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Putting Social Security Back Into the Plan

In today's reality, Social Security has once again become the cornerstone of retirement income planning.

Helen Modly, CFP, ChFC, 07/18/2013

Just a few short years ago, clients would tell us to ignore any Social Security benefits in their retirement planning analysis. "I don't expect it will exist 10 years from now," or "I don't want to have to count on it," were some of the comments we heard.

Planners often acquiesced because clients presented with such rosy employment forecasts: 3%-5% cost-of-living raises annually plus increasing salaries and bonuses of 5%-10% a year were common planning scenarios. Oh, and remember those investment projections showing linear growth of 8%-10% year-in, year-out for decades?

Those Were the Days
Fast forward to today's retirement planning reality where secure employment is considered as great a blessing as good health, investment returns are playing serious catch-up, and Social Security has once again become the cornerstone of retirement income planning.

The primary planning issue concerning Social Security was usually only how much? Workers worked, they retired at 65, and began receiving their Social Security checks right away. Widows usually took their benefits early. Every year they got a little bit of a raise due to cost-of-living adjustments, and that was about the end of the planning implications.

Timing Is Everything
In today's planning environment, the question of when to begin Social Security payments is the real issue. For people born in 1955 and later, the actual Full Retirement Age (FRA) gradually increases from 65 to 67 years old. Another important planning point is how to optimize Social Security for couples, widows, and divorced spouses.

Break-Even Point
We used to be concerned about calculating the break-even point, which is the age at which the sum of the smaller checks initially claimed age 62 falls below the sum of the larger Social Security checks initially claimed at age 65 or 70. Just a few years ago, this was the primary consideration. In essence, we were asking clients whether they thought they would live past 82 or 84, which were common breakpoints for people whose FRA was age 65.

As the FRA has creeped up, so has the amount of benefit reduction they will see if they begin taking benefits earlier. Taking Social Security at age 62 reduces the actual benefit by 25% of the amount a client would receive if they waited until their FRA. Widows whose late husbands were eligible for Social Security can begin taking benefits as early as age 60, but if they do, they will see a 30% reduction in their benefits for life.

On the other hand, delaying the start date increases their benefit by 8% for each year delayed until age 70. This is a huge planning opportunity that is often dismissed without really understanding the implications. By delaying the start date from age 65 to age 70, clients could see their benefits increase by as much as 40% (5 years X 8% increase each year) for the rest of their lives. There are no further increases after age 70, so there is no point in delaying any longer.

Helen Modly, CFP, ChFC, is executive vice president and director of investment services for Focus Wealth Management, a fee-only registered investment advisor in Middleburg, Va. Modly has more than 20 years of experience providing wealth-management services. She is a member of NAPFA and FPA. She can be reached at info@focus-wealth.com. The author is a freelance contributor to MorningstarAdvisor.com. The views expressed in this article may or may not reflect the views of Morningstar.
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