Melanie called the AgingOptions Radio Show last week. She’s turning 65 shortly and has been unemployed for about a year. She’d been told that she should wait until age 70 to collect but her unemployment benefits were running out in a couple weeks. Melanie said she was born in 1948. Since she is already past the age of early retirement, she could in reality begin collecting at any time but her full retirement age (FRA) is 66 years of age. If she had begun collecting benefits at her early retirement age, she would have been eligible for 75 percent of her benefits. If she begins her benefits in September, when she turns 65, she’ll be eligible for 93.3 percent of her benefits. She’s right that she’s better off if she can wait until age 70, Melanie could get benefits of 132 percent of her full retirement benefits.
Elder Law Attorney, Rajiv Nagaich suggested to her that if her plan is to return to work, she could choose to begin collecting benefits and if she found work she could suspend her benefits so they could accrue for when she was ready to begin those benefits in earnest.
If Melanie begins benefits and finds work within 12 months of applying for benefits, she has the option of paying back her benefits and essentially resetting the clock. She’d have to pay for other benefits that she received as well such as Medicare and any benefits a spouse or child may have received. The relevant paperwork for her to do that is Form SSA-521.
But Melanie has another option if she wants to continue to grow her Social Security benefit while she’s on her involuntarily enforced unemployment. This option assumes she has some savings such as a 401(k). A booklet called Efficient Retirement Design by Stanford University’s John Shoven and American Enterprise Institute’s Sita Slavov reported that, “With today’s life expectancies and today’s extremely low interest rates; it is in almost everyone’s interest to delay the commencement of Social Security. For many people, delaying to 70 is the value maximizing strategy.” The booklet also says the highest payoff is for the higher earner within a marriage but the second highest return is for single women. The exception to most Social Security strategies lies with individuals with poor health or short life expectancies.
The authors suggest two options to make it possible to maximize Social Security. The first option and one that Melanie is trying to make happen is just to work longer. Working longer will not only help Melanie’s benefits continue to grow at roughly 8 percent a year but Social Security benefits are determined by the top 35 years of work. So unless Melanie is exceptional, she probably didn’t make nearly as much at the beginning of her work life as she made at the end. Continuing to work allows her to replace some of those lower earning years, including the year of unemployment, with higher wage years. The second option is for Melanie to begin using her private assets and 401(k) balances. It’s also possible to combine the elements from both strategies.
Efficient Retirement Design analyzes how people should use those retirement assets they’ve been saving up to maximize those resources. It’s the authors’ contention that most people leave hundreds of thousands of dollars (really that’s what they say) on the table because they don’t put the work into creating a strategy and executing it. In other words, the easiest thing (and most likely least efficient thing) to do is go to Social Security and begin claiming and that’s the option most people choose.
Social Security benefits amount to 50 percent or more of all income for almost two-thirds of retirees and for more than a third of all retirees it amounts to 90 percent or more of their benefits. Maximizing those benefits can mean the difference between poverty and comfort especially for widows and widowers.
Not everyone has savings. A Bankrate survey released in June found that about 49 percent of Americans don’t have an emergency fund large enough to cover three months of expenses much less a retirement of 20 to 30 years. If that’s you, the strategy for using retirement savings first won’t help you but a white paper I wrote last week on claiming benefits can help you find other options that do pertain to you.
A financial planner that understands Social Security strategies can help work out a plan tailored to your needs. Contact one of our Preferred Partners for expert help.
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