Miami When it comes to claiming Social Security benefits, delaying is a popular idea among planners, but many people don't actually do it.
Most Social Security strategies basically revolve around, how do we get the most money out of the Social Security system for a couple, Daniel Moisand, principal at Moisand Fitzgerald Tamayo, told planners at the FPA Retreat here this weekend. It generates into what kind of delaying strategy makes sense because delaying means more money.
But in reality, most people do not delay benefits until after their full retirement, according to Moisand. In the past two years 45% of men and 50% of women filed for their Social Security benefits at 62, the earliest age possible. Meanwhile only 6% of men and 5% of women wait until age 70 to claim their benefits, he said.
Here's a look at why waiting can pay off and important factors advisors should consider when developing Social Security claiming strategies for clients.
IT PAYS TO WAIT
When a retiree employs the 4% rulewhich calls for a 4% withdrawal of the portfolio in the first year of retirementthe portfolio will plummet over a long-term if the retiree claims Social Security at the earliest possible age, according to data from the Journal of Financial Planning, Moisand explained.
But retirees can extend the life of the portfolio by delaying the start of Social Security. And the longer the delay, the longer the portfolio will last, the data shows.
JOINT LIFE EXPECTANCY
To be sure, Moisand warns advisors that there are times when it doesnt make sense to delay and planners must consider clients life expectancies when helping them decide when to claim.
Of course, he acknowledges that determining life expectancy is not easy and estimating life expectancies for couples further complicates the matter. And muddying the waters even further is a question of whether they should be calculated as individuals or as a couple.
We have to be careful if were talking about a single or a joint life expectancy, he said. When were doing Social Security planning, the benefits that you and your spouse receive arent a direct link.
It doesnt matter which spouse dies, for the purposes of benefits, because at the first death, the survivor benefit becomes the higher retirement benefit of the two spouses, he explained. Ultimately, the biggest challenge to assessing life expectancy, Moisand said, is the obvious unknown factor, and it can only be estimated based on tables and other factors.
There are also twists and turns regarding survivor benefits that advisors should know, Moisand said, explaining that clients dont have to be currently married to someone in order to gain Social Security dollars.
If a client gets married after age 60 they can still receive survivor benefits on an ex-spouse who they were married to for over ten years. Youre not stuck with the new guy, he quipped.
FILE & SUSPEND
Another popular tactic, the file-and-suspend strategy, allows for the client to file for benefits but suspend them, which results in delayed retirement credits while still allowing their spouse to begin claiming spousal benefits.
"If you file and suspend at your full retirement age any time before age 70, when the suspension is lifted you can say I want to go retro," Moisand said.
For instance, he explained, if an individual files and suspends their benefits at age 66 but is diagnosed with a disease at 68 years old they have the ability to lift the suspension and receive a lump sum of money based on the two years of delayed credits acquired. The individual also has the option to forgo the lump sum and instead receive a higher monthly payment than they would have received at 66 had they not filed and suspended.
Purposely restricting an application in order to allow for the younger member of a couple to obtain a spousal benefit until it is time to claim their own provides another way to boost clients' overall payout.
Though this strategy is legal, it's not well-liked by the administration. The administration calls this aggressive manipulation, he said. But, Everyone is eligible for this...Congress put this in place.