Social Security and You: Jump on maximizing bandwagon?

If you are like me, almost every week your mailbox has at least a couple of advertising fliers — usually from financial planners — with misleading come-ons like this: “You could be missing out on hundreds of thousands of dollars in Social Security benefits!” Then they invite you to a seminar where they will fill your tummy with some rubber chicken and fill your head with all sorts of plans to “maximize” your Social Security benefits.

I know that, by and large, my financial-planner friends out there are trying to do the right thing by helping people understand certain strategies that could help folks increase their Social Security payout — over the long run.

But the problem is, all this talk about “maximizing” Social Security benefits has lots of near-term retirees running scared. I see it in my emails every single day. So many folks are worried sick that if they don’t jump on the maximizing bandwagon, they will be making the biggest mistake of their lives by foregoing those alleged $100,000-plus bonus payouts.

Here is my message to all these folks: Calm down! Don’t worry! Certainly, educate yourselves about your various Social Security options. But don’t fret that you are losing out on “hundreds of thousands of dollars in benefits” if you choose one option over another.

To prove my point, I am going to run through several Social Security options and go over a lifetime Social Security benefit experience with a couple I will call Fred and Ethel. And to keep my math simple, I am not going to factor in cost-of-living increases, Medicare deductions or tax liabilities as I figure out their long-range benefits. That’s OK, because I’m just presenting the numbers for comparison purposes.

Fred’s full retirement-age Social Security check is $2,200 per month. Ethel’s FRA benefit is $1,400 monthly. Fred is going to die at the age of 78. Ethel is going to live another five years and die at age 83.

Scenario 1: Both Fred and Ethel take reduced retirement benefits starting at age 62. So Fred’s monthly Social Security check will be $1,650. And Ethel will get $1,050. So up until the time he dies, Fred will get 16 years worth of Social Security benefits at $19,800 per year for a total of $316,800. Up until Fred’s death, Ethel will get 16 years worth of her own Social Security at $12,600 per year for a total of $201,600. After Fred’s death, Ethel will get an additional $754 in widow’s benefits (I’m not going to explain the widow’s math in this column —just trust me) for a total of $1,804 per month. Ethel will get five more years of benefits at $21,648 annually for a total of $108,240. So in scenario one, Fred gets $316,800 and Ethel gets $309,840.

Scenario 2: Both Fred and Ethel wait until full retirement age (age 66) to file for their retirement benefits. As a reminder, Fred’s FRA benefit is $2,200 per month and Ethel’s is $1,400 monthly. That means up until the time he dies, Fred will get $26,400 annually for 12 years for a total of $316,800. (Note that coincidentally, it is the same total he got by taking reduced retirement at age 62.) Up until Fred’s death, Ethel will get 12 years worth of her own Social Security at $16,800 per annum for a total of $201,600. After Fred dies, Ethel will get an extra $800 in widow’s benefits for a total of $2,200 per month. That means over the next five years until she dies, she will get $132,000 in a combination of Social Security, retirement and widow’s benefits. So in scenario two, Fred gets $316,800 and Ethel gets $333,600.

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Scenario 3: Fred and Ethel decide to employ common maximizing strategies. Fred is going to “file and suspend” when he turns 66. That means he will forego his benefits until age 70 to get a 32 percent bonus added to his retirement check at that time. At the same time, Ethel will “file and restrict” — meaning she will file for wife’s benefits on Fred’s record and claim half of his FRA rate until she turns 70, when she will switch to 132 percent of her retirement rate. So between age 66 and 70, Fred will get nothing. But in the same time period, Ethel will get one half of Fred’s FRA benefit, or $1,100 per month. In those four years, Ethel will get $52,800. Beginning at age 70, Fred finally “unsuspends” his benefits and gets a 32 percent “delayed retirement bonus” added to his monthly rate. Overall, Fred gets $2,904 per month for the next eight years (until he dies) for a total of $278,784. Beginning at age 70, Ethel switches from wife’s benefits to 132 percent of her retirement rate or $1,848 — meaning that until the time Fred dies, Ethel gets $177,408 in retirement benefits. Remember, this is on top of the $52,800 she got in wife’s benefits between 66 and 70. And after Fred dies, Ethel starts getting an additional $1,056 in widow’s benefits for a total of $2,904 monthly. Until she dies five years later, that gives her another $174,240.

So finally, let’s look back at all the numbers.

In scenario one, where Fred and Ethel both took benefits at age 62 (which most financial planners would strongly advise against), Fred received a total of $316,800 over his lifetime, and Ethel got $309,840. Total: $626,640.

In scenario two, when Fred and Ethel both waited until age 66 to claim benefits, Fred got a total of $316,800 in benefits while Ethel got $333,600. Total: $650,400.

In scenario three, the only scenario involving “maximizing” strategies, Fred ended up a loser with $278,784 in total benefits. But Ethel came out a winner with $404,448. Total: $683,232.

You should note several points from these examples. If you take Ethel out of the picture, Fred loses lots of money by trying to “maximize” his Social Security. But the addition of Ethel (especially after she becomes a widow) makes the couple a winner in the maximizing game.

And of course, the overriding issue is one that no one knows: life span. The longer you live, the better that maximizing strategies can work for you.