Avoiding Social Security Tragedy

Danger DangerKey Takeaways

  • Know the rules and regulations so you don’t get short-changed.
  • You must be your own biggest advocate for Social Security benefits.
  • Put your desire in writing not to receive retroactive benefits.

At Independence Advisors, I advise clients regularly regarding when and how to begin receiving their Social Security benefits. Although, I don’t tend to be a conspiracy theorist, if I were the latest tragedy occurring with the Social Security Administration (SSA) would set off alarm bells.

One basic strategy to maximize benefits is to delay filing in order to receive additional growth of your benefit every year until age 70. This additional growth can have a dramatic impact in the lifetime amount received. When you consider that your benefit will grow 8 percent every year between full retirement age and 70, this can amount to hundreds of thousands of dollars in additional income over your lifetime. Of course this assumes that you will live close to the Social Security age of mortality. Today a 66-year-old man is expected to live on average to about age 83 and a woman to age 85.

Full retirement age for people born between 1943 and 1954 is 66 and it gradually increases to 67 for anyone born in 1960 or later. This is the age at which you may begin receiving your full, unreduced Primary Insurance Amount (PIA). This is the amount of benefit that is neither reduced for early retirement nor increased for delaying retirement. If, on the other hand, you apply for benefits when you first become eligible at age 62, then your benefit will equal only 75 percent of your PIA. Looking at the other side of the coin, waiting to claim benefits until age 70 will provide you with 132 percent of the PIA.

Real life example

Let’s look at an example assuming you are 61 years old today and wondering what to do about your Social Security retirement benefits. If your PIA is $2,663 per month and you file for benefits at age 62, then your monthly benefit would be only $1,997. What’s more, you would receive that lower amount for the rest of your life, increased only by annual cost of living adjustments. Alternatively, waiting until 70 to file for benefits would raise your monthly benefit to $3,515. That’s a full 76 percent higher than if you took the money and ran at age 62.

So what then is this latest tragedy? In a recent article Larry Kotlikoff and Phil Moeller, authors of the book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” explain how the Administration is denying the wishes of some applicants to delay their benefits. Instead and as a matter of policy, the Administration is forcing applicants to accept what is called a “retroactive payment” when what they are really trying to do is defer their benefits. The net result of this injustice is that against his or her wishes, a person receives a monthly benefit check that is 4 percent lower than it should be for the remainder of their life.

Using the same scenario as above, this little move would reduce your $3,515 benefit to $3,374. That may not sound like much, but it adds up to $33,840 over 20 years–and that’s without taking into account adjustments for inflation.

Retroactive benefits were intended to be for individuals who missed the date by which they wanted to file. It’s only available for people filing on, or after, their full retirement age. Essentially this practice resets the benefit to what it would have been half a year earlier for the “convenience” of receiving a lump-sum payment. Unfortunately, this wipes out six months of Delayed Retirement Credits (DRCs).

Based on SSA regulations, the default assumption is that you want to receive retroactive benefits unless the claimant expressly restricts retroactivity. The first step to avoiding this tragedy is to know the rules of the game. Once you understand the rules we must also remember to be your own biggest advocate. If we don’t make it a priority to look out for ourselves, than who will?

Conclusion

If you are considering delaying benefits until past your full retirement age, be sure to brush up on the rules (and your math). Wherever possible seek professional help. At Independence Advisors, LLC we are here to help answer your questions and be a guide on this oftentimes-confusing journey. Have a question for the author? CLICK HERE TO ASK CHUCK

About Chas Boinske

Charles P. Boinske, CFA, is a 30 year investment management veteran overseeing the strategic direction and portfolio management process for Independence Advisors, LLC. Have a question for Charles? CLICK HERE TO ASK CHARLES