It wasn’t until the middle of the 20th century that “retirement” was much of an issue for the masses. Up to that point, few people lived long enough to retire! For those who were approaching age 65, retirement was the way an employer moved “used up” workers out of the way to make room for those who were younger and more able-bodied.
Advances in medicine and technology mean that most baby boomers will not only live well past age 65, but a significant number may find themselves living well into their 90s. If we project the current optimism about gene therapy and other medical miracles that may turn cancer and heart disease into conditions we can live with (and not die from), it’s not inconceivable that our grandchildren will experience life expectancies nearly twice as long as ours. Retirement income planning is a growth industry – and perhaps the next big thing!
The almost 80-year-old Social Security program now provides benefits to 59 million workers. The Social Security program pays those workers more than $2.3 billion dollars a day in benefits. Social Security benefits are based on covered wages, election age and, for some, marital status. From the beginning, the Social Security Administration encouraged a retirement income strategy with the analogy of a three-legged stool: we should plan on retiring with resources from our company pension, income from personal savings and income from Social Security. Yet with the demise of the traditional pension plan, as well as a mostly negative savings rate among Americans, it’s not surprising that more than 50 percent of Americans consider Social Security their primary source of retirement income, and that only 23 percent of those ages 55 and older report having retirement savings greater than $250,000.
Election options under Social Security can be tricky. Should I elect at the earliest possible moment – age 62 – in spite of the fact my benefit will be 25 percent less than if I wait to a “leading edge” baby boomer’s full retirement age (FRA) of 66? Indeed, more than 50 percent of all Social Security beneficiaries have historically elected to take benefits before reaching their FRA. But it could be argued that anyone with adequate resources would be better off waiting until age 70, since the total benefit difference is 76 percent between these “early” and “late” options. Also, the longer you wait to elect, the higher the survivor’s benefit among married couples.
Some will suggest that one’s sense of life expectancy should play into the decision-making process, since the mathematical “crossover” between early and late election may not occur until age 82 or later. But election timing decisions also should include factors such as the extent of savings and investments, current and future earnings, taxable income, and family circumstances. Still, one of the biggest questions is: What is the appropriate election strategy when considering a spouse’s benefit? An example may serve to highlight the complexity of spousal elections.
“John,” age 67, is 18 months older than “Martha,” his wife of more than 40 years. He has always earned the maximum for purposes of determining Social Security income benefits. Because he continues to work full time, he has not had a need for additional income. As a result, John has decided to hold off on receiving benefits and to wait until age 70 in order to receive a benefit that will be 32 percent higher than the benefit he would have received at age 66. Martha has reached her FRA and has an earnings record allowing for a benefit of $1,000 a month. However, she sees that her $1,200 spouse’s benefit (50 percent of her husband’s full retirement benefit of approximately $2,400) is greater than her own earnings record benefit. So she urges John to “file and suspend” on his own record so she can begin receiving the larger spouse’s benefit now. And in many cases, this is how the benefit election would proceed.
Here’s where an appropriately knowledgeable financial advisor can seem to “leap tall buildings in a single bound!” By reviewing the client’s situation with the appropriate software tools, the advisor points out a completely different option in which Martha elects her own earnings record benefit while at the same time John elects his spouse’s benefit on her record! This results in an initial monthly benefit that is $300 a month more than would have been the “obvious” choice. When John turns 70, he files against his earnings record and is rewarded with “delayed retirement credits.” Also because John – now age 70 – is collecting benefits based on his record, Martha picks up a “spousal benefit” of another $200 a month. This new cash flow will supplement their income needs in retirement.
There are scenarios that can make a lifetime difference of $50,000 to more than $150,000 in total Social Security income benefit payments. Many of those opportunities would not be obvious to the uninformed retiree. “Kids, don’t try this at home” is a sensible caution, and ample justification to work with a knowledgeable financial advisor.