Social Security Claiming Strategies for Couples

hi this is joe elsasser president and founder of covisom and also a practicing financial advisor and welcome to another fin plan friday today's topic is social security for married couples and you may think why bother you know the file and suspend is for the most part long gone the restricted application only applies to a very small portion of the population and in the next couple of years it will be gone entirely and yet it continues to be one of the most asked questions by people on the edge of retirement when should i or for couples when should we claim social security and rightfully so because it will influence not just the cash flow they get from social security but it will also influence how they use other assets in retirement to support their overall retirement income goals and it also influences their tax picture effectively how much tax they will pay over their lifetime and so financial advisors continue to be able to add a good amount of value by evaluating all the options both in a vacuum and also in the context of the client's overall financial plan so there are just a few strategies that i want to talk about today of course this list is not exhaustive but the first strategy is a both delay strategy now why might it make sense for both members of a household to delay benefits potentially all the way out to age 70. that's going to get them the largest possible benefit from social security but what it will also do is create a gap from the time they stop working to the point those social security benefits are engaged you really have ultimate flexibility in which assets you draw from in our practice here in omaha we find ourselves doing a lot of roth conversions during that window in order to level out the amount of required minimum distribution effectively bring that down so that we can create a lower lifetime tax bill that's a really common strategy particularly when both members of a household are able to delay benefits out until age 70. of course that only makes sense if you've got two members of the household in good health and with good family history now a second strategy that is really commonly used we would call the split strategy and that's where you have the lower wage earner in the household claim benefits as soon as possible that gets some cash flow headed into the household it reduces the amount that you'll have to draw from other assets but it also allows that larger benefit to grow as large as it can be at age 70 and that preserves not just the benefit during that individual's lifetime but during the joint life of the couple because at the first death the smaller benefit will go will go away and of course now it's made as small as possible by claiming early and the second benefit will continue to the extent that a large number of widows live a very long time in retirement after the first death that can be incredible protection against either poverty in old age or let's say stress in old age for many of our clients now the other advantage there is you still have a lot of tax flexibility because at worst of that smaller social security benefit 85 is going to be taxable as ordinary income so we still have the ability in most cases to do a lot of roth conversions or to harvest from ira money uh while we're delaying that larger wage earners benefit now one of the big considerations there for the lower wage earner who is often a little bit younger claiming early is they might still be working so this brings into question the earnings test social security earnings test is a two-tier test and there are actually a couple of different varieties of the test so the first tier is for the years between age 62 and the calendar year the client turns full retirement age and that test is roughly 18 000 it moves every year so there's no point in giving you the specific figure for this year you might be watching it next year so you'll look that up every year and then for every dollar the client exceeds that threshold they lose 50 cents of a social security benefit so many people think if i'm over that threshold if i'm over that roughly 18 000 i can't claim and that's simply not true for a lower wage earner it often still makes sense to claim early even if they're somewhat over that earnings test threshold and the reason is because they may lose only a few of their checks throughout the course of the year so for example let's just say for round numbers sake that the earnings test threshold was twenty thousand dollars and the client was working and earning thirty thousand dollars a year that means the client is ten thousand dollars over the earnings penalty uh over the earnings threshold ten thousand dollars divided by two is the penalty amount so that's five thousand dollars now let's say that their social security benefit at that point in time was fifteen hundred dollars that means that they would forfeit four checks during the course of the year and they would only collect eight checks but they would collect eight checks and then when they reach full retirement age their benefit will be adjusted to account for all the months that they did not receive a check now it's not like they get a lump sum for those checks instead their future benefit is increased by the amount that they would have received had they just simply not elected during those months so the earnings test is not a tax it's not a penalty per se but it is a cash flow penalty so it really makes a lot of sense to evaluate those situations where someone may be over that initial earnings threshold between age 62 and the calendar year they turn full retirement age and still have them claim in order to get some checks coming into the household now i mentioned there are two different parts of this test the second part is the calendar year that you turn for retirement age and this one's really interesting because it will often have that lower wage earner not waiting until full retirement age even if they're working and making way too much let's say that you have a birthday in march and we're going to use a round number threshold of forty thousand dollars here now because this second threshold uh during the calendar year you turn full retirement age is considerably higher than the first threshold let's say your birthday is in march that means you reach full retirement age in march you could actually earn forty thousand dollars in january and february each month twenty thousand dollars and still qualify to get your full benefits throughout the course of the entire year because of how that threshold works in the calendar year you reach full retirement age now needless to say there's a lot of nuances here that one's only might only be three months or six months or nine months of extra checks and yet nine months at a couple thousand dollars is most advisors fees for for a year two years or more and so really putting the time into developing a solid social security strategy can deliver significant value for clients whether it's through the tax perspective whether it's through the overall retirement income planning perspective or whether it's through how you harvest other assets through retirement thanks for joining us for another fin plan friday and we look forward to seeing you next month

Channel: Covisum

Views: 12,905

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Id: qSPq2gVWvh8

Length: 7min 15sec (435 seconds)

Published: Tue Sep 07 2021