Given the increasing longevity of people and increasing doubts about the longevity of Social Security, a lot of Americans have become blasé, if not dismissive, about the program’s ability to survive and provide a financial cushion in retirement. Take, for example, the comments from a physician client of Ben Gurwitz, wealth manager and chief investment officer at Financial Life Advisors in San Antonio. 

They met in June to update the retirement plan for the physician and his wife, both 56 years old. The recent changes in Social Security claiming strategies came up, and Gurwitz explained how the previous plan—to use the strategy known as “file and suspend”—wasn’t available anymore following legislation in late 2015. “He casually said, ‘Oh, I’m not really counting on Social Security for retirement because it won’t be around anymore or will be means-tested away,’” Gurwitz recalls. He adds they also discussed that, without changes, the Social Security trust fund would dry up in 2034 and benefits would be cut by about 21%. 

Gurwitz simulated the client’s current plan, which showed a chance of success of 87%, and then simulated a 25% cut in Social Security benefits in his plan, which lowered the chance of success to 73%. Totally removing Social Security benefits lowered the chance of success to 31%. 

“He was absolutely shocked!” Gurwitz says. “At his income level, he just thinks what’s a couple thousand dollars a month matter. But it matters quite a bit.”

While Social Security might not matter much to the nation’s uber-wealthy, it matters to most other Americans, particularly to those with limited lifetime savings. According to the Social Security Administration, 90% of individuals age 65 and older receive Social Security benefits, which can include the old-age and survivors insurance program (the traditional Social Security retirement benefit); disability insurance; and the supplemental security income program that provides monthly payments to people with limited incomes and resources who are aged, blind or disabled. Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.

The average monthly Social Security benefit of $1,341 is only about $350 above the poverty threshold for individuals on a per month basis. But that amount can be significantly more depending on your lifetime earnings and how much you’ve paid into the system, as well as when you retire and claim your benefits, so that even for folks with some financial means—including the types of people served by financial advisors—Social Security remains a key piece of the retirement income puzzle. So a botched claiming strategy could reverberate down the line and potentially put a huge dent in someone’s retirement plan. 

“For most retirees, it’s a very important decision because it impacts so many things: retirement, taxes, estate planning,” says John Shanley, a certified financial planner at Pinnacle Investment Management Inc. in Simsbury, Conn. “And for a lot of our clients, such as those who have $500,000, they need to make a smart Social Security decision because it’ll impact how they’ll run the rest of their lives, such as how they’ll withdrawal money from a portfolio. For couples, it’s important for survivor benefits. And it’s important for individuals, too, which requires a different analysis.”

Many Choices

Created during the Great Depression in 1935, Social Security remains one of the most consequential pieces of legislation in U.S. history. The idea was simple: provide a social insurance program that pays retired workers age 65 or older a continuing income after retirement.

Unfortunately, just about everything else about Social Security isn’t so simple. Like, how to keep it fully funded (more on that later). Or, as mentioned, the various strategies associated with the timing of claiming benefits. 

“There are more than 10,000 strategies for the average person,” says William Meyer, CEO of Social Security Solutions Inc., a developer of software that helps people maximize their program benefits. Adding to the confusion, he notes, there are more than 20,000 pages that describe the rules of Social Security, in addition to the rules themselves.

Meyer and William Reichenstein, a professor of investments at Baylor University and research head at Social Security Solutions, wrote a paper four years ago that showed how collecting Social Security at different ages could boost the longevity of a retirement plan between two to 10 years. “The impact on a retiree is like no other component of financial planning,” Meyer says. “It’s a gigantic decision, and advisors shouldn’t cut a corner on this topic.”

People can begin claiming Social Security benefits at age 62. The full retirement age is 66, which will rise to age 67 by the year 2022. Currently, people who claim benefits before full retirement age have their monthly benefit trimmed by 6.67% per year for each year between the year they claim benefits and age 66. On the flip side, the benefit grows 8% annually for each year a person waits to claim benefits between their full retirement age and age 70—what’s known as delayed retirement credits. 

But the timing for claiming benefits took a different—and potentially less financially fruitful—turn for numerous people with the Bipartisan Budget Act of 2015, which became law last November. In the words of the Social Security Administration, the law closes unintentional program loopholes allowing “aggressive claiming strategies” involving couples with financial means “who follow a deliberate claiming pattern—often under the advice of financial planners—to exploit benefits in a manner that is not the norm (or an option) for most middle class workers.”

Specifically, the law impacts people using so-called “file and suspend” and “restricted application” strategies. In the first technique, one spouse at full retirement age, typically the higher earner, files for benefits and then promptly suspends them. Doing so allows those benefits to earn 8% a year until that worker reaches age 70. Meanwhile, that file is activated and beneficiaries who are eligible to claim benefits, such as the other spouse, can start receiving money. 

Under the new rule, a suspended benefit means just that: a suspended benefit that no one else can claim. Going forward, an individual must start getting his or her own benefit before other benefits can be paid. That rule took effect on April 30, 2016, though people employing the file and suspend strategy before that date can still use it.

The restricted application strategy enabled a spouse at full retirement age to claim a spousal benefit while delaying his or her own benefit until a later date as the amount grew 8% annually until Social Security was claimed—ideally at age 70. Under the new rules, the ability to use the restricted application strategy is grandfathered in for people who were at least age 62 at year-end 2015. In other words, anyone currently employing this strategy can continue to do so, while those who were eligible to start claiming benefits as of the end of last year will retain the option of applying for spousal benefits in a restricted application when they attain full retirement age, even though the youngest among them won’t hit that mark until 2019. 

Ben Gurwitz, the wealth manager at Financial Life Advisors, says he has numerous clients who had a Social Security strategy incorporating file and suspend and/or a restricted application. In cases where they weren’t grandfathered in, he’s done financial plan updates to review how the Social Security changes have impacted their plans and changed the calculus for their claiming strategy. 

“For the most part, the material strength of their plans hasn’t changed much,” he says. “The most I have seen in reduced lifetime benefits is around $50,000 or so. In a perfect situation, it could be up to maybe $100,000 max, but that’s in a situation with lifetime benefits well in excess of $1 million.”