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North Bay Business Journal

Monday, September 3, 2012, 5:30 am

Wealth Matters: How to maximize Social Security benefits in retirement

By Teresa Mitchell

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    The average American spends 45 years or 90,000 hours working. She typically spends about half that time — 20 years or more — retired. Yet, planning for retirement is often overlooked or put off until it’s too late to adequately prepare.

    How ready for retirement are you? Have you calculated what you’ll need to live on in inflation adjusted dollars? And do you have a plan to maximize Social Security benefits?

    Many people don’t realize what a dramatic impact Social Security can make on their retirement income and how critical benefit timing decisions are. For instance, a baby boomer born in 1946 with maximum Social Security earnings would receive more than $1.5 million in inflation-adjusted benefits over a 30-year retirement period if she waited to take benefits until the age of 66, her full retirement age.

    Despite fears that the Social Security System will collapse in a few decades, the 2012 Trustees Report points out that the program will still be able to pay out 75 percent of its benefits in the unlikely event the underlying trust fund is drained.

    The temptation to take benefits early

    Social Security is really a lifetime annuity with annual cost-of-living adjustments. With the power of compounding, these annual bumps can really add up over the years.

    Taking Social Security as early as possible is tempting. However, the later Social Security is claimed, the higher the monthly benefit will be. As with other temptations, it’s a trade-off, but in the case of Social Security, claiming retirement benefits at 62 can be a costly decision for you and family survivors.

    How much of a trade-off? Waiting to collect benefits until your full retirement age increases your benefit by one third and waiting until your maximum retirement age doubles your benefit.

    Strategies for maximizing benefits

    For each year you delay (to maximum age 70), you receive up to 8 percent more in delayed credits towards your monthly benefit in addition to the annual cost-of-living adjustment. Social Security is a safety net at age 62 if you’re in poor health or unemployed, but if you can wait, you have a number of options.

    The most valuable strategies involving Social Security are only available if benefits are claimed at Full Retirement Age (FRA) or later. And there are yet more strategies to maximize long-term benefits for couples, survivors and divorced individuals.

    Maximizing benefits for married couples

    Couples are in a unique situation when it comes to Social Security planning because they have several advantages over their single peers which can significantly increase lifetime benefits. If you are in good health at retirement, one of you has a 40 percent chance of living into your 90s so it’s important to consider benefit options when claiming, especially the spousal benefit.

    The ‘file and suspend’ strategy

    One claiming strategy called “file and suspend” allows you to claim Social Security at your FRA, but suspend actual payments until a later date. This technique is especially useful if your benefits are higher than your spouse’s because you’re older or a higher income earner, and you’re not ready to retire, but your spouse is.

    For example, a husband plans to delay his benefit until age 70 but his wife wants to retire. He claims his benefit at his normal retirement age — say it’s 66 — but then immediately suspends it.

    This allows his wife to file a “restricted” application to claim spousal benefits based on her husband’s record. With this strategy, both the husband and the wife’s own benefits keeps growing to age 70, thanks to those delayed retirement credits.

    Divorce and survivor benefits

    Divorced men and women can take advantage of Social Security benefit options as well. If you were married for at least 10 years and are unmarried today, you are eligible to collect spousal benefits from Social Security based on your ex-spouse’s earnings history. These payments are equal to 50 percent of your spouse’s benefits if you start collecting at FRA, less if you take Social Security early. One strategy would be to claim the divorced-spouse benefit at age 66 while letting your own benefit build delayed retirement credits until age 70.

    If you are a widow(er), you are eligible to collect your deceased spouse’s Social Security payments as a survivor benefit. The widow(er)’s benefit can increase by 20 percent if Social Security was claimed by the deceased spouse at 66, not 62, and 60 percent if the benefit was claimed at 70. Claiming later can be a very effective way to improve a surviving spouse’s long-term financial security.

    Next steps

    Savvy Social Security planning can help you achieve a successful retirement. Your family situation, life goals, health and financial resources should all be carefully considered. The Social Security program has a number of options when claiming benefits, some of which may be more beneficial in your situation than others.

    It may be helpful to speak to an expert about your Social Security options since even some Social Security administrators don’t know about the complicated spousal strategies. Don’t claim before you learn about and assess all your options.

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    Teresa Mitchell, CFP, is a Certified Financial Planner with Sebastopol-based Willow Creek Financial Services, one of the leading wealth management firms in California. For more information, go to wcfsinc.com or call 707-829-1146. Wealth Matters is a monthly column from the firm’s partners.

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