National Issues

01 JAN 2014

The "Magic Age": What You Need to Know About Social Security Claiming Strategies

Robert Donaldson

You may have heard that choosing the right social security claiming strategy can help you and your spouse maximize your benefits. But which strategy is best? What's the appropriate age to claim? What about spousal benefits? If you're wondering which path to take, these social security basics may help you get started.

Choosing the right age to claim

Retirees can apply for social security anytime between ages 62 and 70. Claiming as early as age 62, however, can permanently reduce not only your benefits but your spouse's survivor benefits. On the flip side, delaying until age 70 rewards the worker with the maximum benefit and locks in the highest possible benefit for a widow or widower. Of course, retirees who wait until age 70 to claim benefits may need to bridge the income gap by drawing down their retirement portfolio. So, what is the "magic age" to claim?

Until you or your spouse reaches your full retirement age (FRA), you won't be able to take full advantage of social security claiming strategies. For many of today's retirees (those born between 1943 and 1955), FRA is 66. If you fall into this category and claim your benefits prior to age 66, you will automatically apply for both your worker benefit and any additional benefits you qualify for as a spouse, assuming your spouse is already receiving benefits. If you wait until your FRA to claim, however, you can elect to take one benefit or the other, switching them at a later date if advantageous. In addition, once you reach your FRA, social security benefits are no longer offset by earned income from work.

It's worth noting that the magic age doesn't have the same effect on spousal survivor benefits. A surviving spouse can claim either his or her own benefit or the survivor benefit independently (even prior to FRA), then switch to the other benefit after FRA. In other words, by claiming prior to FRA, the spouse isn't deemed to have claimed both the survivor benefit and his or her own worker benefit.

Making the most of spousal benefits

It's a common assumption that, if both spouses delay claiming social security until age 70, they can maximize their monthly benefits. That's not always the case, however. To help ensure that you don't leave money on the table, here are a few strategies to consider. (Note that, for a couple to take advantage of these strategies, at least one spouse must have reached FRA.)

  • Claim the spousal benefit when one spouse reaches FRA. You can only earn delayed retirement credits on your own worker benefit, not by delaying the spousal benefit. If your spousal benefit will always be greater than your own benefit, it makes sense for you to take advantage of the spousal benefit sooner rather than later.   
  • "Claim now and claim more later." With this popular strategy, you apply for social security at FRA but suspend payments until age 70. This allows your spouse to submit a restricted application for spousal benefits if he or she has also reached the magic age. In the meantime, both of you will continue to earn delayed retirement credits on your own worker benefits. Then, when each of you reaches ages 70, you can apply for your maximized benefits. (Keep in mind that only one spouse can file and suspend so that the other can claim spousal benefits; it's not possible for both spouses to file and suspend.)
  • Claim the lower benefits first. Cash flow needs may require you to turn to social security before both spouses reach FRA. But, if your budget permits, there's still an opportunity to enhance your overall social security strategy. Here's how it works: The spouse with the lower benefit claims as early as age 62; meanwhile, the other spouse waits until his or her FRA and files a restricted application for spousal benefits, which will amount to half of the lower-earning spouse's full retirement benefit. Then, at age 70, the one receiving spousal benefits switches to his or her own worker benefit, which has accumulated delayed retirement credits. Once the spouse with the higher earning history claims his or her retirement benefit, the other spouse can switch to the spousal benefit if it's higher.

Beyond the basics

It's important to note that many social security claiming strategies seek to provide a larger cumulative benefit over a couple's lifetime rather than generating a greater benefit today. If you and your spouse have shortened life expectancies, a delayed claim may shortchange you, possibly lowering your current standard of living or depleting retirement assets that could pass to your heirs.

Clearly, when it comes to determining the optimum social security claiming strategy, numerous variables are at play. Your financial advisor can help you evaluate the benefits of different strategies and find the option best suited to you and your unique situation.

 

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Robert Donaldson is a financial advisor located at Advisory Group West. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (818)241-9061 or at (Derek@advisorygroupwest.com).

©2013 Commonwealth Financial Network®

 

 

The Light at the End of the Tunnel

By Commonwealth

As we look at the trajectory of the U.S. economic recovery, once again this year we see a light at the end of the tunnel and wonder if it is an oncoming train. At this point, it looks as if 2012 may bring the start of sustainable growth. But the end result remains vulnerable to outside influences, so the real question is, How will we know?

The bright spots: employment and housing

When it comes to sustainable growth, economists focus on a number of key indicators, including:

  • Employment. Employment generates wage income, which is the base of consumption. Consumption accounts for more than two-thirds of our economy, so without growing employment, we can't grow anything else with any lasting momentum. The 2012 employment picture has been encouraging, despite some recent weakness. Increases in employment have been accompanied by growth in incomes, which has helped to support an increase in consumer spending.
  • Housing. We're starting to see rising prices in some markets, as well as an uptick in housing starts. Combine that with high affordability levels, low mortgage rates, and rising rents, and you've got a recipe for a continued recovery.
  • Durable goods demand. You may not need a new car every year, but you will eventually, and it seems that many Americans are digging into their pockets to fund big-ticket purchases again.

Are these improvements sustainable? They could be. The current level of employment growth seems to be sustainable around a trend line that would promote continued recovery; continued growth in spending would follow as a result. The housing recovery and growth in durable goods demand should also be able to continue their forward trajectory. Factor in a gradual recovery in local and state government spending and slow growth in business investment—both of which are occurring—and the recovery appears to be on track.

So what could derail it?

The obstacles: political vs. economic 

Major obstacles to the ongoing economic recovery would likely be external events:

  • A war in the Middle East
  • A European economic collapse
  • A significant political event in the U.S.

Of the three, the most probable seems to be the last (although ongoing debt concerns in Europe have certainly added to market volatility). Notably, however, all three examples are political, not economic, events. That political events now trump economic ones is a reflection of the new world order. In some sense, though, this is just a reversion to the origins of the economics discipline, when it was known as political economy. Events in the real world are once again dominating those in the financial world.

Which brings us to the major issue of the day.

The oncoming train? 

It's no secret that the U.S. has budget problems, which came to light in a very public way last summer with the debate in Congress over whether or not to raise the debt ceiling. Now, we have to face the reality that this year's presidential election will determine the government that will have to make long-term decisions about how to deal with the country's budget woes.

To understand the basis of the decisions they will make, we must first understand the underlying facts:

  • The so-called fiscal cliff. The expiration of the Bush tax cuts, the sequestration of government spending, and the renewed debate over the debt ceiling are all expected to hit at the end of the year—or sooner. As a result, we could be facing some extreme uncertainty and the possible derailment of the economic improvements we've seen thus far.
  • Spending and taxes. We currently spend about 50 percent more than we raise in taxes; taxes cover about two-thirds of spending and borrowing accounts for about one-third.
    • Should we just raise taxes? The numbers above mean that if we raised taxes without cutting spending, taxes would have to go up by about 50 percent.
    • What about cutting spending alone? We would either have to substantially eliminate discretionary spending (defense and other government programs) or cut back on discretionary spending while also reducing Social Security and Medicare spending. Neither "solution" would sit well with U.S. citizens; just look at what happened in Greece.

The light

Despite how uncertain our economic picture may be, especially when you consider the political obstacles that could derail the recovery, there are positive developments at work. As financial advisors, we work with investors to help keep their financial plans on track, regardless of what the future brings. And we'll be keeping an eye on that light in the tunnel and hoping for the best.

©2012 Commonwealth Financial Network®

 

 

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Robert Donaldson (CA Insurance License #0541081) is a Registered Representative and Investment Adviser Representative with/and offering securities and advisory services through Commonwealth Financial Network, Member FINRA / SIPC, a Registered Investment Adviser. Additional advisory services offered by Advisory Group West, a registered investment adviser, are separate and unrelated to Commonwealth.

This communication is strictly intended for individuals residing in the states of AZ, CA, FL, HI, LA, NY, TX, UT, WA.