While few high net worth clients intend to rely on Social Security benefits as a meaningful source of retirement income, lifetime benefits may be larger than they might expect: nearly $600,000, on average, for a couple who turned 65 in 2010, and significantly more for high earners with longevity.1 Additionally, Social Security typically replaces about 40 percent of an individual’s earned income,2 or about 28 percent for those with higher preretirement income.3
And, despite concerns about the program’s future solvency, Social Security is actually on track to meet its obligations to retirees through 2037. However, after this time, unless action is taken to significantly cut costs, benefits will be reduced by about twenty five percent,4 and only if no action is taken before then to strengthen the Social Security trust fund. Here are some strategies to help you maximize your benefits:
WHEN TO START BENEFITS
Age 62: About 74 percent of today’s retirees start benefits at the earliest possible age, locking in a major reduction, compared with benefits at full retirement age.5 Starting this early may be necessary if you’re in poor health or need the income, but with life expectancies now reaching into the 90s, delaying benefits can be preferable for many retirees.
Full retirement age: Full retirement age (FRA), which varies (see ssa.gov), is used to calculate any reduction in benefits (if taken earlier) or increase them (if taken later).
Age 70: For each year you delay benefits between FRA and age 70, Social Security adds 7 to 8 percent to future benefits, plus the cost of living adjustment. That guaranteed annual return can make this alternative very attractive, provided you have longevity.
Earning income: If you work before you reach FRA, benefits are reduced $1 for every $2 earned above $15,120 a year. In your FRA year, benefits will be reduced $1 for every $3 earned over $40,080.6 After FRA, working will not reduce benefits. In fact, your benefits will be recalculated to include amounts previously withheld.
Taxes: A portion of your Social Security benefits will likely be taxable. You should work with your tax advisor to review your situation and plan accordingly.
A fresh start: Generally, your decisions about taking Social Security benefits are irrevocable. But if you change your mind after starting to receive benefits, it’s possible to pay back all benefits received to date and reapply at a later age. This is just an overview of Social Security. For strategies you should explore, see ssa.gov, whose calculators let you estimate benefit amounts at different ages.
1 Urban Institute, “Social Security and Medicare Taxes and Benefits Over a Lifetime,” June 2011.
2 Social Security Administration, “Understanding the Benefits,” February 2013.
3 National Academy of Social Insurance, “Social Security Benefits, Finances, and Policy Options: A Primer,” April 2012. Based on estimates from the 2012 Annual Report of the Board of Trustees, SSA.
4 SSA Office of Retirement and Disability Policy, “The Future Financial Status of the Social Security Administration,” 2010.
5 Social Security Administration, “Annual Statistical Supplement, 2011,” February 2012.
6 Social Security Administration, “How Work Affects Your Benefits,” January 2013.
Jesse M. Rodriquez is a Financial Advisor with UBS Financial Services Inc., a subsidiary of UBS AG. Member FINRA/SIPC in 888 San Clemente Drive, Newport,Beach, CA 92660. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies referenced may not be suitable for all investors, as the appropriateness of a particular strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. UBS Financial Services Inc., its affiliates and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax or legal advisor. In providing wealth-management services to clients, we offer both investment advisory and brokerage services, which are separate and distinct and differ in material ways. For information, including the different laws and contracts that govern, visit ubs.com/workingwithus.