By Sharon Lacy
A comment from Anna Rappaport: For many Americans, Social Security claiming is a critical retirement decision, but SOA research (as well as other work) shows that many Americans do not understand the issues. I was delighted to meet Sharon Lacy at the 2012 Financial Planning Association retreat and to see her again at the National Academy of Social Insurance 2013 meeting. Sharon is a financial planner who is passionate about this issue and who has done a lot to help people make better decisions, by working with them, through a tool that she developed, and by speaking to groups. This interview provides insights about what she has learned and how others can use that information.
I submitted some questions to Sharon and these are her responses. The questions span the issues, experiences with people, and use of the tool that enables people to calculate the value of different strategies. Thank you, Sharon for sharing this with us.
What are the key issues in Social Security claiming?
The key issues are:
If there was one thing I could communicate to every worker that is eligible for Social Security benefits it would be to consider your options carefully and to create a claiming strategy. For a basic overview of the Social Security claiming rules see “Understanding the Benefits” (a Social Security Administration publication). Keep in mind that:
What do you see as the gaps in knowledge about Social Security claiming?
First of all, may people do not understand that, without a claiming strategy, they may be leaving tens of thousands of dollars on the table if they claim their benefits too early.
Also, many people do not understand that it is possible to coordinate spousal benefits. The basic concepts of what a spousal benefit is are explained in “Retirement Planner: Benefits for You as a Spouse” (a Social Security publication). Basically, a spousal benefit is equal to one-half of your spouse’s full retirement age benefit.
Coordinating spousal benefits allows a couple to increase their total benefits in one of two ways; (1) for couples that each have substantial benefits, both spouses can delay their own benefit and one of the spouses can receive a spousal benefit during the period between their full retirement age and when they claim and (2) for couples with significantly different benefits (one spouse has a benefit that is less than half of the other spouse’s benefit), the higher benefit spouse can delay their own benefit and still enable the other spouse to begin their spousal benefit.
Even if you understand the importance of developing a claiming strategy, most people do not understand the complexity of identifying the best claiming strategy for their unique circumstances. For some people the strategy is straightforward. If you are about the same age and have about the same benefit, both should delay until 70 and the spouse with the smaller benefit should claim a spousal benefit on their spouse’s work record. However, if there is an age difference and/or a benefit difference the best claiming strategy can be difficult to identify.
How do you help people understand the issues?
First of all we help people understand the basic rules of Social Security. Then we help people identify the claiming strategies that are available to them (given their unique circumstances) and we help them understand the tradeoffs between different claiming strategies. We also help them identify the “optimal” claiming strategy—the strategy that will produce the highest lifetime benefit.
What information do you calculate with your tool?
The basic inputs to the tool are:
Given this data the tool starts with the following assumptions:
In addition, the user may specify the amount of any pension they or their spouse will receive as a result of working for a government agency or nonprofit organization for which they did not pay into Social Security. This information is used to estimate the effect of the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO) on their benefit.
Using all of this information the tool will (1) identify the optimal claiming strategy and (2) tell the user exactly when and how to implement that strategy.
Finally, we allow the user to see the details of the strategy (I will receive this benefit starting in this year and switch to that benefit in that year) and to experiment with filing age and life expectancy to see the tradeoffs between claiming strategies.
Where can people get your tool?
The tool is available through our website. A link to the tool (SSAnalyze!) is provided in the lower left corner of the page. The user will need to create a login but we do not see any information about the user.
Can you give us an example or two where you worked with someone and there was a big difference in value between different strategies?
Example 1 - Sam
About a year ago our client, Sam, came in and told us that he had filed for his Social Security benefit about three months earlier. Sam was 66 (full retirement age). I remembered that he was divorced and that his ex-wife was deceased. After discussing the tradeoffs we recommended the following course of action:
As a result of our recommendation Sam will receive 82.5 percent of his deceased ex-spouse’s full retirement age benefit (she had filed at 62 but a special provision called the widow’s limit guarantees him at least 82.5 percent of her benefit) —almost half of what he would have been receiving otherwise—until he files for his own benefit at 70. When he files for his own benefit he will receive 32 percent more than he would have been receiving if he had filed at 66. The net-present-value of the client’s lifetime benefit increased by over $60,000.
Our client Lisa remarried in 2010 and the Lisa and John came in for planning shortly thereafter. John was three years older than Lisa. Lisa had not worked enough to have a significant benefit and John had just filed for his benefit at his full retirement age. We recommended the following course of action:
As a result of our recommendation the net-present-value of John and Lisa’s combined benefits increased by almost $40,000. More importantly, since John is older and since his life expectancy is shorter than Lisa’s, she can expect to be widowed for at least six years. Because of our recommendation Lisa’s survivor’s benefit will be 30.67 percent higher if John predeceases her.
How have your clients reacted when you talk to them about this issue? What about other people?
Every client we have spoken to about creating a claiming strategy has been thrilled. For one thing, we have eliminated the need for them to research the process and for another, we have shown them how to optimize their benefits. Both of the clients described above have referred other clients, citing our help with Social Security planning as one of their motivations for doing so.
Most of the people that have attended one of my presentations have understood the basic rules (file early vs. file later) but have been (1) surprised to hear that it was possible coordinate benefits and (2) grateful that I was willing to share my expertise and the tool.
What types of groups do you talk to about these issues?
I have spoken to financial planners at local, regional and national FPA (Financial Planning Association) conferences and I have spoken to a number of senior’s groups in the San Francisco Bay area. I am willing to talk to any group that is interested in learning more about the topic.
Postscript from Anna Rappaport: This is a very important societal issue. I applaud Sharon and am delighted to see that she is working with clients, with planners and with the social insurance community through the National Academy of Social Insurance. I hope that her work will encourage actuaries to also go out into your communities and talk to people about the importance of making this decision thoughtfully.
Sharon Lacy, CFP® is the wealth planning manager at Bedrock Capital Management in Los Altos, California. She can be reached at Sharon@bedrockcapital.com.