Tuesday, January 12, 2010

Three Social Security Benefits That Senior Counsel Could Be Using

Here are some relatively unknown (but potentially nice) benefits that Senior Counsel (65-66 years old) can use.  Why should you care if you are younger than 65?  Well, maybe if you bring it to the attention of someone over 65 and they use it to put money in their pocket, maybe they will be grateful.  Maybe you can get a dinner or a referral out of it - at least some good will!  After all, you could be putting several thousand dollars in the pocket of a senior counsel.

As described more thoroughly in this article, senior counsel over full retirment age (65-66) can take advantage of a few unusual strategies to put money in their pocket right now from Social Security.  I actually brought this to the attention of a couple of senior counsel and they are taking advantage of it right now.  We will discuss some of the specific suggestions below.

First, assume a typical lawyer over full retirement age (65-66) that is married and he and his wife are not claiming social security because the amount of the SS benefit grows about 8% for each year that they delay - up to age 70.  Assume also that the lawyer is married and that the wife has worked outside the home periodically - at least enough to qualify for some social security benefit.  This is usually the case - the wife may have worked before they were married, for example.  They couple is focused on the lawyer's social security and ignore the wife's because the lawyer's benefit is typically going to be much more than the wife's.

However - the wife can claim SS benefits based solely on her record, without disturbing the husband's SS benefit.  That is, if the wife claims on her own record, she can start claiming money every month, even while the couple is not claiming SS due to the husband's record and allowing the husband's SS benefit to go up 8% a year.

Now here's the real kicker - the husband can claim a spousal benefit based solely on the wife's SS payment and the wife's work record without claiming SS based on his own work record and still allowing the SS benefit based on his own work record to keep growing at 8%/year.

Finally, once the couple has reached age 70, then they can just start claiming on the husband's work record and he wife can claim a spousal benefit based on the husband's work record.

Here's a hypothetical example.  If the husband and wife claimed a SS benefit and spousal benefit based on the husband's work record, they might be entitled to $1800/month for the husband and $900/month (half) as a spousal benefit.  However, they don't want to claim based on the husband's record because they want their benefit to keep going up.  However, the couple may be entitled to a benefit based on the wife's working record - here the wife is the primary claimer and the husband claims the "spousal" benefit.  Assuming the typical case where the wife has some employment, but not as much as the husband, this might result in a monthly benefit of $600 to the wife and $300 to the husband.  In short, the husband and wife may be able to get $900/month without disturbing their long-term plan.

Why don't more people do this?  Well, it is not well-published and dealing with the SS administration can be very opaque.  Second, the couple is usually focused on the husband's benefit and ignore the wife's.  Third, older lawyers often have some degree of sexism - they rarely think of themselves as the "spouse" - their ears seem to just translate that to "wife" automatically.  Consequently, even if their wife is claiming the benefit in her own name, the husband is typically not claiming the "spousal" benefit that he is entitled to.

Bottom line - Let the senior counsel you care about know that they might be able to pick up some money this way.  They usually have plenty of expenses with grandkids and saving for retirement and are usually eager to have any help that they can get.  Also, it's their money, right?  They have been paying in to this system for 50 years - time they got back what they system lets them have.

Second, the lawyer can claim and suspend SS benefits so that his wife can received a spousal benefit (half his benefit), but the lawyer's total SS benefit keeps growing because he is not claimining SS for himself.  Obviously, the lawyer and his wife should compare the financial impact of this second strategy with the first strategy and see which one is better for them.

Finally, the lawyer could decide to claim the full benefit at early retirment age (62), and put the benefit in an interest-bearing account like a CD instead of spending it.  If the lawyer later pays back to SS all of the benefits received, then the lawyer's SS benefit may be recalculated and the interest earned on the SS benefits is theirs to keep.

For example, assume that the lawyer starts getting benefits of $1000/month at age 62.  They want to take the benefits early because they are not sure how long they will live - the benefit payment will stop with their death, but any benefits they have already been paid go to their heirs.  The lawyer puts all the payments in an interest bearing account and after 8 years has almost $100K of benefits in the account and has earned several thousand dollars of interest over the years.  At age 70, the lawyer pays back the payments - without interest - to SS.  The interest that the lawyer earned is his to keep.

Now SS recalculates the lawyer's benefit level as if the lawyer was first claiming benefits at age 70.  If you assume that each year past 62 gives him about an 8% increase in benefit, that means that the lawyer's newly calculated benefit is going to be 64% higher than it was.

In summary, here are a couple of strategies that are not well known and may be of use to senior counsel.  Why not tell senior counsel about these strategies so that they can be all impressed with you?

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