Thinking beyond Social Security: Congress creates opportunity for advisors
One part of the Bipartisan Budget Act of 2015 signed into law on November 2, 2015 discontinues the popular “File and Suspend” and “Restricted Application” claiming strategies that allowed married couples to continue to grow one spouse’s Social Security benefit while the other claimed a spousal benefit. We believe Social Security should still be a central part of your retirement conversations with clients.
- Social Security makes up 40% of the average American’s income in retirement1 – a substantial chunk of an individual’s retirement plan.
- The new law arguably represents one of the first moves to keep Social Security solvent in the future. Of course, more changes may still need to be considered – such as raising the minimum or full retirement age, or changing the maximum taxable earnings cap on Social Security withholding – but for now, naysayers who believe that Social Security will collapse may have to take a step back.
There are two areas of Social Security that are integral to retirement income planning and that we have observed investors could benefit from additional guidance on from trusted advisors:
- Deciding when to claim
Over 70% of Americans file at the minimum retirement age of 62.2 That means they are taking a 25% haircut on their potential Social Security payments! Of course, there may be valid reasons for claiming early – e.g., poor health, disabled children, older spouse, or widowed. But in many cases, Americans are choosing this option because they simply haven’t saved enough for retirement. They need the Social Security payments as early as possible.
- Spousal and widow/widower benefits
Many investors are unaware of available spousal and widow/widower benefits. For instance, currently a spouse may receive up to 50% of a current spouse’s full retirement age benefit, or the same amount from an ex-spouse if currently single (as long as the marriage lasted for 10 or more years). And a widow/widower may receive up to 100% of the deceased spouse’s benefits – even if the deceased spouse waits until age 70 to claim. This could effectively result in up to a 32% increase in the widow’s Social Security benefit.
Not to mention, there are additional Social Security benefits available for specific circumstances, such as disability and having young children. Knowing how Social Security may affect your clients’ retirement income plan and helping your client understand and weigh their options is a tangible way to add value.
Thinking beyond Social Security
The recent changes to Social Security benefits offer a great reason to reach out to clients and review their retirement income strategies. For instance, are your clients aware of all their Social Security options? Are those clients who are still saving for retirement invested in tax-sensitive investment vehicles designed to increase their after-tax returns? Are those clients who are already in retirement taking advantage of the best possible income vehicles that provide income while at the same time managing risk?
2 Source: Get What’s Yours: The Secrets to Maxing Out Your Social Security by Laurence J. Kotlikoff, Philip Moeller, and Paul Solman – page 15
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