Teachers Get Dinged on Social Security

Hey Paul: I have taught in the local school system for 30 years. I plan to retire in a few years and my teacher’s pension will be about $36,000. I also managed a tutoring business for 10 years and paid social security taxes out of those paychecks. My Social Security statement projects my age 66 benefit to be $500 a month. How will my teacher’s pension impact my social security benefit?

 Teachers like yourself and other state workers generally do not pay social security taxes so they don’t receive full social security benefits. To the extent that they also worked in employment covered by social security as you have they will receive partial social security benefits.

There are two gotchas the SSA applies to those who did not pay into the social security system on all their employment. The first is called the Windfall Elimination Provision (WEP) and means that the reported value of $500 of your own benefit in your SS statement is likely going to be much lower in reality. As a rough rule-of-thumb expect about half in social security from what is stated on the SSA report.

The reasoning behind this reduction is that your limited number of years (10 in your case) in SS covered employment with a modest salary gives the impression that you are a low-income earner. Of course in reality you also had a good teaching salary in addition to the tutoring income.

The SS retirement benefit is based on a three-tiered formula in which the first $856 of averaged monthly earnings is replaced at 90%. The second tier drops down to 32% for earnings between $856 and $5157 and then is only 15% on higher earnings. That is low income workers get almost all of their working years’ income replaced by SS benefits. Middle-class and high-income earners get a larger SS check but at a progressively lower rate.

Accounting for your teachers’ pension makes you “middle-class” so the WEP reduces the first benefit bracket from 90% to 40%. I applied this lower rate to your situation and your own SS benefit will be about $222 a month rather than the reported $500 due to WEP. Sorry to be the bearer of bad news.

There are a several caveats and exceptions to WEP but most don’t apply to new retirees. One exception is that your SS can’t be reduced by more than half your pension. This applies primarily to those with very modest pensions. In your case SS will be reduced by about $278 that is much less than half your monthly pension of $1500.

Another WEP exception is that you can bump up the 40% rate by 5% for each year above 20 years that you have “substantial earnings”. If you have 30 plus years of substantial earnings you are no longer WEP’d! In 2016 substantial earnings was defined by the SSA as $22,050. In your case you only had 10 years that may have qualified as substantial earnings so you are stuck with the WEP 40% rate.

For those who serve as life-long teachers with little or no SS covered employment the WEP doesn’t come into play as you need at least 10 years of work to be eligible for your own social security benefit. But suppose you have a spouse (or ex-spouse you were married to for 10 years). Can you receive a SS spousal benefit approximately equal to half their retirement benefit or can you receive a SS widow benefit equal to their full retirement benefit if you survive your spouse?

No, sorry that’s not going to happen. The Government Pension Offset (GPO) reduces any spousal or widow benefit by two-thirds of your pension. Since your monthly pension is $3000, two-thirds of this or $2000 will be offset on any spousal or widow benefits. Since the maximum SS own benefit this year is about $2600 the maximum spousal benefit is $1300. So you definitely won’t be receiving a spousal benefit. If your spouse dies then your widow benefit would be sharply reduced by $2000. For anyone like yourself with a good pension, don’t count on much if any SS spousal or widow benefits.

Is there anything you can do to avoid or diminish the impact of the WEP and GPO? Yes, here are a couple of things to keep in mind. First, the WEP and GPO are triggered by the actual receipt of your teacher’s pension. If you can start your own SS or spousal benefit at 62 (or widow benefit as early as age 60) before you start your pension then these adjustments do not apply. Once you do start your pension they will likely wipe out any SS benefits but perhaps you can get a few years in of un-dinged SS benefits.

If you are married then it typically is a good idea to select a joint-life annuity rather than single life annuity. This provides longevity insurance at the cost of a smaller benefit check. However the smaller pension would reduce the GPO penalty on spousal and widow benefits. I wouldn’t make the annuity payment type based solely on trying to skirt the GPO but it is another reason to consider a joint payout.

The SSA has two-page briefs on the WEP and GPO (https://www.ssa.gov/pubs/EN-05-10045.pdf and https://www.ssa.gov/pubs/EN-05-10007.pdf) that give further details on these laws.

Dr. Paul Hamilton, CFP is currently offering a comprehensive planning session that will cover your specific situation in Social Security, Taxes, Retirement, and Estate Planning. The one-time fee of $500 is guaranteed to return savings, confidence and peace-of-mind. Contact him at Paul.Hamilton@USA-Economics.com to discuss your situation.

 A Free workshop covering Medicare will be held this Sunday (Aug. 14) at the Jessamine Public Library from 3 to 4pm.










Who Needs a Financial Advisor?

Hey Paul: We are a middle-class family with three children the oldest headed off to college next fall. We are halfway through a 30-year mortgage but otherwise do not have any debt. All our retirement savings of about $300K is in our employers’ 401(k). Do we need a financial advisor? What would be the benefits as we plan towards retirement and other life goals?

It’s a great blessing to have people in your life that you can rely on for trusted advice and accountability. The trick is, of course, how to identify those people with the skill set and character to deliver advice at a reasonable price.

The truth is that almost anyone can call himself or herself a “financial advisor”. If they provide “investment advice” then generally they need to register with the state and undergo background checks and have achieved a certification such as being a Certified Financial Planner (CFP). But that fact that a person is not a criminal and has some book knowledge of money doesn’t necessarily make them a good financial advisor.

A recent commercial (http://goo.gl/bG0tB5) features a Chase Financial Advisor visiting various retirement parties where his clients profusely thank him for making this all possible. While I am all for being grateful for those who have helped us along life’s journey, it is preposterous to claim that it was the advisor rather than the client who put in 40 years of work that is owed the lion’s share of the credit.

Perhaps the small print of the commercial should include Vanguard founder, John Bogle’s take on financial advisors:

“Our hypothetical fund investor has earned $1,170,000, donated $700,000 to the mutual fund industry, and kept the remainder of $470,000. The financial system has consumed 60% of the return, the fund investor has achieved but 40% of his earnings potential. Yet it was the investor who provided 100% of the initial capital; the industry provided none. Confronted by the issue in this way, would an intelligent investor consider this split to represent a fair shake? “ In other words your advisor brought you a bottle of wine to celebrate your retirement and drove up in the Porsche that you bought him.

Now that I have thoroughly bad-mouthed my own (side) occupation, let me provide some brighter views and various alternatives to getting good financial advice. There are several opportunities to obtain solid financial advice. For those who work in a company with a Human Resources office, some basic but very important guidance can usually be gathered on selecting a health insurance plan, flexible spending accounts, and opportunities to contribute (often with a company match) to the employer retirement account.

A second resource is your tax preparer particularly if they are a CPA. A CPA’s forte is tax planning but some have developed expertise in financial planning. Since they would be familiar with much of your finances from your tax return, turning to financial advice is a natural compliment to their services. My mother-in-law has been relying on David Hudson, CPA for many years for both tax and financial advice.

To truly receive comprehensive financial planning one must typically turn to a “financial planner” which as I mentioned earlier can mean many different things. The Hatfield and McCoy feud in financial advising is between those who are fee-based versus those who are commission based. I won’t drag you into all the gory details but much of the challenge is that people are reluctant to pay for advice but will accept a “free” financial review that almost always concludes with a sales pitch for an annuity, permanent life insurance &/or long-term care insurance. These aren’t necessarily bad financial products but often are riddled with exorbitant fees.

The fee-based financial planner is not necessarily a viable option for middle-class households. A typical comprehensive plan will run you around $2000 and for those assets they manage for you there is around a 1% annual fee. [Shameless self-promotion warning] In my own practice I charge $1000 for the plan and show the client how to manage their assets using Betterment.

Let me ask you something. When you’ve been at a restaurant and got a so-so meal did you complain to the manager? No, probably not. Your ‘problem’ is that you are too nice. And when your supposedly trusted advisor puts the hard sell on you won’t be able to say no or ask the tough questions and expect full answers.

What would be some tough questions to ask your advisor? If I invested the funds in an index fund instead of buying this financial product, what is the probability that I’d come out ahead? [No advisor will answer this. Watch out for a mildly related fact such as ‘70% of seniors rely at some point on long-term care.’] How much is your compensation for selling this product? [Could easily be more in an afternoon than you make in a month.]

Fortunately an imminent ruling by the Department of Labor is going to impose a ‘fiduciary standard’ on all financial advisors. A fiduciary is required to put the client’s interest above their own – a modern version of Love Thy Neighbor as Thyself.   The DOL fiduciary ruling will dramatically change how financial planners provide advice and sell products.

Do you need a financial advisor? You know it sounds like you’ve got some enduring financial principals figured out on your own – living within your means, avoiding debt, and working hard. My first advice would be to self-educate by reading a general book on finances as well as religiously turning to my More-Than-Money column each week. A second piece of advice is to seek out a fee-based planner and pay an hourly fee to get specific advice such as financing your child’s college education.

Dr. Paul Hamilton is an Associate Professor of Economics at Asbury University and a CFP providing financial coaching to middle-class Americans. He is available to provide free workshops to churches, local businesses and other groups.

 Contact him at Paul.Hamilton@Asbury.edu or www.USA-Economics.com









When should you start Social Security?

Paul Hamilton | More Than Money | Posted: Friday, February 19, 2016 8:01 pm

Hey Paul,

When should we begin our Social Security benefits? We are a middle-income couple with about $300K in our 401(k) and IRA. We are in reasonably good health, own our home and don’t anticipate any major changes in lifestyle as we enter our retirement years.

Jack and Diane

The timing of Social Security benefits may very well be the most important financial decision you’ll make as you enter retirement. In particular, as a middle-income couple you will have the full slate of potential start ages available. In contrast, the couple that enters retirement with meager savings has no choice but to start Social Security benefits as soon as possible. Alternatively, the wealthy couple can likely opt for the longevity strategy typically involving the high-earner waiting until 70 to start benefits while the lower earner starts spousal benefits at age 66.

The spousal age difference, relative earnings and several other characteristics will matter in making the Social Security decision. I will assume that the Jack is a couple years older than Diane and that he was the sole breadwinner — a situation that is quickly evaporating in America. A typical Social Security benefit for someone who made, in today’s dollars, annual incomes in the $40K’s would be about $1,500 a month — $18,000 annually. All future benefit amounts will maintain their buying power with annual cost-of-living-adjustments.

A quick overview of your benefit options is as follows:

• As all benefits will be based on Jack’s earnings you can start your benefit as early as age 62 and take a 25 percent hit, or wait until age 70 and enjoy a 32 percent permanent bonus on your benefit.

• Diane will only have a spousal benefit which is half of Jack’s age 66 benefit — $9,000. This is reduced if she starts the spousal benefits early with an age 62 reduction of 30 percent.

Three potential strategies

The Early Money Grab Strategy. Jack starts his own benefit at age 62 with a 25 percent permanent reduction, bringing his benefits to $13,500. Diane also starts benefits at age 62 and her spousal benefit, which would have been $9,000 at age 66 but is reduced to 70 percent of the full amount by taking it four years early, is down to $5,600. The total benefit is $19,100 for the two of you. If Diane predeceases Jack then he will just keep his $13,500 own benefit. If Jack predeceases Diane then her widow benefit will be 82.5 percent of his full retirement age benefit — $14,850.

The Patience Wins the Game Strategy. This may be an unrealistic plan in that you may exhaust your entire life savings before Social Security kicks in. The attractiveness of this strategy is that it provides the largest lifetime benefits if you both or even just Diane lives into her 90s. The key steps are that Jack, as the high-earner and older spouse, will wait until age 70 to start his own benefits. This will increase his benefits by 32 percent to $23,760. What you’ve done is locked in the maximum, not only for yourself while alive, but also for your wife. Diane’s key step is to wait to age 66, when she can start her full spousal benefit of $9,000. The spousal benefit doesn’t get any larger after full retirement age so no use in delaying it any further.

The Avoid Extremes (a.k.a. Smart) Strategy. Let me suggest that you think about a compromise solution that combines some early cash flows with the longevity insurance of waiting. If Jack waits until age 66, he’ll get the full benefit of $18,000. Diane can start her full spousal benefit of $9,000 at age 66. So, combined you’ll have $27,000 from social security. When one of you passes, the surviving spouse still receives $18,000 for life.

Social Security and retirement savings

You can reasonably withdraw $8,500 annually from $150K of retirement funds and expect it to last until age 90. Combining this with Social Security benefits brings gross income up to $35,500 — not much lower then your working days earnings. I’d call that a comfortable retirement!

Social Security benefits won’t be taxed as long as your taxable withdrawals from your 401(k) and IRA are not more than $18,500 annually. As a couple, you’ll need to fully finance the first four years out of your retirement savings — this could burn through half of your $300K. But $150K in retirement savings with no debt and $27K of untaxed Social Security perpetuates a middle-income lifestyle for many retirement years.

I have only discussed one specific case here. In practice everyone has a unique life story with various marital histories, earning levels and accumulation of retirement assets. As a service to the readers of this column I have provided a free social security planning page on my website, USA-Economics.com. This planning app will allow you to better understand your own Social Security benefits similar to what I have described for Jack and Diane. No one should have to make the biggest retirement decision on his or her own.

Social Security isn’t just for seniors

Paul Hamilton | More Than Money | Posted: Thursday, February 11, 2016 6:59 pm

Hey Paul,

My parents are close to retirement and they each have a Social Security statement that gives their retirement benefits at different starting ages and shows their lifetime earnings. I don’t recall receiving anything like that. I am not thinking too much about retirement yet but should I have received a Social Security statement?

Leftout by SSA

The SSA stopped sending out annual reports to all workers about five years ago as a cost-saving measure. They still send a statement when a worker reaches 60 as that is when Social Security benefits become most relevant. However, Social Security isn’t just for old folks — it provides life and disability insurance to workers of all ages.

Fortunately, you can easily access your Social Security information online. Go to SSA.gov/MyAccount to set up access. As long as you know your name and Social Security number and can recall some personal trivia such as old addresses, lending banks, models of cars then you’ll be able to see some very interesting and important benefit information.

The chart accompanying this column shows a typical statement for a middle-class worker. Let’s suppose your report is identical. The report includes estimates of what your monthly benefit will be if you retire as early as possible at age 62, at your full retirement age of 67, and the latest age of 70 to begin benefits. This worker earned $47,423 last year but his retirement benefit at age 67 is predicted to be $1,680 monthly — $20,160 annually in today’s dollars. The projected benefits are based on your earnings history and then assumes you earn your past year’s income up to the start of your Social Security benefits. A lot can happen both to your actual earnings, as well as Social Security policy, in the few decades before you retire so don’t put too much weight on these retirement benefit projections.

More pertinent to your situation are the life and disability benefits. The core benefits are all roughly the same whether it turns out to be retirement, survivor or disability benefits — $1,680 if you make it to 67, $1,569 if your spouse makes it to 67 without you, and $1,527 if you become disabled this year. The SSA doesn’t track your family structure so the report will estimate family benefits under the assumption that you have a spouse and minor children.

I don’t like to bring up to people the possibility of their early departure from this world, but it may be of some comfort that your spouse could receive $1,176 in mother benefits while she has one or more children under 16. Additionally each child under 18 (or 19 and still in high school) can receive $1,176 — this is 75 percent of the full widow benefit of $1,569. Your family maximum benefit is $2,908 so if you have a surviving spouse and two minor children then each benefit will be reduced to remain at the benefit cap.

So, the next question to ask yourself is whether $2,908 along with your wife’s earnings, assets and life insurance proceeds are enough to sustain her while the kids are still around. Once the kids age out of Social Security, she will not receive any benefits again until early widow benefits kick in at age 60 at the earliest. In this case she will only receive $1,122 –- 71.5 percent of the widow benefit of $1,569 if she had waited to start benefits at age 67. Of course, she may have her own Social Security benefits that are larger or remarry.

Enough about a world with you. The next scenario may be equally sobering: Your health deteriorates to the point where you “can no longer perform any substantial work.” Social Security disability is more restrictive than most private disability insurance. If you qualify as a disabled worker you are entitled to a benefit of $1,527. Your wife and any minor children are entitled to 50 percent of this amount but only up to a family maximum of at most 150 percent of your benefit. Thus the highest monthly disability check your family could receive is $2,290.

In summary, it is well worth obtaining and looking over your Social Security statement even at younger ages to see what level of life and disability insurance would be available.

Hey Paul,

My husband and I are both in our early 30’s with two children ages 5 and 8. I have worked part-time since our first child was born. My husband had worked in construction but for the last few years has worked at a factory. We are both relatively healthy as are our children. A friend mentioned they had bought disability insurance through an insurance agent. Should we have disability insurance?

Young and Invincible

The decision to purchase disability insurance is complicated by the unpredictable onset and different forms disability can take. Even at your peak health years there is the possibility an accident or chronic illness will limit your ability to work.

This reminds me of a story of a professor who apparently had a stroke while teaching class. A student quickly called 911 reporting that the prof was hunched over and mumbling incomprehensibly. The ambulance arrived but emergency personnel were not given a room number. The EMS team ended up taking out five other professors on gurneys before they got the right professor.

OK, I made up this story but the moral is that if your work requires your full mental or physical abilities then acquiring disability insurance should be given strong consideration.

The SSA reports that about 30 percent of workers qualify for Social Security benefits at some point in their working years. This is astonishing given that the SSA definition of disability includes “the inability to engage in any Substantial Gainful Activity,” which is any job with $1,130 in monthly earnings. So a middle-income teacher or high-income lawyers are not eligible for Social Security disability if they can perform a minimum-wage job.

Based on what you have told me, both you and your husband would likely be eligible for Social Security disability benefits if you meet certain criteria — have earned income at least half the time since age 21 and in five of the last ten years. Earning only $5,040 in the 2016 calendar year qualifies you for a full year of work credits.

The first thing to do is to check what level of Social Security disability you may be eligible for if you become disabled. Reliable estimates of this can be retrieved online from the SSA but need some clarifications. Importantly, Social Security disability covers only major disabilities where the worker can no longer “perform any substantial work;” this is in contrast to most private disability policies that cover “own occupation.” For example, if your husband could no longer do construction work but could still work at a minimum-wage job, then Social Security disability would not kick in.

Social Security disability essentially allows the worker to retire and provides a benefit comparable to if they had worked up to their retirement age. In addition, a spouse and minor children receive up to 50 percent of the worker’s benefit. However, the total family benefits are usually capped at 150 percent of the worker benefit. The average worker’s Social Security benefit is about 40 percent of their average earnings, so the family maximum benefit would only replace about 60 percent of the worker’s income. Where does the other 40 percent come from?

If there were a group disability plan through your husband’s work, I would give that strong consideration. For one thing, there is likely no medical exam required. Secondly, the benefits are tailored to the types of disability that commonly disrupt this type of work. Like any insurance it is not an investment — you are likely to not need the benefits, but if needed, the benefits are a lifesaver.

I would prioritize other items such as term life insurance and saving for retirement above the need for disability insurance. If your budget can accommodate a couple of hundred dollars each month to purchase private disability insurance to supplement Social Security disability benefits, then give it serious consideration. Not all of us are profs that can lecture incoherently until retirement.

Spousal benefits and the demise of social security


Paul Hamilton | More Than Money | Posted: Thursday, February 4, 2016 1:38 pm

Hey Paul: I am a physician who will turn 66 this year. What’s the highest possible social-security benefit that I would receive based on high earnings? I was married to my first wife for 20 years and have been married to my second wife also for 20 years. How do their social-security claims change my benefit?

Good Doc

Assuming you earned over the social security earnings cap — $118,500 in 2016 — every year for the past 35 years, your full retirement benefit at age 66 would be about $2,663 monthly — $31,956 annually. Your spouse — and your ex-spouse since you were married for more than 10 years and assuming she is currently unmarried — would be eligible to receive an amount equivalent to 50 percent of your benefit. These spousal benefits are in addition to your benefit and don’t reduce it or each other’s potential spousal benefit.

If you delay the start of benefits to age 70 your benefits will be 32 percent higher — $3,515 monthly and $42,182 each year in today’s dollars. If you predecease either of your spouses they could switch from the spousal benefit to a survivor benefit equal to your own benefit. So, to your wives, you are annually worth $31,956 alive and $84,364 dead — be careful!

Hey Paul:

A coworker of mine just retired and, according to him, he is receiving his own benefit of $2,000 and his wife, who never was in the work force, is getting a spousal benefit of $1,000. I worked the same position with identical pay as my friend and my wife worked part-time earning about 30 percent of my salary. We looked up our potential benefits and were surprised to see that they were identical to our friends’ — my benefits at $2,000 and my wife’s benefits at $1,000 per month. Is this right?

Show Me the SS $

It depends on what you mean by “right.” For the lower-earner the SSA first calculates a worker’s own benefits based on their earning and then tops this off with a spousal benefit to bring the combined total up to 50 percent of the higher-earner’s benefit at age 66. For your friend’s wife she had no benefits of her own but received the full spousal benefit of $1,000. Your wife may have had her own benefit of roughly $700 but then an excess spousal benefit of $300 made her combined benefit $1000. So technically and in reality these are the right amounts.

Is it fair that your wife paid 6.2 percent of her wages toward social security and won’t receive any higher social security benefit than if she never worked? Many people would agree that seems unfair for the government to collect payroll taxes and not reciprocate with higher social security benefits. A countering question: Is it fair that a married couple can receive 150 percent of the benefits of a single person who has an identical earnings history? Tough call.

Hey Paul:

I met the love of my life at an AARP meeting. We are planning to tie the knot this year. How will marriage impact our social security benefits?

Mrs. Wonderful

Congratulations on your impending nuptials or as we say around here, getting hitched. Evidently the AARP informational events are doubling as excellent social mixers.

One near-term impact is that you will become eligible to draw spousal and survivor benefits on your new love. Spousal benefits become available after one year of marriage along with other stipulations, such as that you are 62 or older and your spouse has begun their own benefits.

Survivor benefits eligibility occurs after nine months of marriage — and regrettably the passing of your spouse. The surviving spouse must be 60 or older (or 50 or over and disabled) to begin survivor benefits. There could be additional survivor or retirement benefits if you have minor children.

If either you or Mr. Wonderful had a previous marriage then your new marriage will impact social security benefits based on those previous relationships. If you are divorced and remarry then you forfeit receiving spousal benefits based on your ex-spouse’s earnings. If you were widowed and remarry before age 60 you also forfeit survivor benefits from your deceased spouse’s earnings. If you remarry after 60 you maintain the survivor benefits.

Hopefully yours and any marriage won’t let social security be the deciding factor in whether to wed. However, some combinations of marrying a relatively low earner, being widowed and remarrying before age 60 will result in significant loss of social security benefits.

Hey Paul:

I am in my early 50’s and greatly looking forward to a comfortable retirement starting in a decade, partially financed by social security benefits. Do you think social security will be different by the time I am retired?

Counting the Days

Yes, likely very different and not in the direction you’ll like. Some policy changes are already set to happen such as upping you full retirement age from 66 to 67. This will increase the benefit reduction if you take benefits at the earliest age of 62 and diminish the benefits of waiting to age 70 to start benefits.

Recent legislative changes will also phase out strategies such as one spouse being able to take their spousal benefit at age 66 while the other spouse delays until age 70 to receive their maximum benefit. This is the so-called “file-and-suspend” strategy.

Let me suggest a more radical social security policy change related to my recent posts on spousal benefits. Currently a non-working spouse can receive up to 50 percent of their spouse’s full retirement age benefit. This is a benefit that my mom and many others currently enjoy as reward for “raising the kids.” But actually there doesn’t have to be any procreation or cohabitation — only a marriage license that is available for a nominal fee to any two adults in every county, with the possible exception of Rowan. Can an old geezer marry a single mom and upon his death provide survivor benefits to her and her kids? Can two people meet on social media, get married, never meet in person and then draw spousal or survivor benefits? Can a happily married couple get divorced, continue to live together and then simultaneously draw ex-spousal benefits? Yes. All these are entirely within the letter — but not the spirit — of social-security law.

I believe it is likely that we’ll see social security benefits reconfigured to be similar to many private pensions in that the wage earner can designate different payouts to fit their family situation. The highest payout would be based on only their own lifetime. A lower payout would occur if the payout continued over two lives with adjustments for the ages of the beneficiaries. This payout method would do away with arbitrary definitions of marriage and the 10-year marriage rule as well as first-dollar recognition of payroll taxes toward potential social security benefits.

In summary, I don’t think you need to worry about social security not being there at all for you in 15 years. But the benefit levels will certainly be mildly if not significantly reduced for people of your age and younger.

Dr. Paul Hamilton is an Economics Professor at Asbury University and a Certified Financial Planner. Questions you’d like to see answered in the column can be sent to paul.hamilton@asbury.edu. All reader-submitted questions answered in the column will be published anonymously and questions may be edited for clarity or generality.

Dr. Hamilton can provide free workshops for local churches, businesses or other groups. His website is usa-economics.com.

Be thoughtful with timing of Social Security retirement


Paul Hamilton | More Than Money | Posted: Friday, January 29, 2016 7:12 am  

Question: I am a 66-year-old lifelong bachelorette. I have just retired from a career in real estate sales where my typical income was $45,000. I visited the social security office in Lexington and was told I could begin my social security benefits next month and receive $1,500 monthly. I came across a financial website that claimed there are social security strategies that would add $200,000 to my lifetime social security benefits. Are these claims valid? If so, what are the tricks?

The timing of when to start Social Security benefits is an important part of retirement planning.

As you may know, social security benefits are paid for life (or as long as the U.S. government is solvent — but that’s another column). These benefits are adjusted annually to keep up with the rising cost of living.

Without any current or past spouses — and I assume no minor children — your benefits will be paid based on your own earnings and only to you. You have reached what the Social Security Administration calls “full retirement age” of 66 (this will be shifted up to 67 in few years). You can start your benefits now and receive the equivalent in today’s dollars of $18,000 annually for the rest of your life.

Let’s suppose you live to 82. Your total benefits would be $288,000 — 16 years of receiving $18,000 per year.

But each year you delay benefits past age 66, your benefit will increase by 8 percent. If you can hold off starting benefits until 70, then your benefit will be $23,760 — 32 percent higher than the $18,000 you would have received retiring at 66.

If you live to age 82 under this new scenario, the total benefits will be $285,120. The benefits are set up such that they are “actuarially fair” — a single person will receive about the same benefits whether they start benefits at 66 or 70 (or any age between 62 and 70) and live to their life expectancy of 82. Of course, you may live to age 99 or pass away tomorrow, so averages aren’t always the best target.

This is where many popular financial planning outfits such as MaximizeMySocialSecurity.com are able to come up with much higher projected lifetime benefits. The general idea is that you should plan for the ‘best-case’ scenario of living to 90 or maybe even 100.

The reasoning behind this is that if you die “young” — say, in your 70s — then you didn’t need the extra money. But if you live into your 90s, you’ll be grateful for the much higher social security benefits.

Suppose you live for thirty years after retiring. Your lifetime benefits would be $540,000 if you start them at age 66, but they will be $712,800 if you wait until 70. But this $172,800 in extra lifetime benefits is only as valid as the assumption of you living to 96.

So when is the real best age for you to begin social security? That decision has to be based on what other retirement income sources you have — such as a pension, 401(k) or annuities — and how they can meet your living expenses over an unknown future.

Many financial professionals will side with the software and advise you to be patient and hold out to age 70 for social security. But only about 2 percent of retirees wait that long.

I recommend that you liberally plan the next 16 years of life – big vacations, generous gifting to family and charities and even negative events like high medical or long-term care expenses.

If $18,000 a year along with your other financial resources will support your “lavish lifestyle” until 82 — and you’re OK to live simply on $18,000 and whatever money may still be available for the rest of your days, then start social security right now.

If you can’t meet your lifestyle goals, then it may be best to delay social security and forgo that cruise around the world.