Finances

Social Security Planning: Plan Early, Reap Rewards

By Adam Cmejla, CMFC

Posted 1/7/15

SYNOPSIS

Planning and adjusting retirement funds can make a six-figure difference in your benefits over a full retirement period.

ACTION POINTS

EXAMINE TIME FRAME. Delaying benefits as long as possible translates into a much higher monthly benefit for you and your family during retirement.

OPTIMIZE SPOUSAL BENEFIT. Implement strategies such as “elect & suspend” and “earn now, earn more later.”

USE CLAIM & SUSPEND STRATEGY. Elect benefits and then immediately suspend before taking any payment, allowing spouse to elect spousal benefit while OD earns delayed retirement credits (DRCs).

Independent ODs, like any small business owner, look forward to enjoying the benefits of social security in retirement. However, I’ve found that many doctors are unaware of how social security works, the various ways to claim benefits and how to maximize the system for your benefit.

Crunch the Numbers

Here isa hypothetical spousal benefit strategy: Dr. John and his wife Jane, both ages 66. Dr. John, the practice owner, has run a very successful optometric practice and has paid himself a wage above and beyond the max social security wage base (currently $117,000 for 2014) and has thus been maxing out his Social Security benefits for quite some time. This translates to a higher benefit for him at his full retirement age, which we’ll say for this illustration is 66. Let’s assume that John’s full social security benefit is $2,200/month at his full retirement age. His wife, Jane, has earned a modest salary working part time in the practice, and therefore, her own Social Security benefit is $850 per month at her full retirement age.

If they were to both elect their own benefits right now, the amount of money that they would take home (before taxes) would be $2,200 + $850 = $3,050. However, electing one’s “spousal benefit” option entitles the spouse either 100 percent of their own benefit or 50 percent of their spouse’s benefit, whichever is higher. By electing Jane’s spousal benefit, her monthly benefit now increases to $1,100, a $250/month increase. Over a 25-year retirement, that equates to an additional $75,000 for doing nothing more than knowing the rules of the system…and that doesn’t take into consideration any inflation/cost-of-living adjustments that may occur on benefits!

Implement Claim & Suspend Strategy

Let’s put another spin on this scenario. Assume that John has done such good financial and business planning that he and Jane don’t need his social security benefit, but they’d like to elect her spousal benefit, but leave John’s alone. In this situation, we’d elect a “Claim & Suspend” strategy. Here’s how it works:

John, at age 66, goes into the social security office and elects his benefits, but immediately suspends benefits before taking a single payment. This allows Jane to elect her spousal benefits, but also allows John’s benefits to grow and earn Delayed Retirement Credits (DRCs), which we will cover later in the article.

By implementing this strategy, their monthly income at age 70 could potentially be $4,231 ($2,200/month increased by 8 percent annually until age 70 and Jane’s monthly benefit of $1,100 in spousal benefits increased annually for inflation at 3 percent). Had they just elected their own benefits at age 66 and not claimed spousal benefits or let one of their benefits grow, their inflation-adjusted monthly income would potentially be $3,714. By knowing this strategy, we were able to potentially add an additional $517/month in income. Over the span of a 25-year retirement, that’s potentially an additional $155,100 in total benefit…again, just for knowing the system!

For the optometrist who has built a successful practice, and can potentially transition more into the CEO role during the latter years of practicing, being able to potentially delay benefits and rely on business-generating income can be a savvy way to not only grow your income streams in retirement later in life, but also protect your retirement assets.

Social Security Planning Resources

There are many factors and options to consider in social security planning. For more information, visit www.ssa.gov.

In addition, Integrated Planning & Wealth Management, LLC, has an an on-demand Savvy Social Security Planning workshop that you can access from any device, at any time. Visit: https://www.brainshark.com/integratedpwm/savvysocialsecurity for more details and to view the presentation.

Elect Benefits

Your first task is to decide when to elect social security benefits. First, calculate when you will reach full retirement age (FRA) This is determined by your date of birth. If you were born between the years 1943-1954, your FRA is 66. However, if you elect benefits at 62, you’ll face a 25 percent reduction in your benefits just for electing four years early. Imagine having your salary that you were promised cut back by 25 percent…what would that do to your household? Delaying benefits as long as possible up to (and beyond, if possible) your FRA translates into a much higher monthly benefit for you and your family during retirement. Also keep in mind that for every year you delay benefits past your FRA, the social security program will allow you to accumulate DRCs. This translates into an 8 percent increase in benefits every year from your FRA to age 70.

If you are married, depending on you and your spouse’s age, earnings history and retirement plans, it may be beneficial to scrutinize your spousal benefit options and implement strategies such as “elect & suspend” and “earn now, earn more later.” Your spousal benefit entitles you to either 100 percent of your benefit or half of your spouse’s benefit, whichever is higher.

Understand Death Payments & Survivor Benefits

A later part of social security planning encompasses understanding death payments and survivor benefits. If you have been married more than 10 years and you are over the age of 62, you may be entitled to spousal benefits from your deceased spouse. Survivor benefits are typically a “higher of” calculation, meaning you will either continue to get your benefit or your late spouse’s full benefit, whichever was higher.

Those who have gone through a divorce may also be entitled to their ex-spouse’s spousal benefit, provided that they had been married for more than 10 years and have not remarried. It does not, however, matter whether the ex-spouse has remarried.

With so many factors to consider in social security planning, I encourage you to also seek the advice, guidance and knowledge of a qualified financial professional to understand how your social security elections impact the other areas of your retirement plan.

Adam Cmejla, CMFC, based in Carmel, Ind.,is president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm “focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve.” To contact: 317-853-6777 or adam@integratedpwm.com.

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