These days, Social Security benefits typically replace about 40% of a worker’s pre-retirement income. Yet many financial professionals never touch on the subject of Social Security maximization when they sit down with their clients—or it’s way at the bottom of their list of priorities.
You can’t always rely on your local Social Security office to offer much assistance, either. They aren’t allowed to offer any real guidance on what you should do to get the highest benefit. And they shouldn’t. They aren’t financial advisers.
But make no mistake, you should get help. There are more than 500 claiming options—and the rules that govern them change frequently.
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There also are steps you can take with your investments now that could set you up for a better Social Security payday later. It’s a process that requires self-discipline and some serious strategizing, but it could end up adding several thousands of dollars to your bottom line over the length of your retirement.
Step 1: Rebalance your portfolio to avoid risk.
The old-school way of investing is to use a buy-and-hold strategy, usually with a 60%/40% split between stocks and bonds (or something close, based on your age). The problem is that in a record-setting bull market like the one we’re in now, those allocations can be thrown out of whack quickly. An investor who starts with a traditional 60% stock and 40% bond portfolio could end up with something closer to 80% stocks and 20% bonds—a much riskier mix—and not even realize it.
Rebalancing adjusts your portfolio to accommodate gains, which may bring with them an increase in risk. Rebalancing forces you to do the right thing by making moves based off logic and allocation choices rather than emotions. I know the idea of selling stocks when you’re watching them climb seems crazy. Anytime there are extremes, emotions kick in and people start making irrational decisions. When the market goes up, we want to hold on and buy more. When the market goes down, we get scared and want to sell. But rebalancing keeps your risk in alignment and takes you off the emotional roller coaster, which is especially important in retirement. It also takes us to the next step...
Step 2: Make a move toward safety assets.
That 60%/40% stock-bond split came about for a reason: Traditionally, when stocks started to drop, we used bonds like an investment version of Pepto-Bismol to help ease the upset. When stocks go down, the government usually lowers interest rates and, like a seesaw, bond prices start to rise. This time, though, in an effort to bounce back from the 2008 downturn, the rates went all the way down to almost zero, and stocks and bonds have both gone up.
And now, as interest rates slowly rise, bond prices are expected to fall.
What does that mean for your Step 1 realignment plan? If growth (stocks) and income (bonds) both carry risk, it makes sense to shift some of your money to a third area, safety assets, which have less risk and higher liquidity. Some examples are CDs, savings accounts and government bonds. Those guaranteed assets are going to be important when you move on to the next step...
Step 3: Delay taking your Social Security benefits as long as you can.
Despite dire warnings from most experts, more people take their Social Security benefits at age 62 than any other age. Why? Because that’s the soonest they can, and, in many cases, that’s when they need it. According to the Social Security Administration, 51% of those in the private workforce have no private pension coverage, and 31% of workers report that they and/or their spouse have no savings set aside specifically for retirement.
But every year you can wait past your full retirement age (which for most people is 66 and some months, not 62), your benefit increases by 8%—guaranteed by the government—until age 70.
Let’s say you were born between 1943 and 1954 and your benefit at full retirement age is $10,000 per year. If you take it at 62, you’ll get only $7,500. If you take it at 70, it’s $13,200. That’s a $5,700 difference per year if you can hold on that long.
If you had your choice between money that’s growing at 1% (or even 2% or 3%), or money that’s growing at 8%, you’d probably use the lower-earning funds first and allow the money that’s earning 8% to keep building, right? Well, you can—if you set yourself up in a way that allows you to wait for your Social Security benefits.
By rebalancing your portfolio and moving a portion to more secured investments, you can bolster the chances that you’ll be able to push off taking Social Security until you’re 66 or even 70. And if you’re married, your spouse will reap the benefits, as well. Let me explain. If my Social Security monthly check is $2,000, and my wife’s is $1,000, hypothetically, at my death, the survivorship benefit is the higher of the two. That would be $2,000. The two of us once had a total of $3,000 coming into the household, but now my spouse only has $2,000. If I were to delay taking my benefit, ultimately increasing the payout to $2,500, when I die, she would get $2,500 per month for the rest of her life. That is $6,000 more for her per year.
Remember that retirement planning is planning for both spouses for the rest of both of their lifetimes.
If you’re relying on old-school methods in this modern-day market, you may be leaving money on the table. Talk to your financial adviser today about using your investments to build a smarter income plan and the possibility of taking these three steps to a more secure retirement.
Kim Franke-Folstad contributed to this article.