Finding Security in Social Security

How much financial security can a person or couple derive from Social Security income (SSI)? For many it is the bulk of retirement income. Per the Social Security Administration (SAA), 52% of married couples and 74% of unmarried persons receive 50% or more of their income from SSI. For diligent investors, SSI may represent a “high side plus” in retirement cash flow. Failure to understand Social Security can be costly.

Your Social Security benefit is based on credits measured over 40 quarters, 10 years of work. Actual earnings are “indexed” to account for changes in average earnings since the year earnings were received. Averaged indexed monthly earnings are calculated for the 35 years in which you earned the most, excluding earnings in excess of the annual amount subject to Social Security. This determines your “primary insurance amount or PIA.”

Your PIA is the dollar benefit you receive monthly if you elect to start payments at your full retirement age (FRA). FRA no longer is pegged at age 65. For those born in 1938 or later FRA increases gradually until it reaches 67 for those born after 1960. For those turning 60 this year, FRA is 66 years. There is talk of extending FRA to age 70. Millennials should plan for that.

The minimum retirement age remains 62. Should you start benefits early at 62? The answer depends on other sources of income; investment assets; health, marital, and employment status; and your judgment as to longevity or lack thereof. My general counsel, “Do not take it early.”

Those turning 62 this year were born in 1952. Your PIA benefit will suffer a permanent 25% reduction compared to waiting until age 66. Further, if you delay taking your benefit at age 66, your benefit amount will grow by 8% per year until age 70. For someone turning 66, the 8% delayed benefit growth is a great deal, beating any fixed income offering available given low interest rates on guaranteed returns.

A study released 8/4/2014 by Nationwide Financial Retirement Institute indicates that 38% of retirees regret taking their benefit early. Be wary! Ads on radio and cable television tout “a weird trick that could add thousands to your Social Security payouts,” pitches from aggressive marketers of newsletters and books difficult to shake off once they have your contact information and credit card number.

It is not a “trick,” nor “weird.” It has to do with “claiming strategies,” whereby you as an individual or as a couple elect when and how to receive benefits. Consult an advisor familiar with Social Security claiming strategies. For example, someone age 66 this year could employ the “file and suspend” strategy. That may allow your spouse to trigger his or her spousal benefit while your own benefit earns delayed credits of 8% per year. Your benefit at 70 will be 132% of what it would have been at age 66. Higher amounts also offer a degree of inflation hedge as cost-of-living raises (COLA) are applied to the higher figure ongoing.

Keep in mind, for married couples the lower earning spouse is entitled to his or her benefit or roughly one-half of the higher earning spouse’s benefit, whichever is higher. At the death of a spouse, the surviving spouse gets the higher amount, but loses one of the monthly checks. This can result in up to a one-third cut in SSI cash flow. Advisors must look carefully at PIA benefits for couples since 8 out of 10 men leave the planet before their wives. If he was the higher earner, claiming strategies significantly may impact her financial independence.

Overall tax planning influences SSI strategies. If you work while receiving benefits before FRA, in 2014 you will lose $1 in benefits for each $2 you earn over $15,480. Ouch! After retirement you may have to pay taxes on 50% of benefits up to 85% depending on individual or joint income. Don’t you love our incentive-killing progressive tax system?

What you don’t know about Social Security can cost you. You earned it. Maximize it!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com