MILWAUKEE, October 7, 2013
Social Security planning is the number one concern among Baird’s wealth management clients according to Tim Steffen, CPA, CFP®, Director of Financial Planning for Baird’s Private Wealth Management group.
"Social Security planning questions are the most common questions we receive,” Steffen said. “Clearly the Baby Boomer crowd is thinking about this. Most know there are options, but they don’t realize how significantly their benefits can change based on decisions they make.”
What determines your Social Security benefit?
Monthly Social Security benefits are based on earnings over your 35 highest-earning years (to be eligible for Social Security, you must have registered 40 quarters of earnings). If you only worked 30 years, you have five $0 years that lower your overall benefit. The maximum annual earnings considered for benefits is $113,700 in 2013, though earning more than the annual maximum won’t impact benefits. A worker who earned the maximum income each year would earn the maximum benefit – $2,533/month for a 2013 retiree at full retirement age.
Benefits are also determined by when you begin to take Social Security. Full retirement age (FRA) is 66 or 67, depending on the year you were born. The earliest one can begin drawing Social Security is 62. But drawing retirement benefits early significantly reduces the benefits you would receive if you waited until full retirement age:
*As compared to age 62 benefit
According to Steffen, “The main thing to remember is that any decision you make to take Social Security benefits before full retirement age will result in a permanent reduction in your annual benefit, and likely a significant reduction in your cumulative lifetime benefit.”
Many clients are hesitant to defer taking benefits given concerns they have about the future of the Social Security program. “While some individuals do believe they need to ‘get it while they can,’ we emphasize that the reform proposals we’ve seen floated are usually designed to not affect those over age 50,” Steffen said.
The value of delaying retirement
If you can afford it and have no health issues that might limit your life expectancy, Steffen believes it will often make sense to delay taking your Social Security benefits. “Individuals do need to weigh a number of factors in their decision to defer including their health, other sources of income, and potential earnings from work,” he said. “However, in our view, it makes sense to defer for those in good health with other sources of income.”
The table below illustrates the increase in benefits received for each year you delay receiving a benefit up until age 70 when you are required to start drawing Social Security. According to Steffen, “Individuals who wait to draw benefits earn a delayed retirement credit of 8% per year, plus any cost of living adjustments. Where else can you earn this type of return on your investment?”
*As compared to age 62 benefit
“By deferring the start of benefits as long as you can, from age 62 to 70, your annual benefit will increase by roughly 76%,” he said. Furthermore, the increase in the annual benefit received by deferring will make up for itself in roughly 8 years, ultimately providing the maximum lifetime benefit. “By age 78 or so, you will have earned back all the money you didn’t receive by deferring benefits.”
The impact of work and taxes on benefits
With many more individuals choosing to work beyond traditional retirement age, Steffen is often asked about the impact of work income on Social Security benefits. Once you reach full retirement age, income you earn doesn’t impact your Social Security benefits. But before FRA, benefits can be reduced. The earnings threshold for 2013 is $15,120 and benefits are reduced by $1 for every $2 over that amount. That translates to monthly earnings of $1,260 (or $15,120/12).
Taxes can have an impact, too. Depending on your income level, a portion of Social Security benefits may be taxable. “Married couples earning more than $44,000 pay taxes on 85% of their benefit,” he said.
Unique planning options for married couples
Married couples have some additional options when it comes to their Social Security benefits. A spouse is eligible for a benefit based on either their own work history or 50% of the benefit based on a spouse’s work history (also known as a spousal benefit). A non-working spouse is eligible for a spousal benefit, but can’t claim one until the working spouse files for benefits. A surviving spouse is eligible for the larger of the benefit based on their own work history or 100% of the benefit based on deceased spouse’s work history.
“There is a way for married couples to get the best of both worlds – receive benefits earlier and earn the delayed retirement credit,” Steffen said. “A strategy we recommend when both spouses have a work history is to have the higher-earning spouse file for benefits and immediately suspend them. This allows the other spouse to begin receiving a spousal benefit initially at age 66 and then switch to their own benefit at age 70. As a result, both spouses can then benefit from deferring their own benefit and receive the 8% delayed retirement credit.”
When to begin planning
While most people wait until close to retirement to think about it, Steffen recommends that people begin thinking immediately about how much money they can expect from Social Security. “Determining your benefit is an important piece of any retirement plan in addition to projecting your retirement expenses and determining how much you can expect to receive from other retirement plans or savings,” he said. You can find out what your projected benefit is by visiting the Social Security website at www.socialsecurity.gov.
To schedule an interview with Tim Steffen on this or other wealth management topics, contact Amy Nutter, Baird Public Relations, at (414) 765-3988 or firstname.lastname@example.org. Steffen is the author of numerous articles about understanding and maximizing Social Security benefits including “Social Security Planning Strategies.”
About Tim Steffen
As Director of Financial Planning for Baird’s Private Wealth Management group, Tim Steffen is a noted expert on the financial and estate planning needs of high-net-worth individuals. Prior to joining Baird in 1999, he worked in Arthur Anderson’s Private Client Services group where he specialized in tax and financial planning. He earned his bachelor’s degree in Accounting from the University of Illinois. Steffen is a Certified Public Accountant/Personal Financial Specialist, a CERTIFIED FINANCIAL PLANNERTM professional, a Certified Private Wealth Advisor® professional and a member of the American and Wisconsin Institutes of CPAs, the Financial Planning Association and the Investment Management Consultants Association. For more tax and financial planning tips and insights, follow him on Twitter @steffen_rwbaird.
Baird is an employee-owned, international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Established in 1919, Baird has approximately 2,800 associates serving the needs of individual, corporate, institutional and municipal clients. Baird has more than $100 billion in client assets. Committed to being a great place to work, Baird ranked No. 14 on FORTUNE’s 100 Best Companies to Work For in 2013 – its tenth consecutive year on the list. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s investment banking and private equity operations. For more information, please visit Baird’s Web site at rwbaird.com.