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Social Security Tools Can Help Maximize Benefits

Robert Powell

New online tools can help retirees — with some caveats

One of the most critical decisions older Americans face is when to start their Social Security benefits.

People often claim their benefits at the earliest age possible — 62. But experts say it's best to wait until one's full retirement age, or even age 70, which is when one is eligible for the largest monthly benefit possible.

According to many experts, Social Security beneficiaries often leave a lot of money on the table by claiming early. It's prudent, therefore, to run the numbers to determine the best age to claim.

They are numbers worth crunching given what Social Security represents to the average American's balance sheet. Some estimate that the net present value of a stream of monthly Social Security checks over the course of retirement represents one-third of the average American's assets. It represents about 20% of total income for those Social Security beneficiaries in the highest income quintile, and 83% for those in the lowest income quintile.

New Online Tools

But trying to get a handle on when to take Social Security has been a chore, partly because there were few online resources save those offered on the Social Security Administration's website. Now, however, a growing number of organizations are launching tools, including two this month, designed to help Americans decide when to claim Social Security.

AARP, a lobbying group for older Americans, recently launched a free online calculator that is powered by a company called LifeTuner, and Social Security Solutions launched a suite of online and off-line for-fee services.

More than half of those claiming retired-worker benefits in 2009 chose to receive benefits as soon as they became eligible at age 62, according to AARP. "But that decision comes at a cost of lower monthly benefits, potentially decreasing one's lifetime retirement income by a significant amount," AARP said in a release.

According to AARP, its calculator helps people weigh the variables and make an informed decision for their individual circumstances. The calculator walks users through a question-and-answer format and provides estimates for both monthly and lifetime benefits across a range of ages. It also allows users to customize their experience by calculating spousal benefits and taking into account the impact of continuing to work while collecting benefits. Also, it gives users the opportunity to compare estimated monthly benefits to expected expenses in retirement, and to print a personalized summary report. Try the new AARP calculator here.

We asked various Social Security experts to review the new AARP calculator and provide us with objective (and, given that a few experts offer competitive tools, some subjective) feedback. Here's what they had to say.

A Good Start

In general, experts who evaluated AARP's tool largely praised the calculator as a good start, but they also said there's room for improvement.

"I applaud AARP for providing the public with this useful online tool... and [for] emphasizing the positive financial benefits associated with delaying claiming past age 62 and even past the FRA [full retirement age] or what some also call the normal retirement age, which is now 66," said Jason J. Fichtner, a senior research fellow at the Mercatus Center at George Mason University.

"Far too often people choose to begin Social Security retirement benefits at age 62, not realizing that there's a 6% reduction in benefits for each year below the full retirement age," he said.

With the FRA now at age 66, Fichtner said someone taking benefits at age 62 would receive a 30% reduction in monthly benefits. "If that same person waited until age 70 to begin benefits, the monthly payment would be 76% higher than that age 62 initial benefit and 32% higher than initial benefit if they claimed at age 66," he said.

Elaine Floyd, a certified financial planner and director of retirement and life planning at Horsesmouth LLC, found the calculator to be "surprisingly accurate." Horsesmouth, a website for financial advisers, offers for-fee Social Security benefit claiming tools.

Others, however, said AARP's focus on how "it pays to delay" is not the proper emphasis. William Meyer of Retiree Inc. and Social Security Solutions, which offers a suite of fee-based benefit-claiming tools and services, praised AARP for building awareness for this topic. But he said the key difference between his firm's message and AARP's can be summarized in the marketing tag lines: "AARP promotes 'it pays to wait.' Our tagline [is] 'We get you more.'"

It's Personalized

The AARP tool starts off by gathering details about your situation, including annual earnings and whether you are single, married, or divorced.

You have the option of entering either your projected Social Security benefit based on your current salary or your actual benefit based on your actual earnings history. To do the latter, you must visit Social Security's website or review your paper-based benefits statement, which we should note won't be mailed this year.

The experts said it's best to use your actual earnings history from SSA. Using your current earnings could overstate your benefit because your earnings today are likely higher than in previous years; you also might understate benefits because you underestimate future salary increases

Laurence J. Kotlikoff, a professor at Boston University and president of Economic Security Planning Inc., said AARP's calculator is providing a low-ball estimate of one's future benefits because it ignores projected future growth in economy-wide average annual earnings. Economic Security Planning offers a benefits-claiming calculator called Maximize My Social Security for $40 per year.

Kotlikoff said his firm's calculator takes into account the person's entire earnings history and then projects using the Social Security Trustees' assumptions of future real wage growth. "This last issue is, potentially, a big problem," he said.

For the record, the AARP calculator does let you change two default assumptions: the discount rate or rate of inflation, which is set at 3%, and your annual salary raise rate, which is also set at 2.5%. But you could either overstate or understate the future rate of your salary increases.

Fichtner also praised the tool because it asks users whether they are a current or former government employee. Those workers are subject to what's called Windfall Elimination Provision and Government Pension Offset, which could result in a person getting a lower benefit amount than both the AARP and SSA benefit tools will estimate.

"The WEP/GPO offset has been a nasty surprise and financial shock to many former government workers when they start receiving Social Security retirement benefits," said Fichtner. "The more we can highlight the existence of the WEP and GPO so that people are better informed and can plan appropriately, the better."

Married or Divorced?

The calculator, in asking whether you are married or divorced, helps users sort through some of the lesser known facts and strategies about claiming Social Security. As some know, there are at least two strategies that "marrieds" can use to maximize their household's benefits, and the calculator does that, according to Dana Anspach, a certified financial planner and principal and financial adviser with Sensible Money LLC. "It provides clear instructions on how to maximize benefits for 'marrieds,' and tells you exactly when each spouse should file," she said.

For married couples, for instance, it recommends either the file-and-suspend or claim-now-claim-more-later strategies as appropriate, depending on the ages of the spouses, said Floyd of Horsesmouth.

"For myself, it suggested that I claim my divorced-spouse benefit at 66 and claim my own benefit at 70," she said. "This is something I might not have thought to do if I'd had little knowledge of how Social Security works. Many people will be surprised by the strategies concerning spousal benefits, but they are absolutely legitimate and provide extra income to couples and to divorced women and men while they are delaying their own benefit to age 70.

When to Claim?

One of the best features of the AARP calculator is that shows users in a personalized manner their monthly Social Security payout based on the age at which they might claim. In my test drive of the calculator, for instance, the monthly benefit when claiming at age 61 is $1,672 verus $2,946 at age 70.

Fichtner praised this feature of the calculator, but said the tool could be improved by adding the percentage increase in benefits that accrue from delaying. "While the dollar numbers really do drive home the benefits of delayed filing, also seeing that your age 70 monthly benefit would be more than 75% higher than your age 62 initial monthly benefit says a lot as well," he said.

Meyer, of Retiree Inc., said this about AARP showing monthly versus cumulative benefits: "The logic in the AARP tool strives to maximize monthly benefits," he said. "This is an interesting approach, but not as smart as strategies that maximize the cumulative value of all the benefits over the person's life. The claiming strategy to optimize for the most monthly benefits is not always the strategy for maximizing lifetime cumulative benefits. Our motto is 'don't leave money on the table' so we get you the most over your lifetime."

Others agreed that showing monthly versus cumulative doesn't reveal the whole picture. "It's not clear what is being maximized," said Kotlikoff. He said his firm's calculator focuses on the simple present value of benefits. "The AARP tool claims to maximize monthly benefits," he said. "But for married people it's recommending filing-and-suspending strategies, which clearly don't maximize immediate monthly benefits. The AARP tool can't be getting the right result for someone with a very short maximum age of life."

How Much of my Expenses are Covered?

In creating a retirement-income plan, experts often recommend that retirees use their fixed sources of income, such as Social Security and defined-benefit pension plans, to pay for their fixed (and sometimes their discretionary) expenses.

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