by Michael Karlin (November 2015)
You probably don’t know it, but the government may have just picked your pocket with regard to future Social Security benefits. The Bipartisan Budget Act of 2015, signed into law by President Obama on November 2, will greatly reduce the effectiveness of two little known strategies to maximize Social Security benefits – namely, suspension of benefits and restricted applications. Proper usage of these techniques could add well over $60,000 in benefits for many two earner couples during the first few years following retirement.
To “file and suspend” a benefit means that the worker files for his Social Security benefit as if he is going to start receiving payments, but then immediately “suspends” it – in other words, he will not actually receive payments until reinstated. The purpose of the suspension is generally to enable his wife (or husband – it works both ways) to collect spousal benefits, while allowing the worker’s benefit amount to increase due to later retirement. In two earner families, at full retirement age a wife is entitled to the greater of her own benefit or half of her husband’s entitlement.
A “restricted application” occurs when the wife applies for spousal benefits only, while declining to apply for her own earned benefit. This is done, often in conjunction with the husband suspending his benefit, in order to receive spousal benefits while allowing her own benefit to increase for later retirement.
To illustrate how these strategies are used, assume that Abe and Sarah are both age 66, and retire under Social Security with annual benefits of $30,000 each. Assuming that Abe lives until age 84 and Sarah until age 88, their approximate life expectancies, and that inflation is 3% per year, they will receive a total of $1,672,000 in lifetime benefits. Alternatively, Abe can “file and suspend” his benefit at age 66, and wait until age 70 to commence receiving his payments, which will be 32% larger at that point (there is an 8% increase for each year that benefits are deferred between ages 66 and 70). Sarah can file a “restricted application” for spousal benefits only, receive half of Abe’s entitlement, or $15,000 per year, until age 70. At age 70, Sarah will then file for her own benefit, which is also 32% higher then. In this manner, by deferring benefits until age 70 and using both the “file and suspend” and “restricted application” techniques, Abe and Sarah will receive total lifetime payments of $1,940,000, or $268,000 more than they would get had they both simply commenced their own benefits at age 66.
Now, thanks to the budget bill, which was negotiated and put together hastily with no public debate and no public hearings, these techniques are being eliminated. Spousal benefits will no longer be payable on any retirement benefits that are suspended more than 180 days after passage of this bill. Restricted applications will no longer be permitted for anyone who is younger than age 62 on December 31, 2015.
Suspension of benefits is only allowed if you are between ages 66 and 70. Therefore, if you are not in this age range, you are probably best off just ignoring this issue. The government robs us blind through waste and corruption virtually every day, so there is no need to fret over this latest outrage, especially if you never even knew that you could eventually benefit from it. BUT, if you are between ages 65-1/2 and 69 today, then you need to quickly evaluate whether suspending your benefits is worthwhile, because you must do it before May 2016 in order to be grandfathered in the old, more beneficial rules. Also, if you are over age 62 by the end of 2015, you are grandfathered in the old restricted application rules, and should consider whether you can use them to your advantage.
Social Security rules are very complicated, especially for couples, divorcees, widows and disabled people. Our government gives and takes away, sometimes in a seemingly arbitrary and capricious manner. Make sure that you get everything you are entitled to, and act fast if you are in a position to suspend your benefit and gain from the old rules.
by Michael Karlin (October 2014)
If you’re approaching retirement age, one of the most important financial decisions you need to make is when to start collecting your social security benefits. This decision should rest on several factors – such as your health, whether you need this benefit to meet current expenses, your available resources outside of social security, and coordination with your spouse’s benefit. The rules are complicated, especially for married couples, and a wrong choice can cost you tens of thousands of dollars in future income.
The two most common mistakes that retiring individuals make is starting social security payments too early and failing to coordinate receipt of your own benefit with that of your spouse. Let’s start with a recap of the basic retirement rules:
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“Full retirement age”, or the age at which you can receive benefits without a reduction for early retirement, is 66 for those born between 1943 and 1954.For people born after 1954, the full retirement age gradually goes up, until it reaches age 67 for those born after 1959.
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Benefits can be received as early as age 62, with a 25% reduction for those born between 1943 and 1954.
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Benefits can be deferred to any age between 67 and 70, with an 8% increase for each year receipt is delayed beyond full retirement age (i.e., a 32% increase at age 70).
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A qualified spouse is eligible for a benefit of 50% of the primary recipient’s benefit.Note that the spousal benefit is also reduced (30% reduction at age 62) if receipt begins before full retirement age.
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A surviving spouse (i.e., a widow or widower) is entitled to 100% of the deceased spouse’s benefit following his or her death, payable as early as age 60 (with a reduction for commencement before full retirement age).
For example, Yossi has earned a social security benefit of $2,400 per month commencing at age 66 (his full retirement age), and is thinking about retiring early at age 62, and taking a reduced benefit of $1,800 at that time. His accountant tells him “you should take it at 62, because you’ll never make up for the four years without benefits if you wait until 66.”
Is this sound advice? Probably not, for several reasons. First of all, Yossi only needs to live until age 78 to “break even” if he takes $2,400 per month at age 66 instead of $1,800 at age 62, and today’s life expectancies go well beyond 78. Also, social security is indexed for inflation, and cost of living increases are worth more if they apply to a larger benefit. Yossi’s surviving spouse will be eligible for 100% of his benefit if he dies first, and it would certainly help her at that stage to receive a larger benefit. Finally, in today’s low interest rate environment, where you either get a miniscule return on your savings or risk them by investing in bonds or equities, it makes sense to use up some of your other savings while letting the social security benefit grow for a few years.
Far more complicated are decisions for married couples, when each spouse has a record of earnings covered under social security. Usually, married couples are better off by coordinating and taking their benefits at different ages. But there are numerous obscure rules that often lead to uninformed and ill-advised decisions.
Let me illustrate this by a simple example: Jonathan and Rachel are celebrating their 66th birthdays in close proximity, retiring together, and looking forward to having more leisure time, travelling, and spending more quality time with their grandchildren. They each earned a monthly social security benefit of $2,500, and go to the social security office in Hackensack where they fill out their benefit applications. They return home excited and looking forward to receiving monthly checks, totaling $30,000 per year for each of them, or $60,000 per year total. When one of them dies, the total benefit will decline to $30,000 per year for the remainder of the survivor’s lifetime.
Jon and Rachel would be shocked to learn that they just missed an opportunity to substantially increase their lifetime income. How so? Well, a much better strategy for them would have been for Rachel to apply for her benefit, and Jon to file what’s called a “restricted application” for spousal benefits based on Rachel’s benefit only, while letting his own benefit increase for late retirement. In this manner, they would collect a total of $45,000 per year for each of the next four years (i.e., $30,000 for Rachel, plus a spousal benefit of $15,000 for Jon). When they reach age 70, Jon will apply for his benefit, which has now increased for late retirement to $39,600 (i.e., a 32% increase on top of his basic $30,000 annual benefit), and they will receive a total of $69,600 in each subsequent year while they are both alive. If Jon dies first, Rachel will then see her benefit increase from $30,000 per year to her surviving spouse benefit of $39,600.
If Jon lives to age 83 and Rachel to 86, their approximate life expectancies, they would receive almost $100,000 more in lifetime benefits under the “restricted application” strategy! Factoring in inflation and annual cost of living increases would make this difference even larger (at 3% annual inflation, the differential grows to more than $160,000).
Other strategies are also available to maximize the benefits you and your spouse will receive over your lifetimes. Their use and effectiveness depends on the relative ages, benefit levels and health of each spouse. The best strategy will depend on your particular circumstances. Also, note that if you’ve already retired under social security and regret that decision, you might still be able to mitigate some of the damage if you have not yet reached age 70.
Our community is heavily taxed by all levels of government (especially in New York and New Jersey), and we certainly get back considerably less than we pay in. Therefore, we should make sure to get full value on any benefits to which we are entitled, such as social security. To that end, you can begin by setting up an account in ssa.gov, the social security website, and review the social security rules and your benefit entitlement. Read up on the strategies associated with social security, and consider what best applies to your situation. Alternatively, due to the complexity and obscurity of the various strategies, you may seek professional advice when retirement approaches. Paying a small fee for a consultation and benefit illustrations may be a wise investment, to the extent that it allows you to effectively maximize benefits that will be payable to you and your spouse over what, hopefully, will be a long, healthy and productive retirement.
Social Security: Takeaways Under the Recent Budget Bill
Beware - Don't Leave Social Security Money on the Table
Maximizing Social Security Benefits
Social Security: Don't Leave Money on the Table
Social Security: Like a Good Marriage
by Michael Karlin (November 2014)
When a man and a woman enter into marriage, they each replace, to a large extent, a primary focus on self fulfillment with a full commitment to the spouse. In a good marriage, each partner’s needs are as important to the other as his or her own needs, and each performs acts of kindness for the other selflessly, without any thoughts of return. In this manner, the union of husband and wife creates a whole that is much greater than the sum of its parts – two individuals who encourage and support each other, help each other overcome weaknesses, and with G-d's help, produce and raise children. This is far more than each could have accomplished individually.
By the same token, for married couples who both have an earnings history, Social Security should not be viewed individually, but collectively as a unit. Choices as to when to start collecting Social Security should be made in coordination with the spouse – in this manner, you will be able to take advantage of the spousal and survivor benefits associated with Social Security, and maximize the payments to be received over your joint lifetimes. With a good strategy, total benefits for the married couple will be greater than the sum of what each could have received had they been single.
The fact is, the vast majority of retiring couples are not aware of all the complex and obscure rules associated with Social Security. This lack of awareness leads many of them to receive considerably less than the full payout that they are entitled to.
Social Security provides valuable spousal and survivor benefits for married couples. A spouse of a retiree is entitled to a benefit equal to 50% of the worker’s benefit (with a reduction for benefits starting before “full retirement age”, which is age 66 for those born between 1943 and 1954). A survivor of a retiree is entitled to a benefit equal to 100% of the retiree’s benefit (with adjustments for early or late retirement). Decisions as to when to start receipt of Social Security should take these potential benefits into account.
Let’s assume that both Chaim and his wife Chani are age 66, and each has been working for a full career and are entitled to their own Social Security benefits. What should they do? One option (Strategy 1) would be for each to collect their own benefit, beginning at the age of each one’s choosing, without consideration of the other. By doing this, however, they missed out on the valuable spousal benefit, and the whole is merely equal to the sum of the parts. Their total benefit while both are alive will be the same as if they had not been married.
A better plan would be to look out for each other, and use a strategy that more fully utilizes the spousal and survivor benefits that Social Security provides. For example:
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Strategy 2 – Chaim files for his benefit and immediately “suspends” it.This allows Chani to receive 50% of Chaim’s benefit as a spousal benefit (by making a “restricted application” for spousal benefits only) until age 70.In the meantime, each of their individual benefits will increase by 32% until age 70 (the increase is 8% per year for retirements after full retirement age, until age 70).At age 70, Chani switches to her own benefit, and Chaim starts collecting his own.If Chaim’s benefit is larger than Chani’s and he dies first, Chani will then get Chaim’s larger benefit after his death for the remainder of her lifetime.
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Strategy 3 – Chaim files for his benefit at age 66, and Chani applies for spousal benefits at the same time (using a “restricted application”).Then, at age 70, Chani applies for her own benefit, which has increased by 32% at this point.
Of course, either of these strategies may be used in reverse – just switch the names of Chaim and Chani. This gives at least four strategies for this particular couple, each of which is likely to produce a better result (i.e., more lifetime income) than Strategy 1, where each applies for their own benefit. The particular strategy that works best will vary by couple, depending on their relative ages, benefits and health considerations. It is important for each couple to consider all the various options and strategies, in order to produce the optimal result.
The main strategies available to married couples for maximizing their Social Security payouts are:
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Suspending a benefit – After full retirement age, a person is permitted to apply for his benefit and then suspend it. The most common reason for this is to permit the spouse to collect spousal benefits before the retiree starts his own benefit. Also, if someone already started collecting his or her own benefit at an earlier age and now regrets that decision, they may suspend the benefit, allow it to increase with the usual 8% per year adjustments between age 66 and 70, and then reinstate the benefit at a higher level.
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Restricted application - Generally speaking, when a married individual applies for a spousal benefit while also entitled to their own benefit, the Social Security Administration will compute the greater of the spousal benefit (i.e., 50% of the spouses entitlement, with the usual adjustments) or his own benefit. Even if the spousal benefit is larger, it will be deemed as if the spouse retired also, and his own benefit will not grow any more for the age adjustments. This can be avoided after full retirement age by filing a restricted application, whereby the individual specifies that the application is for the spousal benefit only, and not his or her own benefit.
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Claim some benefit now, more later – This usually operates in conjunction with one or both of the other strategies, and allows a person to apply for one benefit, and then for another a few years later. For example, in Strategy 2 above, Chani is using a restricted application together with Chaim’s suspending his benefit in order to get the spousal benefit at age 66, and then her own larger benefit at age 70.
The most recent Social Security statistics (for 2012) show that about 65% of retirements occur before full retirement age, and that less than 2% of people wait until age 70 to commence receipt of their benefit. Clearly, the most effective strategies would result in far more people waiting until at least full retirement age and even age 70 to start collecting their benefit.
In actuality, most married people nearing retirement age are not familiar with these strategies, make ill informed decisions, and leave tens or even hundreds of thousands of Social Security dollars on the table over their retirement years. If you are near retirement age, you need to be aware of the importance of these decisions on your financial future, and adopt a carefully thought out plan. Unfortunately, it is a complicated issue, and the best strategy will differ for each couple based on their own circumstances, such as ages, health, and relative benefits. Because of this complexity and the large amount of money involved, most people are best off seeking professional help from an expert on the subject, who will prepare individual year by year benefit illustrations under several options, and fully explain the choices available to them and their implications. Fees are not that high and well worth it. Make sure that in your marriage, the whole is better than the sum of the parts, not only in life but in your Social Security also.
Social Security: Don’t Be in a Rush
By Michael Karlin (January 2015)
A popular expression goes “good things come to those who wait”. Undoubtedly, whoever coined that phrase did not have Social Security benefits in mind, but the saying certainly applies very well to them. As opined below, most people are better off deferring their Social Security retirement date until at least age 66, and probably to age 70.
Full retirement age under Social Security for people born between 1943 and 1954 is age 66. Benefits can be started as early as age 62 with a reduction (25% for those whose full retirement age is 66), or may be delayed as late as age 70 with an actuarial increase (8% per year after full retirement age). Thus, for example, an individual with a primary insurance amount (i.e., unreduced benefit) of $1,000 per month, can collect $750 per month at age 62, $1,000 per month at age 66, or $1,320 per month at age 70. The percentage increase in benefit by waiting from age 62 to age 70 is 76%.
Statistics from the Social Security Administration for the latest available year (2012) indicate that a majority of new Social Security awards occur before full retirement age. Specifically, nearly 40% of retired workers in 2012 commenced receiving their Social Security benefits at age 62, another 25% between 63 and 65, 31% at age 66 (i.e., full retirement age), and only 4% after FRA. The percentage who waited until age 70 to receive their benefits was less than 2%.
Thus, nearly two-thirds of new Social Security recipients begin collecting their benefit before full retirement age. Is it possible that so many people making similar decisions are mistaken? In a word, yes! Most (not all – see below for exceptions) people are better off deferring their receipt of Social Security until age 70, or close to that age, and could lose up to tens (or even hundreds) or thousands of dollars over their joint lifetime with their spouse by starting benefits too soon.
There are several reasons to postpone commencement of your Social Security benefits:
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Longer Life Expectancies - Many people look at the “breakeven age”, which is the age at which total cumulative benefits received since retirement at a later age overtake the cumulative benefits received at an earlier retirement age. Thus, for example, if you start collecting $1,000 per month at age 66, your total benefits will “catch up” to what you would have received by collecting $750 per month beginning at age 62, by age 79. Therefore, you can argue that people who die before age 79 are better off starting their benefits early, and those who live to age 80 or later are better off starting benefits later. There is nothing wrong with this reasoning. But most people underestimate today’s life expectancies – men now in their mid-sixties are expected to live until the mid-80’s, and women a few years longer. And life expectancies continue to expand, thereby making it likely that most people will survive beyond the breakeven age.
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The Spouse Counts Also – In most marriages, the husband has the larger earnings history, and gets a bigger Social Security benefit. His benefit will be paid not only for his lifetime, but for his spouse’s lifetime also, if she outlives him. For example, if Yaakov is getting $2,000 per month and his wife Leah gets $1,100, in most circumstances Leah’s benefit will pop up to $2,000 after Yaakov dies. If Yaakov is now 67 and Leah 64, and Yaakov lives to age 85 and Leah until 90, then his benefit will be payable for another 26 years (Leah’s lifetime) instead of 18 years (his lifetime). This significantly changes the breakeven calculation, and makes it much more valuable to defer retirement and get a higher benefit.
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Don’t Forget Inflation – Social Security benefits are indexed, and increase each year with inflation. Factoring this into the equation also increases the value of deferring benefits, because inflation increases are more valuable when they apply to a higher benefit. Furthermore, inflation makes the value of benefits payable in later years worth more than that which applies in earlier years, further strengthening the argument for waiting to retire.
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Today’s Low Interest Rates – In a very low interest rate environment, a retiree cannot earn much on his savings unless he invests it in equities, bonds or other risky investments. Therefore, why not use up some of your savings, which aren’t earning much anyway, and increase your annual benefit by 6-8% per year through deferral?
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The Insurance Aspect of Social Security – As the name suggests, Social Security was adopted as a form of longevity insurance, to protect people from outliving their assets. This is the opposite of life insurance, which protects families of wage earners from untimely death. Dying early and not getting the most you could have from Social Security is unfortunate, but no worse financially than living a long lifetime and not getting a life insurance policy payoff. Much more important is protecting yourself from a long lifetime, and making sure you have adequate income if you live into the 90’s or beyond.
I believe that these arguments make a compelling case for most people to wait until at least the upper 60’s to commence Social Security benefits. In fact, there are only three cases where one might want to retire earlier – (i) if you and/or your spouse are in poor health, or have a family history of premature death; (ii) if you have limited savings or other sources of income, and need your Social Security benefit to live on; or (iii) if both you and your spouse have a significant earnings history, and the best way to maximize your joint lifetime benefits is by coordinating them which, in many cases, requires one spouse to retire early and one late (for example, if both you and your spouse are past full retirement age, and neither is receiving a benefit yet, you are definitely making a mistake and should contact me immediately).
So, when the time comes for you and your spouse to consider retirement, remember the saying “the early bird may get the worm, but the second mouse gets the cheese”. Social Security is more comparable to the mouse – don’t fall into the trap by rushing. Instead, take your time, and you are more likely to be rewarded with greater income and security through your golden years.
Michael Karlin is a Fellow of the Society of Actuaries and an Enrolled Actuary, with over 35 years of experience as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts. Mr. Karlin can be reached by phone at 201-836-6408 or 201-741-7774, or by email at ssmaximize@outlook.com.
Social Security: Don’t Make These Mistakes
By Michael Karlin (August 2015)
Social Security is, by far, the largest pension system in this country, with over 58 million people receiving benefits that exceeded $812 billion in 2013. Unfortunately, Social Security is also a very complicated system, with little clear guidance available to individuals nearing retirement age. Even Social Security personnel are often unfamiliar with the complex rules and strategies that enable people to get all that they deserve under the system.
Because of its complexity, many (if not most) couples make poor decisions, thereby losing tens or hundreds of thousands of dollars over their joint lifetimes. This article attempts to introduce readers to some of the key issues involved when it is time to apply for benefits, and avoid the bad decisions that could result in loss of income.
The most common mistakes that people make are as follows:
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Taking benefits too early
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Failing to coordinate benefits with their spouse, and
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Lacking awareness of the full scope of benefits provided by Social Security, and thereby not applying for all benefits to which they are entitled (especially spousal, survivor and divorcee benefits).
Here are several simple examples that illustrate these costly errors.
Case 1 – Yossi is age 62, retired and in good health, and hears from his accountant that “take your Social Security benefit now, because if you don’t, you’ll never make up the difference”. He obediently applies, and starts receiving $1,500 per month at age 62. This is probably a mistake. Firstly, by waiting until age 70, Yossi could instead have received $2,640 per month, 76% higher. If Yossi lives past age 80 (which is likely, given today’s increasingly longer life expectancies), he will receive more in total by starting his benefit at age 70. Secondly, the larger benefit may continue not only for Yossi’s lifetime, but for the rest of his wife’s lifespan as well, thereby extending the benefit’s payout period many years further. Third, Social Security benefits are indexed for inflation, so starting with a higher benefit results in larger inflation increases, adding more value to waiting. Fourth, because of today’s very low interest rates, it pays to draw on savings first, and get a 6-8% yearly increase in the benefit. Finally, Social Security is a form of longevity insurance, and it is more important to be protected in old age than “taking the money with you to the grave”.
Case 2 – Abe is age 71, having retired five years ago with a monthly benefit of $2,000. His wife Sarah is age 66, and recently heard (not from her accountant) that it often works out better to wait until age 70 to retire. So, she plans to start collecting her Social Security benefit at age 70, when it will be $2,112 per month instead of the $1,600 monthly benefit she could have received at age 66. Unfortunately, Sarah is also making a mistake – not with the timing of her benefit, which is indeed advisable, but rather for not knowing that she can collect a $1,000 spousal benefit on Abe’s benefit until she turns age 70. Believe it or not, many people in Sarah’s position don’t realize that they can receive $48,000 over the next four years with no downside at all – i.e., her benefit after age 70 will be identical to what it would have been had she not applied first for the spousal benefit.
Case 3 – Esther is age 62, having never remarried after, nebach, Mordechai, her husband of 25 years, died 15 years ago. She needs the money to live on, and decides to start collecting her own Social Security benefit now. Regrettably, Esther did not know that she can collect a survivor benefit based on Mordechai’s benefit from age 62 until age 70, while letting her own benefit grow until then. In many circumstances, this is a much more valuable option.
Case 4 - Chaim and Chani are both age 66 and healthy, each with a monthly entitlement of $2,000. They take a trip to their local Social Security office, where each applies for their own benefit. Chaim and Chani return home pleased with the prospect of enjoying hopefully a long and productive retirement, with monthly checks totaling $4,000. They would probably be shocked to learn that they just made a mistake that could ultimately cost them tens of thousands of dollars. How so? Well, assuming they have sufficient savings to carry them over for the next four years, a much better strategy would be for one of them, let’s say Chaim, to “suspend” his benefit until age 70, while Chani collects a spousal benefit of $1,000 (half of Chaim’s). At age 70, each can then commence receiving their own benefits, which will now total $5,280 per month. Hence, by sacrificing $3,000 per month for four years, they will then receive an extra $1,280 per month as long as they are both alive. If they each live to their approximate life expectancies (age 84 for Chaim, age 88 for Chani), this translates to $102,000 more in Social Security benefits over their lifetimes if there is no inflation, and nearly $200,000 more if inflation averages 3%. And the differential increases if either one lives longer – for example, if inflation is 3% and Chani lives until age 95, the difference becomes $312,000!
These are just a few examples of the common mistakes that people frequently make with regard to Social Security. We pay taxes into the system our entire working career, and should make sure to get back all we are entitled to in our retirement years. Don’t shortchange yourself when the time comes – plan in advance, read up on the subject and consult a professional if necessary. You get only one chance to apply for benefits – make sure to do it right!
Michael Karlin is a Fellow of the Society of Actuaries, with over 35 years of experience as a pension consultant to large organizations. He now assists individuals in maximizing their pension and social security lifetime payouts, and is also available to speak on the subject. You can visit Mr. Karlin’s website ssmaximize.com, or reach him by phone at 201-836-6408 or 201-741-7774, or by email at ssmaximize@outlook.com.
The following is an excerpt from the typical output that we prepare for our clients.
