The Social Security Playbook: Claiming Your Way to a Better Retirement

This show provides insights into Social Security, emphasizing strategies to maximize benefits for retirement. While Social Security may not cover all retirement expenses, optimizing claiming strategies can significantly enhance financial well-being. You will learn about Social Security basics, fundamental definitions, unique claiming strategies, the impact market performance can have on claiming decisions, and the long-term outlook for the Social Security fund.

Social Security Basics: Full Retirement Age and Primary Insurance Amount

Core to Social Security planning are the Primary Insurance Amount (PIA) and Full Retirement Age (FRA). Your FRA is determined by your birth year, with 67 being the FRA for those born in 1960 or later. The PIA represents 100% of the benefit received at your FRA. Claiming benefits before your FRA results in a reduced benefit of ~6% per year, while delaying beyond your FRA earns Delayed Retirement Credits (DRCs). DRCs increase your benefit by approximately 8% per year up to age 70, leading to a potential 24% increase over your PIA for delaying three years beyond an FRA of 67. DRCs do not accrue past age 70. The annual Cost of Living Adjustment (COLA) is added on top of these benefits, whether claimed early or delayed.

Spousal Benefits: A Key Consideration for Married Couples

Spousal benefits allow a spouse to receive up to 50% of their partner's PIA , particularly beneficial when one spouse has significantly lower earnings or did not work. If the lower-earning spouse's own benefit is higher than 50% of their partner's PIA, they would claim their own benefit. The higher-earning spouse must have already filed for their own Social Security benefits for spousal benefits to begin. Claiming spousal benefits before your FRA will result in a reduced amount.

Claiming Strategies for Maximization: Longevity and Household Dynamics

Maximizing Social Security benefits largely depends on longevity and individual circumstances. For single individuals, delaying benefits from 62 to 67 has a break-even age of approximately 81.5 years, assuming a 2% return adjusted for inflation (real return). Delaying from 67 to 70 has a break-even age of about 85, assuming a 2% real return. The break-even age is the age you need to live to reap the reward of delaying Social Security. Married couples should think differently when it comes to maximizing benefits because only one person may need to life expectancy or beyond for delaying tobe beneficial, due to survivor benefits (example discussed on the podcast episode refers to a spouse with a lesser benefit being able to take over the higher benefit from their deceased spouse). Generally, when planning normal life expectancy scenarios, the higher-wage earner delaying their claim (to 67 or 70) and the lower-wage earner claiming as early as possible tends to optimize benefits for couples. A unique strategy involves the lower-earning spouse claiming their own benefit at 62 and then switching to spousal benefits once the higher-earning spouse files.

Important note: If an individual is working and claims Social Security before their FRA, their benefits may be reduced based on income.

Market Performance and Claiming Decisions

Market performance can influence claiming decisions. In periods of low market valuations and high expected returns (e.g., March 2009, after the global financial crisis), claiming Social Security earlier might be beneficial to allow the investment portfolio to recover. Conversely, when market valuations are high and expected returns are low, delaying Social Security might be advisable, using portfolio withdrawals to supplement income while the Social Security benefit grows. This is described as a long-term strategy, not market timing.

The Longevity of Social Security: Addressing Concerns

The Social Security fund is currently projected to be funded through 2035. However, it is our belief that the complete cessation of Social Security is unlikely. Historical precedent from the mid-1980s indicates the system faced similar issues and was addressed through legislation. Likely future solutions, based on past actions, may include increasing taxes, adjusting COLA adjustments downward, and increasing the FRA. These changes are often implemented close to the projected shortfall, in this case 2035.

Our Stance

Our stance on the future of Social Security is that it is believed to be a vital component of retirement income and is expected to continue. While adjustments are anticipated to address solvency, likely involving increased taxes, modified COLAs, and a higher FRA for future generations, the program's fundamental structure and benefits are believed to remain intact. Therefore, we strongly suggest continuing to integrate Social Security into your retirement plan, with the understanding that the system is expected to adapt to ensure its continuation.

Author: Ryan Wyatt, CFP®, CIMA®

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