Wednesday, January 8, 2014

Hedging with Social Security Benefits

There is much discussion in Washington these days about “entitlement reform.” An obvious example includes the Social Security system. A question that often arises in this area is “When should I begin to draw my benefits?” That question is critical since the benefits one receives is reduced if taken before “full retirement age” (which is determined by your date of birth) and increased if taken after full retirement age. For example, for an individual whose full retirement age is 66, starting social security benefits at age 62 (the first year of eligibility) will reduce the monthly benefit by 25% for the remainder of the individual’s life. Delaying the start of benefits until age 70 will increase monthly benefits by 30%. There is basically a 6.3% reduction in benefits for each year one elects to start benefits before full retirement age and an increase of 8% for each year after full retirement age until age 70. There are no further increases in benefits after age 70.

The strategy of “file and suspend” is one way to provide some benefit and still allow a couple to provide for an increase in social security benefit. The primary breadwinner (at full retirement age) can file for social security benefits but “suspend” the beginning of payments until a future time (say age 70). The spouse can receive “spousal benefits” of approximately 50% of the primary beneficiary’s benefit at the filing date. What’s the result?

  1. The couple receives some social security benefit (1/2 of the primary’s benefit) at the primary’s full retirement age.
  2. The primary can defer starting his/her benefit until a later age and enjoying an increase of 8% per year for such deferral.
  3. The spouse can receive a higher benefit if he/she uses the spousal benefit in lieu of taking his/her own benefit until a later age.
  4. If the primary breadwinner dies before the spouse, the spouse’s survivor benefit will be larger (based on the higher benefit attained through deferral until a later age).
There is some flexibility in such a choice. If circumstances change and the primary would like to receive his/her benefit prior to age 70, there are two choices:
  1. File for an increased benefit (greater by 8% per year for each year past the full retirement age) and receive that larger benefit for life, or
  2. Request a retroactive benefit based on benefits due at full retirement age and continue the full retirement age benefit for life.
For example, if the primary’s benefit at full retirement age was $2000 per month, and at age 68 the primary decided to request benefits, his/her options would be:
 
  1. Collect an increased benefit based on age 68 of approximately $2333 per month (8% increase per year for each year deferred) and that benefit would continue for life.
  2. Request a retroactive benefit of $2000 per month (based on benefit eligibility at full retirement age) for two years (24 months x $2000=$48,000) and continue receiving $2000 per month for life.
We at Paragon Financial Advisors are happy to assist you in your analysis of benefit eligibility; however, we want you to confirm your options with the Social Security Administration to ensure that your particular circumstances conform to the general guidelines. Our goal is to assist you in providing options/choices in your financial planning. No one knows what the future holds, but the more options you have, the better the final outcome will be. 
 
 If you have unanswered questions or need additional guidance please call us. Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investmentmanagement services for our clients.


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