Update Nov. 15, 2015: The Budget Bill signed into law in late 2015 dramatically changes the popular “File and Suspend” strategy discussed here. People who can take advantage of it by April 1, 2016 are grandfathered, but depending on your birth date, the strategy has gone away for other folks. See our article “How the New Social Security Claiming Rules Affect You” for more.
Update March 11, 2015: The publication of this strategy on air generated a good-sized controversy about its fairness (see Comments below as well as this article in Politico: The Debt Wars: Boomers vs. Millenials.
March 1, 2015 — There has been a flurry of features lately on a subject we feel is critically important to almost every retiree – maximizing your Social Security benefits. One of the most instructive pieces we have seen is a short video segment by Paul Solman, the economic correspondent for the PBS Newshour: “Trips and Tips for Getting the Most Out from Social Security Benefit”.
Even for the experts, navigating the system can be confusing and costly. In this entertaining video Solman gives 2 major tips for maximizing your Social Security benefit. Both could mean hundreds of thousands of dollars to many people. The first is on the often misunderstood spousal benefit. The second has to do when to claim, and that depends on your answer to the provocative question, “What is Your Worst Case Scenario”.
One day during a tennis game Solman’s friend and Social Security expert Larry Kotlikoff told him that he was entitled to nearly $50,000 in spousal benefits. Solman, the seasoned economic correspondent, was shocked that he didn’t already know this strategy (although he has since collected on it). Basically the strategy for 2 working adults who are of approximately the same age works this way. At age 66 one spouse, presumably the higher earning one, claims and suspends her Social Security benefit. When the 2nd spouse turns 66, he files for the spousal benefit (50% of Spouse 1’s full retirement benefit at age 66). At age 70, Spouse 1 claims her benefit, getting 8% more each year for waiting past age 66. Spouse 2 drops the spousal benefit and claims on his own benefit at age 70. The advantage of this strategy is clear – both spouses get their maximum benefit at age 70, but the couple also gets the spousal benefit from age to 66 to 70 on one person. In the case of an earner whose SS benefit is $24,000, those 4 years of spousal benefits add up to $48,000. According to Solman, Americans are leaving at least $10 billion in unclaimed spousal benefits like this on the table every year.
“What is Your Worst Case Scenario?”
Think about that question, because we didn’t get it right. According to the authors the correct answer is not that you die soon after you start collecting and lose out on your fair share. It is unfortunate that you didn’t get to live a long life and that you lost out on some money, but worse things could happen. Nor is the right answer that you held out for the maximum benefit at age 70 but died before the break-even point – once again you are dead and it doesn’t matter. The real answer to the worst case scenario is this: you live too long, exhaust your savings, and spend years living in poverty on a smaller than it had to be SS benefit. With our increased longevity, this is the most serious problem that most of us face. In fact in the March 4 New York Times there is a quote from The Center for Retirement Research at Boston College: “…more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement.”
So how do you overcome that problem?
The best way to avoid running out of money in your 80s, 90s, and even 100s is to claim your Social Security benefit as late as possible. For a variety of reasons a very high number of folks take SS at age 62, the earliest they can claim a retirement benefit. But every year you wait to claim will put more money in your check. If you can put it off to age 70, either by working, spending less, or using your savings, your monthly check will be 76% higher than at age 62. Yet surprisingly, only 2% of people do this. Think about that 76% bump – with the average benefit currently about $12,000 a year, by waiting you can turn that into $21,120, which by the way, is indexed to inflation. That is a huge difference for people who live into their 90s. For higher earners, the extra dollars are even greater.
Too many claim too early, and lose out
Solman and Kotlikoff, along with their co-author, financial journalist and aging expert Philip Moeller, believe that the vast majority of people claim their benefits too early. There are of course good reasons to file before age 70. One is because you have nothing else to fall back on: you are unemployed, have no savings, and will starve otherwise. Another is that you and/or your spouse have a life threatening illness – there is no point in delaying (but even then don’t forget that if the deceased spouse is the higher earning, the 2nd spouse is eligible for 100% of that higher benefit for the rest of his/her life). Many others claim early because they don’t know any better, or they are afraid the system is going to run out money and they will lose out.
The authors address early claiming and many other questions in their new book, Get What’s Yours: The Secrets to Maxing Out Your Social Security. They think that it is nuts to worry too much about questions like: “How long do I have to wait before break even analysis”. Instead, you should worry about living in poverty if you live beyond your savings. They also dismiss the notion that you should collect because Social Security is broke. The facts are that SS has every dollar needed to pay all benefits for the next 20 years. And after that, even without reforms that could fix the system, it has enough to pay 70% of what is promised. Solman et al raise the excellent point that because Social Security is the 3rd rail of politics, no one is going to see any benefit cuts soon. No politician would be willing to let that happen. Update: Since the publication of this strategy on air there has been a mild controversy about its fairness (see Comments below as well as this article in Politico: The Debt Wars: Boomers vs. Millenials.
Want the Book?
In GET WHAT’S YOURS: The Secrets to Maxing Out Your Social Security (Simon & Schuster; February 17, 2015; $19.99 U.S.), Boston University economist Laurence Kotlikoff, financial journalist and aging expert Philip Moeller, and PBS NewsHour business and economics correspondent Paul Solman explain the traps to avoid and strategies to employ in obtaining the highest possible retirement, spousal, child, mother/father, survivor, divorcee, and disability benefits.
Find out for yourself
There are a number of tools including those online and personal consultation services to help you figure your potential SS benefits. You should start with the Social Security Administration’s free Online Retirement Estimator. After you use that you will have a much better idea of what you are entitled to.
Comments: Please tell us how you like the video, and if will affect your Social Security claiming strategies, in the Comments section below.