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Economic Insights
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   Retirement Income
Optimizing Social Security Benefits
By Wade Pfau
May 15, 2012

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My dissertation was about Social Security reform, so I’ve read more of the Social Security Handbook than any human being should be forced to digest.   Despite this background, William Reichenstein and William Meyer’s new book, Social Security Strategies: How to Optimize Benefits, taught me a lot about how to strategize to get the most out of Social Security.

I’ve written programs to calculate average indexed monthly earnings (AIMEs), primary insurance amounts (PIAs), adjustments for the age of initial receipt, family maximum benefits, child benefits, survivor benefits, and so on. But I wrote those programs about 10 years ago and I’ve become rather rusty on these matters in the intervening years. 

So I am glad that I understood the basic idea of the book, which is relatively straightforward through the end of Chapter 3. It covers the basics of Social Security and how a single individual can maximize his or her benefits.

The book does get vastly more complicated in Chapter 4, which is about couples. The problem is, for couples in which both spouses work, each spouse is potentially eligible for benefits based on their own work record (plus your spouse is also eligible for a benefit based on your record), plus a spousal benefit based on their living spouse’s work record, plus a survivor benefit based on a deceased spouse’s record. Divorcees can get something too, with different rules, if the marriage lasted at least 10 years, but those with multiple ex’s or young kids should watch out for that family maximum benefit based on one earner’s record.

I’m not going to try to explain Chapter 4 in detail, but its contents are important to me as the curriculum director for the Retirement Management AnalystSM designation. Especially for lower- and middle-income Americans, Social Security may end up providing the vast majority of retirement income. And so it is very important to get Social Security claiming decisions correct. To be clear, Social Security claiming decisions are defined in the book as: “a decision as to when a single individual will begin their own benefit or when each partner of a couple will begin their own benefits and, when applicable, their spousal benefits.”

As the authors show, a wrong decision on Social Security could end up costing retirees a couple hundred thousand dollars in lost benefits. But as the authors clearly show, becoming a factotum on Social Security matters is really complicated. It is asking too much for advisors to become deeply knowledgeable about these Social Security rules. But at least they should have a solid understanding of the basic principles and be able to figure out approximately correct solutions, and also have a working knowledge about how to use software that will allow them to show clients the outcomes from different claiming strategies, and to narrow in on a good claiming strategy for both spouses. The authors of the book offer software as a part of the website, www.SocialSecuritySolutions.com, but I haven’t had an opportunity yet to test it for myself.

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