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First comes love, then comes marriage, then comes figuring out what the hell to do about Social Security. Retirement planning can be quite complicated for anyone, but the newness of Social Security options for LGBT couples find some of us unprepared.
By David Rae, CERTIFIED FINANCIAL PLANNER™
Myth: Hooha! The money is there for the taking. You turn 62 and under the aegis of Social Security, the federal government sends you a check for the rest of your life. Sounds great, right? Why wait, when you can get the moolah now from Uncle Sam every month from now until you die?
Reality: Uh oh. For most Americans, full retirement age is currently in the neighborhood of 66-67 years-old. Opting out of the workforce earlier than that to collect Social Security benefits, even though you can legally do it at 62, means that you might be leaving a lot of money on the table without realizing it.
Before venturing forth, let me clarify what Full Retirement Age is as far as the government is concerned. In a future blog, we'll cover this in depth along with the ins and outs of filing for Social Security.
The good news
There are a variety of strategies for gay couples to increase their Social Security benefits dramatically over their lifetimes. By coordinating benefits, and strategizing to maximizing these benefits, a same-sex married couple can potentially increase lifetime benefits by ten's of thousands of dollars. And by planning ahead and being strategic, members of a couple can each claim benefits and take maximum advantage of spousal and survivor benefits.
Here are some options and insights that you probably never considered when same-sex marriage wasn't legally recognized and enforceable:
• Retirement and the Social Security benefits do not always happen at the same time.
Just because you decided you don't want to be chained to a desk 40 hours a week doesn't mean you need to rush out and start collecting Social Security. There may even be a few years between leaving the work force and taking benefits.
• Social Security is the closest most of us will come to having a pension.
While the average benefit check isn't enough for most of us to fully live on, don't underestimate the value of this money in the grand scheme of your overall retirement income plan. There really is no other type of retirement income that has zero stock market risk, interest rate risk, or longevity risk. You can't outlive social security. You still run some inflation risk, as the cost of living adjustments are unlikely to fully keep up with your increased cost of living over longer periods of time.
• Delaying benefits may mean more money in your pocket over the long term.
On average, social security benefits grow about 7% per year between 62 and 70, and this doesn't even include cost of living adjustments. This may mean you are essentially earning more by delaying SS than you will on your safest investments.
Think about it this way, you could claim benefits at 62. If you choose this option your benefits will be reduced permanently for each month you claim benefits before your full retirement age. Claim at 62, and you will see you benefits drop 25% from what you would have received at Full Retirement Age. (we will assume 66 for this conversation).
Now if you delay past 66, you get about and 8% credit for each year you wait to claim benefits until 70. That means your monthly benefit at 70 could be 76% more than benefit at 62. ($1500 at 66 becomes $1980 at 70, but is just $1125 at 62).
Spouse to spouse
Here are where the new benefits come in for the LGBT community. If you are married and your accrued benefit is less than your spouse's you have the choice to either take your benefit, or take the spousal benefit off your spouse's record. Essentially your spousal benefit would be 50% of your spouse's benefit. Keep in mind you can't file for benefits on your spouse's record until they are at full retirement age.
One of the top goals of married couples to boost the benefit for the surviving spouse. The surviving spouse will get 100% of the higher earners benefit when they pass assuming they are past their full retirement age. The surviving spouse can claim a survivor benefit as early as age 60, but again the benefit is reduced if taken before full retirement age.
Strategies to maximize your benefits as a couple
As a Certified Financial Planner, there are a number of different ways couples can approach Social Security. With marriage equality the law of the land now, it is my pleasure to be able to offer them all to my clients. Here are two of the most advantageous:
•File and suspend
Let's assume one spouse (Spouse A) makes more than his husband and is a higher earner who doesn't want to take SS until he hits 70. Now let's say the second spouse (Spouse B) is a bit younger at 62. He could collect his own benefit, but could he get more from money per month with a spousal benefit? If they can that's great, but there's just one problem, Spouse B can't collect his spousal benefit until Spouse A files for SS.
As long as Spouse A is at his full retirement age, he can file for his benefit, and Spouse B can apply for a spousal benefit. Then Spouse A asks Social Security to suspend his benefits. Best of both worlds, Spouse B gest his higher spousal benefit, and Spouse A can continue to accrue a larger future Social Security benefit. He can then simply reapply when he wants to start coverage, presumably at age 70.
Another added bonus to this File and Suspend Social Security maximization strategy is you are also increasing the future survivor benefits. If Spouse A dies first (statistically likely since he is 8 years older), Spouse B has the option to a) take the higher of his own benefits, or b) his now-deceased husband's benefit. If this all seems confusing, worry not, I'll be going deeper into this subject in future posts.
•Spousal options flip
Another valuable strategy that many people aren't aware of is what I call the Spousal Option Flip. Let's say you, Spouse J, earn more than your wife Spouse K. You may be able to pull in some extra money by applying for the spousal benefit at your Full Retirement Age. This will allow your larger personal benefit to continue to increase again presumably until 70. At 70 you flip, you switch on to your own benefit and your wife can now claim her spousal benefit based on your new improved higher benefit. (FYI, as your wife Spouse K will be entitled to a survivor benefit of 100% of your benefit in the case she dies before switching back to her own benefit.)
Congratulations if you've made it this far without your eyes crossing, you have passed LGBT Social Security 101. You probably now know more than 90% of the population (which isn't saying much, actually).
But don't despair if all this seems difficult to untangle. That's what Certified Financial Planners™ are for and I speak from experience when I say that all Social Security options - as well as a myriad of strategies as to how to best handle your money - can be untangled to your benefit.
Find a trusted financial planner (more on this subject later, too) and learn about strategies that may increase your take home from Social Security. Even if you are getting started late, you can still get your financial house in order and potentially improve your golden years. As the saying goes, better late than never.
DAVID RAE, CFP®, AIF® is a Los Angeles-based Financial Planner with Trilogy Financial Services and has experience with retirement planning, a regular contributor to Advocate.com and other news outlets who focuses on serving the LGBT community. Follow him on Twitter @davidraecfp Facebook.com/davidraecfp . For more information about his experience and service visit his website, www.davidraefp.com.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA,SIPC, a Registered Investment Advisor. Trilogy and NPC are separate and unrelated entities.