanwhile, however, because he or she has filed for retirement, the lower-earning spouse can retire and start collecting the spousal benefit of the higher-earning spouse, which would be one-half of the higher-earner’s benefit amount.
In addition, if the lower-earning spouse is also 66, he or she can also continue to work without penalty. And since this person has not filed for his or her own Social Security benefits, he or she can wait to age 70, and then shift over to his or her own account and collect the maximum benefit.
2. Maximizing your earnings just before retirement can pay off big in higher Social Security benefits.
The Social Security administration calculates your benefit amount in retirement by averaging the top-earning 35 years of your working life, after adjusting earlier years for inflation. What this means is that each year over 35 that you earn more money, a lower-earning year is erased from the average. Think of those college years and post- college years when you were working for peanuts, or at part-time jobs. Those years get erased and replaced by your peak earning years as you head towards retirement–another good reason to work longer and wait to collect benefits.
3. Social Security benefits can continue to rise after 70, if you continue to work.
For those lucky enough to have the health and the desire to keep working past 66, or 70, or whenever you started to collect your Social Security benefits, if your earnings are greater than in earlier years that are being averaged into your benefit calculation, your benefit amount will continue to be adjusted upward as your higher earning income years replace those years you were working just out of college, since Social Security based your check on an average of your top 35 years of earnings (adjusted for inflation).
4. Don’t throw your deadbeat spouse out too soon!
An ex can retire on his/her former spouse's benefits, as long as they were married at least 10 years. Apparently, surprisingly many marriages blow up just shy of 10 years. This puts the advisor in the awkward position of needing to advise the lower-earning spouse that she (usually) should hang in there, even if hubby is a jerk, to get past that 10-year limit so as to be eligible later in life to collect spousal Social Security benefits.