Thu, 9 Oct 2014
Double-check your Social Security statement, understand the importance of your 'full retirement age,' and weigh the benefits of delaying, says retirement expert Mark Miller.
Note: This video is part of Morningstar's October 2014 5 Keys to Retirement Investing special report.
Christine Benz: Hi, I'm Christine Benz for Moringstar.com. Making the right decision on your Social Security start date can make a big difference. Joining me to share some tips on this topic is Mark Miller, he is a Morningstar contributor. Mark, thank you so much for being here.
Mark Miller: Always great to be here, Christine.
Benz: Mark, before we get started on Social Security planning and key takeaways that people should have in mind, let's talk about why Social Security planning really seems to have caught fire recently. There is so much interest in this area.
Miller: I think there are a few factors. I think one is that a lot of the political stuff around Social Security has quieted down and people sort of are back to a fundamentals understanding of how important Social Security is in most retirement plans--so, that's one. The clouds have parted, if you will. Two, I think there is more focus on help and advice to people around Social Security. I actually wrote about this for Morningstar recently--the different ways you can access advice and help. Workplace retirement plans are starting to add Social Security advisory services. There is a whole cottage industry of companies that can help people make plans and optimize their benefits. So, there is more marketing around it, if you will, from the commercial sector.
So, I think those are some of the factors as to why there is more focus on it. And I think the last thing is, in the defined-contribution space, we're seeing more and more focus on retirement income and the importance of thinking not just about accumulation of wealth but [also the question of] "How do you spend it down?" And so the retirement-income conversation naturally leads to a conversation about Social Security because it's the grandmother of all retirement-income programs.
Benz: So, you brought some key takeaways that people should have in mind as they are navigating Social Security. Obviously, it's a pretty complicated topic when you dig into it, but you think that if people are armed with a few key things that they will be better situated to make a decision.
Miller: The first thing I would say is that I don't like to say it's a hugely complicated topic. I think that's kind of off-putting to people. You often hear people say there are 7,000 rules.
Benz: Exactly. And there are, right?
Miller: I guess technically that's the case. Don't ask me what they are. I can tell you it boils down to a handful of things. I don't think people should find this as daunting as sometimes it's made out to be. I think there are four or five key things--if you will, a checklist. One is that I always urge people to start with their statement. The Social Security Administration prepares an annual statement updating you on what your benefits will be at retirement. Now, they stopped mailing out the statement a handful of years ago to save money. They are now resuming statement mailings as of this fall on an every-five-year basis. But the thing to know is that you can download your statement every year if you've created a my Social Security account on the [official Social Security] website. And if you do that, you'll receive an email prompt once a year reminding you to go take a look at your statement. And you can log on and just download your statement and have it. So, there is no reason not to have it.
Benz: What I am looking for if I take a look at my statement?
Miller: It's going to show you what your benefit would be if you filed at 62 or at your full retirement age or at 70. So, that's useful. Then, the other thing that's good to do with that statement is to take a look at the history of your earnings that are being used to compute your benefit by year. It's always a good idea to check the last couple of years of what's on the statement against your own record to see that they agree. It's rare, but there are cases where there will be an error on the statement that's not in your favor. And so, you'll want to go and talk to Social Security about that, and there would be a process where you can provide the paperwork to get it corrected. So, this is just good Social Security hygiene, if you will. Not a big deal, but worth doing.
Then, as you get into all of the various maximization strategies, that statement is your baseline, because many times with the online tools and so forth that you might use to make decisions, it will start by asking you to go get that statement and input what your benefit is at full retirement age. So, you need that number anyway.
Benz: So, you've mentioned full retirement age a couple of times. You say another key thing that people should know is what that means. And it's a moving target, right? Depending on your age?
Miller: It's a moving target because of the reforms of Social Security in 1983, which are gradually moving the full retirement age from 65 to 67. So, it's a moving target just because it's gradually moving. For people retiring right now, it's 66 and change. But the thing to know about full retirement age is this: The benefit is calculated around something called the primary insurance amount, which is just Social Security's formula for figuring this out. And so, when people talk about optimizing your benefits, this is what it means: that if you file at your full retirement age, you get 100% of the PIA, the primary insurance amount. If you were to file at 62, the first time you are eligible, you would get 75% of PIA. If you waited all the way until 70, the last year for which you can get additional credits, you would get 132% of PIA. This gives you an idea of the scale of difference in the payouts according to year, and that's just a very simple way to think about it.
Benz: And that leads into your next point, which is that when you look at these numbers, you are generally going to see that if you are able to delay, you can really get a powerful compounding effect in that benefit.
Miller: No doubt about it. It works out to roughly 8% a year for every 12-month period that you wait. I usually say to people that there is no one-size-fits-all answer to this. There can be reasons to file early, which could mean as early as 62.
Benz: Those might be what?
Miller: It could be somebody who is not in good health and, frankly, doesn't have a long life expectancy; [that person] might as well get those benefits paying out. That would be, I think, the biggest single reason. The other would be perhaps a case where you have a spouse who already has a big defined-benefit pension--in other words, you already have a lot of other guaranteed income coming into the household. That could be a reason to add Social Security at that point. And then, the last one is people who just have a real need for that money. If you are facing foreclosure or something, or if you just need the money now and you don't have alternatives. I'd never say to people, "Thou shalt never file for Social Security"; but all other things being equal, people who have the ability to wait and are in reasonably good health--have good genetic history in their family--it's generally beneficial to wait at least to full retirement age.
Now, a lot of people interpret that to mean, "Well, I have to wait till 70." And I always say, "No. Seventy would be great, but 68 is good." So, as much as you can, I guess, is the answer. And it's especially the case for women, who tend to outlive men. You often have cases where women get to an advanced age and they have exhausted all of their savings and Social Security is what's left. So, the bigger the benefit, that's going to be so much better. And the last thing to mention about Social Security is that it's an inflation-adjusted benefit. There is an annual cost of living adjustment, so it's one of the resources you will have in retirement that is inflation-protected. And that is hard to underestimate the benefit of.
Benz: It's very hard to come by. Another key takeaway is that couples ought to step back and think about their strategy. Here is where things get a little more complicated, where you've got two people maybe with separate earnings histories.
Miller: Not 7,000 complicated, but a little bit more complicated.
Benz: Somewhat complicated. [The two people have] separate earnings histories and maybe you've got some age disparities in the mix, too. So, what are some of the key things if you are part of a married couple attempting to make a good decision here? What are some of the key things you should have in mind?
Miller: So, the first thing is to think about it as a couple. I can't tell you how many times I've talked to readers of my work who just start talking to me about their decision. I say, "Are you married?" Yes. I say, "Have you talked this over together?" And a lot of times, the answer is no. So, that's first: Do you think about it as a couples thing, because the spousal rules are important and beneficial in many cases. A basic rule of the road is that, for couples, the higher earner should delay as long as possible. Often, that's the man and men don't live as long. So, if the man delays and gets the higher benefit, later on when he's no longer in the picture, that surviving spouse steps up to get the survivor benefit, which is 100% of the deceased spouse's benefit. So, that's very straightforward. Higher earner delays: good strategy.
Benz: Then, a related strategy is called "file and suspend." This is one you've written about for us; it's gotten a lot of traction. It's a little bit complicated, but let's talk generally about how this works and how this can be very, very beneficial, especially for couples.
Miller: It can be complicated. So, let me mention also that we've done some writing about this on Morningstar.com. People can refer to the written versions--the cheat-sheets--on this. But the first thing to say about file and suspend is that it's a strategy that works by waiting until the full retirement age. You want to wait until both people are at FRA to do this, because this is what gives you the flexibility to make the changes down the road that are integral to the strategy. So, that's the first thing to understand. Basically, this is the situation where the higher earner at full retirement age files for benefits but then immediately files a notice to suspend those benefits. So, they are not taking the benefit and--let's just say it's the guy--when he does that, he then continues to accrue credit. So, he's 66. He suspends. He's not receiving benefits. He can go ahead and wait until 70 or 68 or 69 to file and gets those additional credits. But at the time that he does the file and suspend at age 66, assuming that the spouse is also at full retirement age, she now files for the spousal benefit at age 66 at the FRA, the spousal benefit is half of the spouse's benefit. So, you'd now get some Social Security income coming in right away.
Now, the higher earner has delayed, perhaps as late as 70, and when he then files finally, the spouse then converts to her own full benefit--she can do that if she didn't do this until FRA. And later on, a survivor benefit. So, there are two or three factors here that lead to a higher benefit. We ran a scenario on this for a piece on Morningstar.com. With that couple, the man's benefit was going to be, at full retirement age, $2,500 a month and the spouse was going to be $1,800. And assuming that he lives to 83 and she lives till 95, it makes a difference, lifetime, in their combined benefits of about $163,000.
Benz: Versus doing what?
Miller: Versus the standard filing at your full retirement age. So, it's a substantial difference.
Benz: I know there were some rumblings earlier this year that this strategy was potentially on the chopping block. What's your view of that?
Miller: If I could, before I get to that: The one other thing I want to say about the benefit of this model is that the surviving spouse, at very advanced age--say, at age 94--we calculated it out that her annual benefit is now $9,000 higher than it would have been. And back to this point about people who have exhausted other savings: You can see how profound a difference that could be for somebody at that point. Now, to your question: Yes, the White House took a shot at file and suspend in the budget this year, saying this is a strategy that should be curtailed because it's something that is being used by high-income couples to "game the system." And it has gone nowhere since then.
Benz: So, no news on that front. And we think it's a pretty attractive strategy for people who fit this kind of profile.
Miller: I think it is. And I think, as we've discussed in some of the columns, there are ways to get help with this strategy. I think that is a very good thing to look into because there is some complexity attached to this, and some of the advisory firms that we mentioned in that story on the website can help walk you through these things for a pretty modest fee. If you think about a $163,000 return lifetime for maybe a $200 fee for somebody to help you optimize your Social Security, it's a good deal.
Benz: It could be money well spent. Mark, thank you so much for being here. It's such an important topic. We really appreciate your insights.
Miller: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.