Friday, December 21, 2007

Social Security - Maximizing Future Benefits

Kathleen Casey-Kirschling will be America's first boomer to collect Social Security benefits. She was born one second after midnight on January 1, 1946 and will begin collecting benefits in 2008. Since I retired in my forties, it will be quite a while before I am eligible for retirement benefits. However, The Wall Street Journal article The Baby Boomer's Guide To Social Security by Gary Ruffenach provided some interested information that caused me to start thinking about optimizing Social Security benefits.

The article offered an interesting strategy for maximizing social security benefits for a married couple where the higher wage earner is between zero and four years older than the lower wage earner. In the past, the recommended strategy was to wait until 70 before the higher wage earner claimed Social Security benefits. That's because the lower earning spouse gets the higher of 1/2 of the higher wage earner's benefit or their own benefit. Also, the lower wage earning spouse will get the bigger benefits when the higher wage earner dies. I think the break even is one person living past 80-84 depending on the situation.

However, waiting until 70 can be a long time. The Baby Boomer's Guide To Social Security provided another approach where the lower wage earning spouse takes reduced benefits at 63 based on her on earnings. The higher wage earning spouse then applies for spousal benefits at 66, the full retirement age. At 70, the higher wage earning spouses applies for their own benefits and the related spousal benefits. With this strategy, one can get Social Security benefits while waiting for the older higher earning spouse to reach 70. What a great idea!

The article also highlighted the Social Security Calculators which enable one to estimate benefits at retirement. I used the Online Calculator (#2) to estimate my future Social Security payment benefits and learned some interesting facts. First, I estimated full retirement benefits if I had continued working until the appropriate age. Second, I calculated my full retirement benefits if I have zero wage income from now until the appropriate age. Third, I projected my full retirement benefits if I earned $20,000 , in today's dollars, until the appropriate age.

Having zero wage income until full retirement age reduced my Social Security payments by about 40%. While I expected some reduction, I was surprised by the magnitude. Interestingly, if I earn $20,000 a year from now until my full retirement age, I can recover about 80% of the reduction, and therefore, only have a 12% reduction in Social Security benefits.

Based on the results from the Social Security calculator, I don't think I can just let Social Security benefits "happen." I'll need to do more analysis of on how maximize future Social Security benefits.

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

1 comment:

Kristin said...

This is good information. thanks
I tried two scenarios with the SS calc. 1) retire now in my 40's with zero income until 62 and 2) retire at 62 contributing full SS income until until age 62.

The first plan resulted in a 20% reduction from the second.

not sure why we have a difference, perhaps the calculator factors in total SS earnings? I have been at the SS tax max for several years