Social Security provides couples with a number of legitimate choices for electing when and how they can receive their retirement benefits. However, these choices can result in material differences in the accumulated retirement benefits that a couple can collect during their retirement years.
This article will layout two different benefit election methods we call "Claim & Suspend" and "Claim Now-Claim Later" as a way of showing how to maximize your benefits. Social Security "Delayed Retirement Credits" may mean against S&P 500 strategies.
Main Concepts: Before we dive into the specifics of each method, we must lay-out a few central concepts that make all of this possible.
1. Deferring Retirement Increases Benefits; Early Retirement Decreases Benefits: When it comes to electing Social Security Benefits, there are 3 stages that are important to consider.
a. The first is age 62. Currently, this is the earliest you can claim Social Security.
b. The second is your "Full Retirement Age" (FRA). This will be at age 66.
i. Under the current laws, electing your Social Security benefits between the age of 62 and your FRA (66) will reduce your benefits in proportion to how early they are elected (62 to 65). For example, your benefits will be reduced more if you elect to receive them at age 62 versus age 66.
c. The third and final important age is age 70.
i. Electing your Social Security benefits between your FRA (66) and age 70 will increase your benefits. For each year you'll defer retirement, between your FRA (66) and age 70, you will earn an 8.0% annual "Delayed Retirement Credit" (DRC) that will ultimately increase your total benefits. For example, if your monthly benefit at your FRA (66) is $1,000 per month but you wait until age 70 to receive your benefits, you will receive $1,320 per month.
2. Spousal Benefits: As a spouse, you can claim a Social Security benefit based on your own "earnings record" or you can collect a "Spousal Benefit". A Spousal Benefit will provide one spouse 50% of the amount of the other spouse's Social Security benefits as calculated at the latter's FRA (66) ("Full Retirement Age") (50% of $1,650 = $825). This monthly benefit amount will be discounted to reflect any early retirement election.
3. Spousal Benefits at Death: Upon the death of a spouse, the surviving spouse is able to receive the full amount of the deceased spouse's benefits.
Benefit Calculations: Maximizing your benefits depends on many factors including your relative ages, your scheduled Social Security benefits, individual longevity, projected cost of living adjustments (COLA's) and when and how you elect your benefits-to name just a few. All of these factors are important to consider when making these decisions and will affect each individual's situation differently.
"Claim & Suspend" Vs. "Claim Now-Claim Later": With regards to Social Security benefits, the "Claim & Suspend" method would most likely benefit a couple where one spouse is the breadwinner and the other spouse is staying at home. The "Claim Now-Claim Later" method would most likely benefit a couple where both spouses are working.
Claim & Suspend: Ed, 66, has a high power job that has entitled him to a monthly full-retirement benefit of $2,327 per month at 66. Mary, 62, was a full-time mother who remained at home. Ed, who continues to work, files for his full retirement benefits but immediately suspends receiving them. Mary can now elect to receive spousal benefits on Ed's record.
Mary's Benefits: By electing spousal benefits on Ed's record, Mary's full time benefits are $1,163 per month (1/2 of Ed benefits $2,327). However, because Mary is only 62, she will only receive 70% of her full benefits. This amounts to a total of $814 per month.
Ed's Benefits: Because Ed suspended his benefits, he is actually accruing the 8.0% "Delayed Retirement Credits" each year from age 66 to age 70. As a result, once he elects his benefits at age 70, he will receive $3,071 per month, which is a 32% increase to his full-retirement benefits of $2,327 per month. By the time Ed is 85 he will have received over $200,000 more in benefits by using the "Claim & Suspend" method versus the conventional strategy where Ed retires at 66 and Mary retires at 62.
Claim Now-Claim Later: In this example, Dorothy, 66, is the family breadwinner and Roger, 62, has been a substitute teacher. Roger's Social Security record entitles him to $1,433 per month at his FRA (66) ("Full Retirement Age"). Roger decides to receive his benefits at age 62, reducing his benefits by 75% to a total of $1,075 per month. Dorothy elects to receive spousal benefits on Roger's record. Since Dorothy has reached her FRA, she is entitled to 50% of Roger's full-retirement benefits amounting in $716 per months.
During this time, Dorothy has not elected to receive benefits on her own record and as a result, has been accruing the 8% annual DRC ("Delayed Retirement Credit"). Once she turns 70, Dorothy can elect to receive her own benefits of $3,216 per month. Once Dorothy turns 85, she will have received more total Social Security benefits than if she had used a conventional strategy.
In addition, Roger is entitled to receive Dorothy's benefits if she passes away.
Social Security Delayed Retirement Credits versus S&P 500: For each year you delay your retirement benefits between your FRA and age 70, Social Security will provide you with an 8.0% increase to your total benefit. Assuming your FRA is 66 (as it is for many people), and you don't elect to receive benefits until age 70, the end result is a 32.0% percent rate increase to your retirement benefits.
The S&P 500: The S&P 500 (SPY) has paid an average yield of 1.8% per year between 2000 and 2012. During the 4 years between your FRA (66) and age 70, the total yield on the S&P 500 will amount to 7.2%. This goes to show you how valuable it can be to delay your retirement benefit election (32.0% vs. 7.2%).
What about the Capital Appreciation for the S&P 500? As we all know, capital appreciation is a matter of timing. For the period between 2000 and 2012, the annual change for the S&P 500 was 1.5%. Between 2009 and 2012, the average annual change was 12.4%.
However, between 2005 and 2008 the annual change was -4.6% while between 2001 and 2004 it was -0.2%.
Although it is hard to compare Social Security benefits to the stock market, it is clear that there is value in taking a hard look at how and when you elect to receive your retirement benefits. If you have health and wealth, one of these election methods might work for you.