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Three Key Levers in Your Social Security Plan

Jason Stipp

Jason Stipp: I'm Jason Stipp from Morningstar. Your Social Security benefit compared to your investment portfolio may seem like the easier piece of your retirement puzzle to manage, but Morningstar's Christine Benz recently dug into some of the issues with Social Security and some of the options, and she found there is actually a lot for you to pay attention to you as you're managing your Social Security benefits. She is here to tell us a little bit about what she found.

Christine, thanks for joining me.

Christine Benz: Jason, nice to be here. I told you I had to take a couple of Advil during the writing of some of these articles because there are a lot of different variables to think through.

Stipp: But some very interesting scenarios. So, first things first, for folks who maybe haven't dug into all of these details yet, there are some really high level things that they absolutely just must keep in mind. So, what are some of the things that if you have nothing else taken away from this discussion, you really need to know about?

Benz: The one thing I would say, Jason is wait longer, if you possibly can, because you really do see an appreciable step up in the benefit you'll receive, if you wait, not just to your normal retirement age, but ideally even beyond, if you can.

And the key consideration there is what your own longevity will be if you have health issues or have reason to believe that your longevity will be less than average, that might be an argument for taking it as soon as you possibly can. But if you have longevity on your side, you want to wait, because you will see a big step up in the benefit.

Stipp: So, again, what are the age ranges where you have the opportunity to take it, and then also if you wait, when would you be taking at that point?

Benz: Well, 62 generally is the first point at which someone could file, and then the next age bracket that you'd want to be thinking about is what's called your normal retirement age and what that is will depend on the year in which you were born. It's anywhere from 65 to 67 for most people who are looking toward retirement today.

Stipp: Okay. Christine, so the first key important lever to keep in mind is when you take the benefits, and whether you should wait or not wait. So, the second piece is another concept, another option that you should think about as you're thinking about your Social Security is the notion of a do-over. Can you explain how that works?

Benz: Well, it's complicated, Jason, but the basic idea is that you begin filing when you are first eligible, so age 62 for most people. Then at a later date, you actually withdraw your application for benefits and then begin taking benefits when you're somewhere between the age of 66 and 70. So, the idea is that by filing at 62, you're ensuring that you're at least getting some benefit during your lifetime, if you were to die prematurely, so you've gotten something back from what you've paid in. Then the benefit of waiting later, though, and so refiling later on, is if you do make it beyond age 66 or anywhere from 66 to 70, you'll be able to get a higher payout at that point, and your spouse will also be able to get a higher payout. So, that's the key advantage there.

Stipp: So, it's really a way to sort of hedge your bet, so that you have that little bit of extra time, but I guess the important piece here is knowing that you really can't just go out and spend that money that you start to collect when you're 62 because you may decide, hey, I'm pretty healthy, I'm feeling pretty well, I might want to refile for those higher benefits. But you'd have to pay all that initial benefit back?

Benz: You do. That's an important consideration, Jason. So, I typically say this strategy is best suited to the healthy and wealthy, so people who think that they're going to live a good long time, this will make sense for. Ideally, if someone is in a position to save the benefits that they've received maybe in a short-term bond fund or something like, they'll be able to pocket that interest, because when you pay the IRS back assuming you've filed all the right tax documents, you will not owe interest on that money.

Stipp: Okay. So, two key options here; the first one is, when you take it; the second one is deciding if a do-over is right for you. A third very important way of optioning your Social Security is thinking about your spouse and how you decide to take your benefits as a couple. Can you explain a little bit about that?

Benz: Right. So, this compounds the headaches really because you've got two people maybe with two different age bands as well as two different earnings histories. But one common strategy that you hear couples using is, where the lower earning partner files for benefits when he or she is first eligible, and then the higher earning partner at that point receives the spousal benefit, based on the lower earning partner's benefit. And then when the higher earning partner hits normal retirement age, 66, 67 something like that, he or she files for benefits and then both partners' benefits step up. So, the lower earning partner bags his or her own benefit, and gets into the spousal benefit and that ensures a higher payout during both partners' lifetimes.

Stipp: So, it certainly sounds like it's good to know your options but there are also lots of different combinations to think about here. As you're trying to figure out what's best for you, for your individual situation, how would you recommend going about arriving at that best solution?

Benz: Well, two key pieces of advice. First of all, a lot of financial advisors are very well schooled in the ins and outs of Social Security and can help you figure out how to maximize your payout given your personal situation. And the other thing I will say is that having played around with the Social Security website tools over the past few weeks, they've got some good stuff there and some good ways to calculate benefits given various scenarios. So, I would urge people to hop on the site. There's also a lot of good free information. Hop on the site and see what you can do there.

Stipp: Well, certainly a very complicated topic, but it's at least good to know the basics of what your options are. Thanks so much for joining me, Christine.

Benz: Thank you, Jason.

Stipp: From Morningstar, I'm Jason Stipp. Thanks for watching.