by Alvin Wolcott, CPA

Are you nearing retirement?  Are you planning your cash flow needs now and for the future?   For most people, Social Security is likely a significant portion of their retirement income.  However, many people will start their social security benefit early without carefully weighing the costs of taking the lower reduced benefit.

Factors to consider when selecting the ideal Social Security start date include:

• An individual’s health and family history of longevity.
• Assets and other sources of income available to fund retirement.
• Whether you plan to work during retirement years.

When postponing the start date of Social Security the annual payout increases from 5-8% annually depending on what year you were born and how many years you delay benefits.  This is equivalent to a government guaranteed return on your investment; where else can you obtain guaranteed returns like that in this investment environment?  According to the Social Security website a man reaching age 65 can expect to live, on average, until age 83 and a women reaching age 65 can expect to live, on average, until age 85. The average life expectancy for both men and women extend past the “breakeven” point on waiting until age 70 to begin collecting social security.

Additional considerations for married couples include:

• How and when to take advantage of the spousal benefit.
• How to maximize the beneficiary benefit.

Example:  Steve and Beth are both age 60, and the full retirement age is 66 for each of them.  Beth’s earnings history is slightly higher than Steve’s, so they decide to have Beth delay her retirement benefit until age 70.  However, to help with their near-term cash flow, they choose to have Steve take his benefits at age 62.  When Beth reaches full retirement age, she can file a “restricted application” for just her spousal benefit, which allows her to collect 50% of Steve’s benefit. Four years later, when Beth reaches age 70, she files for her own retirement benefit to obtain her maximum possible benefit.

Result: Beth receives spousal benefits for four years (from age 66 to 70) at essentially no cost to her, since her own retirement benefit is deferred and she will still receive the maximum available by waiting until age 70.  Depending on the size of Steve’s primary insurance amount, these four years of spousal benefits could reach a large five-figure sum.

Planning Summary
• It’s often a good idea to have the spouse with the higher earnings delay taking their benefit; this allows the maximum benefit for the surviving spouse.
• It’s less advantageous to have the spouse with the lower primary insurance amount delay benefits since they can utilize the beneficiary benefit and switch to the higher spouses benefit if they are the longer lived spouse.  Depending on circumstances, it can still be a good idea for the lower earner to delay benefits.
• With planning, it may be possible to have one spouse receive spousal benefits for the years between full retirement age and age 70, while allowing the higher-earning spouse’s own retirement benefit to continue growing until age 70.  This site can be used as a guide but it won’t necessarily answer every question, so contacting an advisor maybe prudent.  If you would like to review your full retirement strategy please call our office to schedule an appointment.