The number one Social Security strategy is maximizing the two-life benefit, says Bob Stowe of Stowe Financial Planning.
The approach, which is applicable to a married retired couple, is to delay collecting on the greater of the coupleís two benefits the longestóuntil the beneficiary reaches age 70, if possible. The couple should commence the second, or lesser, of the two benefits when the beneficiary reaches full retirement age to maximize the payout, says Stowe, a fee-only financial planner, based in Plano, Texas.
FILE AND SUSPEND
There are two ways this can be done, he says. The first is called file and suspend, where the spouse with the greater benefit claims it, but doesnít draw against it. A couple that can afford to wait would do this when the top earner reaches age 66, but would then allow the benefit to grow at 8% a year, untouched, until it tops out when the recipient reaches age 70. The advantage is that once the high earnerís benefit is claimed, the lower-earning spouse can now collect a spousal benefit of 50% of the top earnerís benefit, which could be more than the lesser-earnerís own benefit.
However, Stowe says, if the second spouse was also a worker and is entitled to a more generous benefit, then he or she would file a restricted application. This would let the second spouse receive the spousal benefit, while allowing his or her own benefit to continue to grow until the second spouse reaches age 70, at which point both spouses can begin collecting the maximum benefit.
In elaborating on this strategy, Stowe makes several other important points:
- With Social Security payouts, some advisors think in terms of the crossover point. But when the client is a couple, he says, the crossover point doesnít really matter, since the goal is to maximize the two-life benefitónot the crossover point. Because the odds favor one spouse outliving the other, and since the surviving spouse gets the larger of the two benefitsóthatís the one you want to maximize, he says.
- For a single client, the crossover point could matter. If the client lives to the average age of mortality, then whether the client starts collecting early and receives a smaller benefit for a greater number of years, or starts collecting later and receives a smaller benefit for a fewer number of years, the client will receive the same total dollars either way and itís a wash.
INVESTING PAYOUT STRATEGY ELIMINATED
But if the client expects to die early, then it makes sense to begin collecting early. Likewise, a client who anticipates living longer than average should delay collecting until age 70.
- It used to be possible to begin collecting Social Security benefits, invest the payout, and then pay it back to the Social Security Administration at a later date and start over again at a higher rate. But SSA now limits the timeframe for paying back any benefits that were received to within one year of receiving them, effectively eliminating this strategy.
- The people who work at the SSA ďare really very helpful,Ē Stowe says, ďand itís very worthwhile for your clients to have a discussion with them,Ē before starting to collect.
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