As you construct a plan to generate a lifetime of inflation adjusted income, one of the items you should pay close attention to is how and when to begin taking your Social Security benefits.
Maximizing your Social Security benefits is an important part of an overall income plan for retirement for several reasons. First, Social Security benefits are tax-advantaged because in a worst case scenario only 85% of the income you receive from Social Security is taxable. Second, Social Security income is adjusted for inflation so over the years your income will increase to keep up with it. And third, Social Security provides survivor benefits when one spouse passes allowing the surviving spouse to continue to receive income guaranteed for life.
Most people know if you begin taking Social Security at 62, then you take a permanent reduction in your benefits (30% reduction for people born after 1959). For most baby boomers if you wait until age 66, then you can receive your full retirement benefit. For every year you delay taking your Social Security benefits beyond your full retirement age up to age 70, your Social Security payments increase by 8% per year. It’s hard in today’s interest-rate environment to find a way to increase your cash flow by 8% per year on a guaranteed, tax-advantaged, inflation-adjusted basis.
While those are some of the most common strategies for maximizing your Social Security benefits some of the lesser-known planning strategies include techniques called “switch strategies”. We refer to these planning options as “switch strategies” because they often involve the election of a limited benefit initially, then a switch to a larger benefit later. A major university study suggested that these strategies represent over 10 billion in unclaimed Social Security benefits. For an individual family, it’s not uncommon for them to receive an additional $20-$50,000 or more in benefits during their lifetime.
You can use two basic techniques that enable switch strategies: the restricted application, and the file and suspend. When you go to the Social Security office, the individual you meet with may only be trained to help you identify the highest benefit you can get today, not necessarily over your lifetime, or over the joint lives of you and your spouse. As a result, you are unlikely to hear about these techniques during a typical visit.
I have seen instances where the wrong decision on when to claim your Social Security benefits could be the determining factor between having enough saved for retirement or running out of money in retirement.
Before you create an investment strategy for retirement make sure you’ve taken all the steps necessary to build it around a solid financial plan. A part of a good financial plan should include strategies for showing you how to get the very most out of your Social Security benefits. Remember retirement really is all about your cash flow not net worth. Be sure to work with an Advisor who specializes in retirement. You may also want to visit the website www.SocialSecurityTiming.com and use their interactive calculator to get some ideas on how to maximize your Social Security benefits.