Michael Woloch, DDS, CFP
What comes to mind when you think of Social Security? Small payments that don't really have a major impact on retirement finances? Checks that suddenly arrive in the mail when we turn 65? Many of us dismiss Social Security (SS) as something out of our control and not a significant part of our retirement resources. We will see that these notions are far from true.
In fact, SS is a vast and sometimes confounding program. But if you are savvy about how to maximize your benefits, the rewards can be significant.
What would you think the total benefits in current dollars would be for an average dentist and spouse living an average lifespan? For this example, let's say that in most years, the spouse earned half that of the dentist, and both filed for benefits at age 66. The answer is roughly $900,000. This means that you would need to have this amount at the start of retirement and invest it properly to keep up with inflation to duplicate SS benefits. That's because SS benefits are automatically increased each year at the rate of inflation. And you've already earned this just by paying your FICA taxes all along, but the timing and types of claims you make significantly influence this number.
Basically, SS is a pension-monthly payments for life, guaranteed by the US government. It also can provide benefits for your spouse, your minor children, a divorced spouse, a surviving spouse (when one spouse dies), a disabled child (if disabled before age 21), even a surviving parent of a worker (if the parent was supported by that worker). Many of these benefits are for life.
Some basic rules of the game:
• You must put in a claim for each type of benefit. You will not get any benefit automatically. Also, the SS Administration doesn't know you have a spouse or child; you must tell them as you file for each type of benefit.
• Your spouse can collect benefits on your work record. This can be at the same time that you are collecting on your own record. This "spousal benefit" can be about half of your benefit.
• You can collect on your spouse's work record, but there's a catch. When and if to do this is a complex decision requiring careful planning and knowledge of the rules.
• Each worker's yearly earnings are recorded by the SS Administration. If in 2015 you earn $118,500 or more, you've maxed out-that is, you have earned the maximum future SS benefit for this year. As a point of reference, in 1979 this figure was $22,900. These earnings amounts are adjusted to the equivalent of current dollars. They will take the average of your top 35 years to determine your benefit amount.
• "Full retirement age" is now 66, and will gradually go up to 67 for those born in 1960. Claiming at age 66 will give you your full benefit, but claiming four years later will permanently add 32% to your monthly payment, plus cost-of-living increases.
• All benefits are adjusted upward for inflation. So if your benefit is $30,000 when you start collecting, that figure will be adjusted annually and will always keep up with inflation.
Important ways to maximize your benefits
• Wait until age 70 to claim benefits on your work record. The earliest you can claim is age 62, but the monthly payments, for the rest of your life, will be 76% higher if you claim at 70 instead of 62. This will result in a significantly higher lifetime amount if you and/or your spouse live beyond the statistically average lifespan.
• You can claim spousal benefits on your spouse's work record. You can do this if your spouse has filed for his or her benefits, between age 66 and 70-without lowering the benefits on your record when you claim it at age 70.
• The rules of when and which benefits to claim to obtain the highest total benefit can be very complex. This is especially true when you consider both spouses, with different ages and work record histories. Information obtained from the SS office may be helpful, but they don't dispense "advice"-only "information"-and it's often not the ideal resource when you are doing your best to maximize your benefits. A financial advisor knowledgeable in SS strategies may be able to help you obtain a substantially higher payout.
• Carefully check your earnings record for any errors. These are sent to you by mail every five years, or you can open an account at http://socialsecurity.gov/myaccount/ and view your record at any time. You will also see your projected future benefits, which can be very helpful in your financial planning.
There are many strategies to maximize your SS benefits. This was a brief primer with some basic facts and tools. Each case is different, and to get the most out of SS, careful research of the SS rules and regulations, or consulting with a financial advisor skilled in this area, can yield the best results.
Michael Woloch, DDS, CFP, is a Certified Financial Planner and Registered Investment Advisor, and president of Financial Strategy Advisors LLC. Michael uses his knowledge of finance and experience as a practicing prosthodontist to guide fellow dentists to realize their financial goals. Contact him at [email protected] or (646) 856-7680.