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Joe Eqcome is the pen name of Robert A. Frank, CFA, a Wall Street executive who has spent over 30 years as an investment professional. Mr. Frank is the founder of GrowthIncome Research & Management, LLC. GrowthIncome Research & Management, LLC’s business mission is focused on generating... More
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  • Maximizing Retirement Returns Through Social Security Elections 4 comments
    Jun 21, 2012 4:01 PM

    (This article is being published on my instablog because SeekingAlpha's policy is not to focus on personal finance issues as important as maximizing Social Security benefits which dwarfs any retirement portfolio management or investment strategy it publishes on its "Retirement" section by hundreds of thousands of dollars. Go figure? )

    Most retirement advice dispensed focuses on "maximizing the value" of retirees' investment portfolios. This is a fool's errand.

    Instead, pre-retirement couples would be better served to focus on optimizing Social Security retirement elections to maximize their career payroll contributions in aggregate retirement benefits. The difference could mean multiples of hundreds-of-thousands of dollars-the value of a winning a small lottery. (See example below)

    If You're a Hammer, the World's a Nail. The reason for the sheer volume of advice focusing on retirement investing, i.e., recommendations concerning asset allocations, dividend growth stock purchases, creating bond ladders, purchasing single-premium annuities, etc., is that most of the retirement guidance is disproportionately dispensed by organizations that specialize in the lucrative business of purveying financial products and/or services. These purveyors range from money managers, banks, securities brokers, insurance companies, etc. Yet, for many, portfolio allocation plays only a minor-if not insignificant-role in securing a comfortable retirement.

    The Limited Value of Retirement Investment Strategies: A paper released by the Center for Retirement Research at Boston College states that on average a superior money manager executing an optimal portfolio strategy would only generate an incremental retirement benefit equivalent to six months' salary for the typical retirement saver. The report suggests that this is due in large part to the very fact that few retirees have saved enough money in their retirement accounts for the "magic" of portfolio allocation or investment strategies to have a material, positive impact.

    A Red Herring: The unhappy conclusion facing those born after 1959 and eligible to collect Social Security benefits is simple: without a material increase in their savings, 74% of households will fall short of their income needs at age 62 and 47% will fall short at age 67. Therefore, concentration on investment strategies to maximize investors' retirement "nest egg" is a "red herring", i.e., a questionable strategy for generating a comfortable retirement.

    Alternative Strategies for a Comfortable Retirement: For "Generation X" ("GenX"), those born in the early 60's to the '80's, the message is very clear: save more, spend less and hope your cohort group does not get marginalized by any forthcoming changes in Social Security entitlement programs. Good luck with that!

    Maximization of Social Security Benefits: For the baby boomer generation, where time has run-out to adequately save for retirement, there are strategies for couples to maximize their collective retirement benefits.

    Social Security provides a number of legitimate options for couples to elect when and how they will receive their benefits. The choices can result in material differences in the accumulated retirement benefits during a couple's retirement years (see example below). Maximization of 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.

    Main Concepts: There are a few central concepts necessary to understanding the basic mechanics for optimizing a Social Security retirement benefits' election strategy.

    1. Deferring Retirement Increases Benefits; Early Retirement Decreases Them: Assuming you're eligible, the longer you wait to collect your Social Security benefits the more money you will receive when you do. The earliest you can claim Social Security benefits is 62. However, your benefits will be reduced proportionally based on your age, the year in which you elect the benefits and the nature of elected benefits. Conversely, for each year past your full retirement age ("FRA") (66) you defer retirement, you will earn an annual credit (Delayed Retirement Credit ("DRC")) that increases your annual benefits up to the age of 70 when such credits stop accruing.

    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 full retirement age. This monthly benefit amount will be discounted to reflect any early retirement election. It will also preclude you from receiving benefit payments based on your own Social Security record-if you are eligible at a later date. Electing Spousal Benefits once you've reached your full retirement age will allow you the flexibility to gain DRC's during the period of Spousal Benefits. You are also eligible to switch to your own Social Security Benefit record at a later date at a higher DRC rate.

    3. File and Suspend: One spouse of the two can file for benefits and then immediately suspend the benefits and not receive payments allowing the other spouse to receive spousal benefits. The spouse who files and suspends provides the mechanism for the other spouse to seek Spousal Benefits. This allows the suspending Spouse to continue to accrue DRC's until a later date when that spouse can elect benefits that reflect a higher rate of payment.

    Why this is Important? Here is just one simple example. Let's assume that Jim and Betty are married. Jim (62) is scheduled to receive $2,000 per month from Social Security at his "FRA" and Betty is scheduled to receive $1,600 per month from Social Security at her "FRA". Their respective life expectancies are 83 and 90.

    1. Scenario 1: Each decides to elect Social Security benefits early, at 62. They would receive in the aggregate $836,640 of Social Security retirement benefits over their retirement years.

    2. Scenario 2: Betty claims her benefits on her record at 62 at a reduced rate of $1,200 per month ($1,600 monthly less a 25% discount for early-retirement at 62). Jim, now 66, claims a spousal benefit on Betty's record after she files for her benefits. He is now able to receive $800 per month (one-half of Betty's 1,600 monthly FRA retirement benefit). Once Jim reaches 70, he claims his benefits on his own record.

    (click to enlarge)

    Utilizing the strategy of Scenario 2, Jim defers his own Social Security benefits until he is 70 years old, allowing him to accrue credits that increase the benefits on his record. During this time, Jim receives the spousal benefits based on Betty's record. By doing this Jim hasn't been deemed to have been using his own record to collect benefits. Once Jim reaches 70 years old, he can begin to collect his benefits at the rate of $2,640 per month. In addition, a further advantage of deferring benefits is that it increases the survivor benefits for his spouse (Betty) upon his passing.

    Impressive Results: In comparing Scenario 2 with Scenario 1, by Betty taking early retirement and Jim taking Spousal Benefits and deferring and electing retirement benefits on his record at age 70 (Scenario 2), they will collectively generate lifetime benefits aggregating $1,043,520. This is an increase of over $200,000 over the same period under Scenario 1. It's the equivalent of winning a small lottery. (Neither the cost-of-living adjustment to benefits or the discounted value of future dollars has been considered in these calculations.)

    What's the Point? It behooves couples approaching retirement, and the 10,000 people that do it every day, to try to maximize their Social Security benefits. It's legal and you may be leaving something on the table that you're legally entitled too.

    Caveats: This article barely skims the surface with respect to permutations for optimizing a couple's Social Security benefits. This is a complex area that is dependent on many factors outside the scope of this article.

    Before electing your Social Security benefits, you should speak with a trusted financial advisor with experience in this complex area and/or contact the Social Security Administration (1-800-772-1213, or go to their website: regarding information with respect to the election of a couple's retirement benefits. If you don't ask, you don't know. You may be throwing out a winning lottery ticket.

    Joe Eqcome

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Comments (4)
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  • mikenh
    , contributor
    Comments (232) | Send Message
    Thanks Joe, this directly affects me in the next four months and I was totally unaware of it.


    You're right about the permutations, for example: My wife and I had a small business and could apportion salary levels between us as we wished. We opted for equality for domestic harmony, but it was short-sighted. Had we paid attention, over the previous decade, to the average income number that the SSA uses, my wife could have taken more income and raised her average without hurting mine, resulting in a larger total SS income.
    22 Jun 2012, 09:31 AM Reply Like
  • a fat panda
    , contributor
    Comments (813) | Send Message
    You are assuming that Social Security carries no risk. The system is short 20.5 trillion dollars, including its trust fund assets. This isn't a gen-x problem.


    Before you sell outside assets to concentrate your risk in Social Security - you ought to at least read the Trustee's Report and understand what their assumptions are. They haven't said that Social Security will last until 2033. That requires favorable economic outcomes. The report assumes that Social Security will be immune to the insolvency of medicare - which is laughable.


    According to the Supreme Court - Flemming V Nestor - you aren't entitled to anything. Your benefits are whatever Congress says that they are. In fact, if you are 63 today, you expect to live long enough to see your benefits forcibly cut because of lack of funding.
    5 Jul 2012, 10:52 AM Reply Like
  • Joe Eqcome
    , contributor
    Comments (622) | Send Message
    Author’s reply » a fat panda,


    Thank you for your comment and observations.


    Let me see if I can expand on my initial comments for the purpose of clarification.


    Point 1: Social Security Carries Risk. This is quite correct. However, this risk is moderate for current retirees compared to private pension fund assumptions of actuarial returns of 7.5% or greater understate their liabilities by $100's of billions.


    Given the choice between choice of opting for the GM retirement fund--or for that matter a state pension fund, versus Social Security, I'd choose the latter.


    Point 2: Social Security May Not Last Until 2033. This date represents the date in which full benefits may cease. As you're aware, S.S. in a "pay-go" system. S.S. benefits will not be eliminated but reduced to approximately 75% of full benefits. I dispute your linking Medicare and Social Security together as they represent two different sources of revenues. However, I'd entertain your logic for such a position.


    Point 3: "Don't Sell Outside Assets to Concentrate on Social Security": There is no implication that your non-S.S.retirement savings or portfolio management are mutually inclusive.


    What the article states is that without changing any of your retirement savings behavior, there are ways to maximizing Soc Sec benefits by planning carefully within the rules and regulations that guide such benefits.


    Even if Soc.Sec. reduces benefits it will likely be sometime in the late '2020's or early '2030's. Therefore odds for a reduction are fairly low in the next 10-to-15 years.


    Point 4: Your Benefits are Whatever Congress Says They Are: Any of the proposals to reduce S.S. benefits pretty much "grandfather's" in people over 55. The political will to take on seniors who have been paying into the system for 30 to 40 years would be suicidal.


    Having said all of that, your points are valid. However, the likelihood of a vast change in S.S.for the current group of seniors 60 and older is in our opinion remote.


    Therefore taking time to select your benefits in a valuable and profitable exercise.


    5 Jul 2012, 04:29 PM Reply Like
  • CBSail
    , contributor
    Comments (2) | Send Message
    my wife and I are both 60 and plan to take SS at 62. our approach tracks along the phrase 'you can't take it with you'. sure, delaying ss a couple of years will increase our monthly benefit, but I don't think I'll be hitting the blacks at that point or solo sailing across the bay. I'm sure some folks are still working on their bucket list into their 70s and 80s but I prefer to finish mine off sooner rather than later. People approaching retirement need to make judgement calls of course, but life has alot to offer when you can see, hear and walk without assistance.
    19 Jan 2013, 11:17 PM Reply Like
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