How to Have More Money When You Retire

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In my last article, I talked about upcoming changes in the Social Security laws and how that would change the options available to folks as they claim their benefits. Now that some of these changes have occurred, it is time to revisit this topic. In many ways, social security claiming strategies are now more important than ever. Understanding your options and coordinating a claiming strategy with your overall income planning can be the difference in running out of money and not, in retirement.

Will Your Income Last a lifetime?

Once you understand the importance of building your retirement income around sources of guaranteed lifetime income, you can appreciate why Social Security is so important for most of us. Since most of us no longer enjoy a pension, Social Security is the primary resource for creating lifetime, guaranteed income. On top of that, it is tax advantaged and indexed for inflation (your income has the opportunity to increase over time). This is income you will receive no matter what happens to interest rates, markets, your health or any of the myriad other risks to retirement security. After all, the bills will continue to come in, so it is very reassuring to know you have the income available to pay them!

Meet Jack and Janet

So let’s look at a real life example of how having a strategy can provide a lot more money to you in your lifetime. I will use a real couple I am working with. We will call them Jack and Janet. They both work and earn a reasonable middle class living, earning about $115,000 per year between them. Janet had some years earning very little while she stayed home with their now adult son, working mostly part time during most of his childhood. Janet is 2 years older than Jack and is eligible for about $1200 per month at her full retirement age of 66, and $1765 at her age 70. Jack is eligible for $2360 at 66 and $3160 at 70.

What Happens if I Take My Benefit Early?

These days, most recipients claim before their full retirement age, which is 66 for both of them, but that cost is so high, I won’t take time here to address why you should rarely do that as the cost is in the hundreds of thousands for most middle class taxpayers to take their benefit before full retirement age! Please don’t do this without fully understanding what it is going to cost you.

Most people, who don’t file early, will take their benefit at full retirement age, which is 66 for this couple. If they did that, the combined monthly benefit will be $3,540 per month ($1,180 for her, $2360 for him). At that rate, they would have collected $1,019,520 by the time Janet hits 90. Not bad! However, they will use a couple of techniques to dramatically increase their total income. First, Janet is going to wait until she is 68 to claim her benefit — She will use the “file and suspend technique when she turns 66 in order to protect all of her options, more on that in another blog post. She will get about $1,400 per month. This is so that Jack can claim a spousal benefit of $700 per month for the next 4 years as his benefit continues to grow 8% per year until he turns 70. This alone will provide a spousal income of nearly $34,000 over the next 4 years, at which time he will claim his full benefit, at 70, of about $3200 per month. So, by waiting, their annual income will be over $55,000 per year! So by age 90 they will have collected $1,085,760, or about an extra $66,000! Now this assumes there are no cost of living adjustments to Social Security benefits during the next 25 years, which is unlikely. If we were to add in a 2% inflation adjustment we would have tens of thousands in additional income over that time.

Live Long and Get Paid

Now before you say, “who is going to live that long?” you should know that recent studies show that for every couple that reaches 65, there is a 50% probability that one of them will live to 93! A 25% probability that one lives to 97! These numbers are increasing at an alarming rate, and must be taken into consideration when doing retirement planning of any type.

By using this strategy, Jack and Janet will enjoy tens of thousands in extra income over their retirement, have their investment portfolio last many more years, and create a lot more financial security for Janet, as her widow’s benefit will be Jack’s payment, not hers!

Understand Your Options

I know how tempting it is to “take the money and run,” but investing a little time to understand the options and create a strategy for claiming that suits your specific situation, will give you more lifestyle, less stress and a more secure retirement. Isn’t that what you really want? Remember, there is no one size fits all strategy for optimizing your benefits. If you would like help creating a custom Social Security claiming strategy, you can contact us for a 45 minute social security analysis and strategy session at no charge. Let’s find out how much we can put back in your pocket!
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