social security

For those who have spent decades building their net worth, the topic of Social Security is often the last to come up in a retirement planning discussion. Many underestimate its worth, or their ability to affect these payments. 

Yet the lifetime value of Social Security can be significant. Take, for example, a two-career professional couple, both age 66. If one collects $2,500 in Social Security benefits each month, and the other receives $2,000 per month, they will receive over $1 million in benefits if they both live to 85. Still, many people file for their Social Security checks without understanding its value and how the system works.

The most important thing to know is that Social Security rewards the patient. Although you can start retirement benefits as early as 62 — and many people do — you'd be locking in a permanently reduced benefits for life. Your check would be 25 percent to 30 percent smaller than what you'd get at your "full retirement age" — currently 66 and climbing to 67 for people born in 1960 and later. Once you pass your full retirement age, your checks grow even more: eight percent each year you delay, until your benefits maxout at age 70.

Maximizing Your Benefits

Financial planners point out that it’s difficult to get a safe, guaranteed, inflation-adjusted return that high anywhere else. That's why they often advise clients to tap other retirement funds, such as IRAs or 401(k)s, if that's the only way the retirees can delay taking Social Security.

A delayed start serves as a kind of longevity insurance. The longer people live, the more likely they are to run through their assets, so a larger Social Security check can mean greater comfort in old age.

A delayed start also makes sense for those who simply want to get a decent return on all the money they paid into the system. Given Social Security's failure to take into account current life expectancies, most people are likely to live past the "break-even" point where delaying benefits reaps more than starting early. The wealthier and better educated you are, the longer you're likely to live, making a delayed start a virtual no-brainer.

Waiting at least until your full retirement age also allows you to use other strategies that can help maximize your Social Security benefits.

File and Suspend

The first strategy is called "file and suspend." Once you've reached full retirement age, you can file an application for benefits and then immediately suspend it. Doing so allows your benefits to keep growing, but gives you the option of changing your mind. If you later need or want the money, you can request a lump-sum payment for benefits dating back to the date of suspension (although you lose those eight percent annual delayed-retirement credits you built up since your full retirement age).

"File and suspend" also would allow your husband or wife to claim a spousal benefit while your own benefit continues to grow. At age 62 — the earliest spouses can claim such benefits — their checks would equal 35 percent of what their partner would get at full retirement age. (If you would get $2,500 at age 66, for example, your spouse could get $875 at 62.) Waiting until the spouse's own full retirement age would boost the spousal check to 50 percent of the partner's benefit (or $1,250 in this example).

Restricted Application

There's another incentive for a spouse to wait until his or her own full retirement age to begin spousal benefits. Doing so allows spouses to file what's known as a restricted application to get just the spousal benefit. Then their own benefits can be left alone to grow, and they have the option of switching to that benefit when it maxes out at age 70.

If they file for spousal benefits before their own full retirement age, by contrast, they're considered to be applying for both the spousal and their own benefit, and given the larger of the two. They're stuck with that check going forward, and lose the option to switch — even if their own benefit ultimately would have been larger.

Clearly, there are a lot of moving parts to Social Security claiming decisions that require a thoughtful and tailored approach. Your financial advisor can help you determine the Social Security strategies that best fit your overall financial plan.

  • Kathleen Gilmore, CFP®, Principal, Clifford Swan Investment Counsel contributed to this report
City National Bank, as a matter of policy, does not give tax, accounting, regulatory or legal advice. The effectiveness of the strategies presented in this document will depend on the unique characteristics of your situation and on a number of complex factors. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. The strategies presented in this document were not intended to be used, and cannot be used for the purpose of avoiding any tax penalties that may be imposed. The strategies were not written to support the promotion or marketing to another person of any transaction or matter addressed. Before implementation, you should consult with your other advisors on the tax, accounting and legal implications of the proposed strategies based on your particular circumstances.