By MICHAEL BAUCH
“Most people have no idea that if they begin Social Security [as early as] age 62, they will permanently lose at least 30 percent of their lifetime benefits,” says John Durante, an independent financial adviser whose near-retirement-age clients make up a large portion of his practice. “People need to understand the value of Social Security and how to make the best use of it,” Durante says.
Social Security is an important benefits program for all Americans, even the wealthiest. According to Boston College’s Center for Retirement Research, Social Security replaces one-third of employment income, even for the highest-earning 20 percent of the population.
The oldest Boomers will reach age 62 next year. They will be the first ones making the long-anticipated transition from accumulating retirement savings to developing an income stream that will last, hopefully, as long as they do. Smart Social Security planning will be critical to their success.
Most Boomers probably do not know that 62 is the earliest age when they can start receiving Social Security benefits (70 being the oldest allowable starting age), and that delaying the start of benefits could be one of the smartest retirement planning decisions they can make.
“Very few people understand Social Security, or that their decisions about it will affect them for the rest of their lives,” Durante says. He makes it a top priority to counsel his clients about Social Security.
When Should Benefits Begin?
“Taking Social Security early will permanently reduce a person’s benefits, which could have a long-term impact on a surviving spouse. And it really hurts people who continue to work, or elect to go back to work before they reach normal retirement age,” Durante says.
Another point: “Most people don’t know that they lose a dollar in benefits for every two dollars they earn over $12,960, if they begin Social Security before normal retirement age.” Durante notes that although the reduction is less for workers reaching normal retirement age, they still lose a dollar for every three dollars that they earn above $34,440. Workers can receive full benefits with no reduction starting with the month that they reach normal retirement age.
Since many Boomers plan to continue working, delaying benefits may help them to save more for retirement.
“They won’t need to withdraw assets so early. They can go on making contributions to their 401(k) plan, which means more tax-deferred income when they retire.
‘When I meet with people in their late 50s or early 60s, they sometimes have romantic notions about retiring early. For some, depending on their health, financial situation, and interests, this may be possible.” Some of his clients want to take Social Security early and want to stop working at the same time. “I point out to them that they would no longer be saving or have income, and would be withdrawing assets three to seven years before their normal retirement age. That is a tough double whammy to overcome. It’s not realistic for most people.”
A middle-aged couple who were Durante’s clients had about $1 million dollars in assets and owned their home free and clear. Their income goals, especially during the initial retirement years, were going to be similar to their pre-retirement needs -- about $100,000 a year. Durante ran a few calculations and told them that, starting at age 62, they could safely withdraw from their portfolio 4 percent each year, adjusted for inflation.
That would provide $40,000 per year. The husband would qualify for about $15,000 annually in early Social Security benefits. His wife, age 58, would not qualify for benefits for several years. “This fell very short,” Durante said. “They would need either to eat too much into principal or have to severely curtail their lifestyle.”
His recommendation was that they not cut back on their lifestyle, but both continue working for the next three to five years, “although with more time off to enjoy life. They also decided not to take Social Security early. Overall, they’ll be far better positioned to meet their income goals in three to five years.”
Plan Carefully
Durante points out two major reasons that individuals, and especially married couples, should wait to begin Social Security until at least their normal retirement age. “First, it’s an annuity that provides guaranteed lifetime income. Second, those who wait until at least normal retirement age will be rewarded with higher benefits -- and Social Security also has favorable income provisions for surviving spouses.”
He believes it’s vital that spouses know their options in case one of them passes away. “It’s especially important for the wife to know, since she will probably be the survivor and will need as much income as possible.”
Suppose an older, higher-earning spouse dies first. The survivor can choose to receive his or her own benefit, or 50 percent of the deceased spouse’s monthly benefit, whichever is higher. This is especially important if the survivor earned less than the deceased spouse during his or her working years.
If she chose a benefit amount based on her own lifetime earnings record, she would probably receive less than the survivor benefit based on her deceased husband’s earnings. “If the husband began benefits early, it would permanently reduce the wife’s survivor benefit.”
The question for those who begin taking Social Security at their normal retirement age, or older, is whether they will live long enough to make up for the lower payments they would have received by starting early.
An individual who receives $15,000 per year starting at age 62 could receive $20,000 per year by waiting until age 66. With anticipated life-expectancy improvements -- a couple now age 65 has a 50 percent chance of living to age 92, and a 25 percent chance of living to 97 -- it is likely that a higher percentage of Boomers will live to these older ages.
With this in mind, it may be a good idea to wait until age 66 to start taking Social Security. You can find out by using the break-even age calculator on the Social Security Website (www.ssa.gov). For best results, use your latest Social Security benefit statement when making this calculation. Gg
CALCULATING YOUR BREAK-EVEN AGE
Enter earlier retirement age: 62 years and 1 month
Enter corresponding monthly benefit amount $1,297*
Enter later retirement age: 66 years and 0 months
Enter corresponding annuity benefit amount $1,852*
*from client’s Social Security statement
ESTIMATED BREAK-EVEN AGE: 75 YEARS and 1 MONTH
Source: Social Security Online- Break-Even Age Calculator (www.ssa.gov)
Durante cautions that “the later the better” philosophy is not for every client. “For my clients, where one spouse or the other is in poor health, or who need the money for other reasons, I recommend that they begin benefits as soon as possible. Each client is different. I adjust my advice to each client’s situation.”
