September 20, 2012
Social Security: There is a Better Way
Married couples have up to 567 options for deciding when and how to file for their Social Security benefits. Yes, 567!
“They are faced with a bewildering array” of choices, said David Freitag, vice president of Impact Technologies Group Inc. in Charlotte, North Carolina, which just released a spiffy, user-friendly Social Security calculator to help.
No wonder people just throw up their hands and claim their benefits at 62, when they first become eligible. But in the midst of the baby boomer retirement tsunami, oodles of calculators are coming online to simplify the decision for couples. Impact is offering a 14-day free trial to anyone who wants to test its calculator.
Couples’ strategies have become more complex, because today’s boomer wives have spent a lifetime working and because they may earn wages rivaling or exceeding their husband’s, said Jim Blankenship, a financial planner in New Berlin in central Illinois. There is also more money at stake in making the right decision, he said.
“Before, it was much easier to have a rule of thumb to go by,” he said. “The decisions are different than what they used to be.”
Single people have it relatively easy. They essentially have only nine options for when to start up their Social Security benefits: any year from ages 62 through 70. Like singles, each spouse has the same nine years to claim benefits. But the age factor increases the combinations of ages, for a couple, to 81.
There are also up to seven different filing strategies for couples, Frietag said, including spousal, restricted and suspended benefits. The latter two strategies are two distinctly different ways in which the lower-earning spouse begins collecting benefits while the higher earner delays to maximize benefits for the couple – and the longest-living spouse – over the long haul. Further complicating the matter, there are other delaying tactics when the age gap between partners is unusually large. [Morningstar has produced an excellent video to explain these strategies.]
Freitag demonstrated Impact’s calculator for Squared Away. It displays a 9-by-9 grid with your potential filing ages – 62 through 70 – on the horizontal axis and your spouse’s ages on the vertical axis. After entering a few pieces of information about each spouse, a star alights in one of the grid’s 81 squares to identify the best age for each spouse to file, maximizing their combined benefits.
Users can play around with the assumptions – longevity and interest rates – on the left and watch the star move around. At the same time, an estimate of the couple’s total benefits also appears and can be compared with comparable estimates in various scenarios.
Every Social Security calculator has its benefits and shortcomings, which are detailed in this About.com article. Impact, for example, hasn’t yet incorporated divorced couples, widows and widowers, though it’s working on it.
Freitag said his firm’s calculator improves on others, however, by allowing a couple or financial planner to adjust both how long each partner expects to live – already standard for some calculators – and also the current level of interest rates, which can affect the value of benefits. [Longevity, he warns, is a “wild card” that can determine whether a strategy ultimately works the way it was intended. ]
The free trial of the calculator for financial advisers and companies is available now; Impact plans to release a simpler consumer version later this year. But the commercial version is pretty simple. Try it!
To answer questions about Social Security, AARP recently released an interactive tool online with questions and answers, a quiz, a slide show and other information.