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Opinion: Social Security maximization: the $779,000 question

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Getting more Social Security money – or potentially much less depending on how and when you claim – may have a significant effect on your retirement comfort, for the rest of your life.

To replicate a $2,000 monthly Social Security benefit for 25 years with a 2.5% annual cost of living adjustment would require a hypothetical $590,000 investment growing at 4% per year.

If you owned such a large investment, you would want to make sure it was well-managed. Your Social Security benefit should get the same attention.

You may start taking benefits as early as age 62, if you’re willing to give up 25% of your full retirement age benefit. That’d make your hypothetical $590,000 investment suddenly less than $443,000.

Or if you are financially able, you may wait until as late as age 70 to potentially receive up to 32% more than your full retirement age benefit. It would take a hypothetical investment of $779,000 growing at 4% per year to produce an equivalent income.

Claiming strategies
When you look at it this way, you can see why your Social Security claiming strategy is critical.

So delaying Social Security may mean significantly higher income, but of course it will take some time before the higher payouts beat what you would have received by starting earlier – your “break-even” date. But typically the break-even point may come as early as your late 70s or early 80s. Ask your financial professional if they can help calculate your break-even date. An analysis that also estimates annual Social Security cost of living adjustments is especially important for a retiree who has reason to believe their lifespan may be shorter than average.

But what if you delay Social Security to age 70 to receive the maximum benefit, and then die on the way to the mailbox to get your first Social Security check? Your surviving spouse will receive the equivalent of the higher of their own benefit or yours. They may benefit significantly from your Social Security planning. By the way, be sure you have a power of attorney in place now, so if you survive that heart attack on the way to the mailbox but are incapacitated, your spouse can cash the check without having to get a court order.

What about the fancy spousal Social Security claiming strategies you used to hear about? Some no longer exist, but this one still works: A spouse with a lower earnings record who reaches full retirement age before starting Social Security may choose to take 50% of the higher earning spouse’s benefit instead of taking benefits on their own account. If the lower-earning spouse then delays taking benefits on their own account until age 70, this may dramatically increase their own benefit, thereby ultimately increasing the overall income for the household.

The rules around spousal claiming strategies are complicated, and staff at Social Security Administration offices may not be aware of all the rules, so work with an experienced professional.

Another helpful Social Security tip: Your Social Security benefit may be dramatically reduced if you earn too much from working before your full retirement age, while simultaneously receiving Social Security checks. The offset is 50 cents for every dollar earned, until the year you reach full retirement age. At that point, the reduction is less to account for people reaching full retirement age during the year they retire. There are a number of moving parts to this equation.

After you reach full retirement age by the SSA’s definition based on year of birth, you can earn as much as you wish from working without affecting your Social Security benefit.

Program’s fate
Finally, a question we hear all the time: Will Social Security even still exist for me in the future? We believe hair-on-fire reports of Social Security’s impending doom are greatly exaggerated. Very minor adjustments to payroll withholding caps and rates, the cost of living adjustment formula, the definition of “full retirement age” (for future generations, not people close to retirement right now), and perhaps some form of means testing, can fix future Social Security funding shortfalls without significantly affecting current workers or benefit recipients.

Social Security and Medicare are critically important and very popular with voters who are in or near retirement, so we believe Congress will make the necessary adjustments well before real problems arise. So update your retirement planning if needed, including properly accounting for Social Security income. You paid into it, so you’ve earned the benefit.

Certified financial planner Kenny Gott is president at Piatchek & Associates and author of the book “Bottom Line Financial Planning.” He can be reached at kgott@pfinancial.com.

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