By Brian Hufford, CPA, CFP®
What are your thoughts about the question, "Will you receive Social Security benefits over your lifetime?" Perhaps never has there been a greater imponderable than how to think about Social Security as part of a retirement strategy. Let me illustrate some of the issues with a case study for a hypothetical 60-year-old dentist and spouse who wish to retire at age 62, Dr. Jack and his wife, Diane.
Jack and Diane would like to file for Social Security immediately upon retirement at age 62, just two years from now. They fear that if they do not file as soon as possible that U.S. budget problems may prevent them from filing for and receiving their promised Social Security benefits. At age 62, Jack's benefit would be $2,013 per month, and Diane would receive $1,868 per month from her separate earnings record.
These two checks could supplement their retirement income by a total of $3,881 per month. In a meeting, I asked them whether they had ever considered waiting until their full retirement age of 66 or even the maximum benefit age of 70. They looked at me as if I had two heads and reminded me of their fears for the solvency of the Social Security trust fund.
I pointed out to them that the difficulty in thinking about Social Security for retirement planning is that their current promised benefits at age 70 would be $6,793 per month compared to the $3,881 per month they would receive at age 62. This is a compound growth rate of 7.25% per year for the additional eight years that they would wait to file for benefits. I also pointed out that, perhaps the right way to think about Social Security is as "longevity insurance" to avoid running out of retirement savings if they lived to age 90 or beyond. I asked them if they realized they could receive almost $300,000 more in benefits from Social Security if they followed an enlightened delayed filing strategy based upon their earnings record.
They related to me that they did not like the prospect of receiving no benefits if the Social Security system ran out of money by the time they were 70 or the possibility of receiving small benefits if they died in their early 70s. I told them that I understood their stance. But I asked them how does one weigh these outcomes against the possibility that, if the Social Security system remains intact and benefits as currently promised are realized, they could receive $300,000 more in benefits to age 90?
Not only that, but the probability of a successful retirement grows from 70% to 92% at age 90 because of the additional benefits with a delayed filing. Their response was, "So you mean that if we delayed our filing for benefits that we would have to use less of our own savings over a long retirement, which would give us a much higher probability of success?" I said this was correct. In fact, I told them that they would receive $300,000 more in benefits if they lived until age 90, even though they would have delayed filing for benefits until as late as age 70.
Jack and Diane's case study illustrates the challenges of planning with Social Security in a retirement strategy. We have found that by using all of the strategies offered by the Social Security system, most retirees could dramatically increase their promised benefits by spending the time necessary to work through a custom filing plan.
For Jack and Diane our strategy included the following: (1) Jack would file and defer benefits at age 66 so that Diane could receive spousal benefits at that time; (2) Jack would file for his maximum benefits at age 70; (3) Diane would switch to filing for her earnings record benefits at her age of 70; and (4) Diane would receive Jack's higher benefits if he predeceased her. Compared to simply having both file at age 62, the benefits received through this strategy, at age 90, would be almost $300,000 greater.
If Jack and Diane die in their 70s, they likely are better off filing early. The critical question for all of us is how to think about promised benefits from Social Security. Will the promises be kept? Will I live for a long time? Finally, what is more important, getting my money as soon as possible or filing later for longevity insurance? File or delay. That is the question.
Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. Contact Hufford at (888) 470-3064 or email@example.com.
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