Before their annual meeting with Jason Hill, founder and president of Client Focused Advisors LLC in New York, they shared one of those decisions with their adviser. That year, when they turned 66, their full retirement age for Social Security, the husband and wife both planned to start their benefits but continue to work. They would use the additional income stream to pay down the $60,000 remaining on their mortgage.
While the adviser understood the couple’s desire to be debt-free before retirement, he had a number of concerns about their plan.
“Often, people make these choices without all of the relevant information,” says Mr. Hill, whose company offers securities and investment advisory services through Signator Investors Inc. “I just wanted these clients to understand what all of their options were before they made a decision.”
Mr. Hill drew up a projection of the couple’s future Social Security benefits and walked the clients through a chart illustrating how delaying their claims would allow their benefits to increase annually over the following four years.
Jason Hill, founder and president of Client Focused Advisors ENLARGE
Jason Hill, founder and president of Client Focused Advisors PHOTO: CLIENT FOCUSED ADVISORS
The adviser also described the tax consequences of their plan. Because the couple had a combined annual income over $44,000, 85% of their Social Security benefits would be taxable.
At that point, recalls Mr. Hill, “they were eager for alternative recommendations.”
One option, he explained, was a “file and suspend” strategy. The husband, who was the higher-earning spouse, could file for Social Security and immediately suspend those payments. By deferring the distributions, he would allow his benefit to grow by 8% of the full-retirement benefit annually until he claimed it at age 70.
Meanwhile, his wife could file a “restricted” application for only a spousal benefit based on her husband’s record, but not her earned benefit. That way the couple could begin taking a stream of income from Social Security of roughly $1,300 a month, while both delayed—and increased the size of—their earned benefits. The strategy would increase their combined lifetime benefit by more than $250,000.
“Once they saw those numbers, adopting the ‘file and suspend’ was a fairly easy decision,” says Mr. Hill.
The adviser also asked the couple to rethink their intention to use the Social Security income to pay down their mortgage. With a little more than four years left on the loan, their remaining payments consisted mostly of principal.
“It was essentially an interest-free loan at that point—there was no good reason to pay it down ahead of time,” he says. “Especially when there were other vehicles they could use to actually grow that money.”
As a public-school teacher, the wife had access to a tax-deferred annuity which offered a 7% fixed return. By contributing the $1,300 monthly spousal benefit to that annuity, the couple was able to save another $15,600 year, giving them more confidence in their ability to fund their retirement.
Source: wsj.com ~ By Alex Coppola