Maximize Your Social Security: 3 Key Benefits

Today, I would like to highlight three of the most important features of Social Security benefits that many clients underestimate. While some clients may be familiar with each of these key benefits, most gain a new appreciation for the importance of their filing decision when they connect the dots.. These features not only provide financial security but also address some of the most significant risks retirees face.

1. Cost of Living Adjustments: Your Shield Against Inflation

Historical Cost of Living Adjustments (COLA) for Social Security benefits from 1975 to 2024

Social Security was designed to ensure your benefits approximately keep pace with inflation. Each October, Social Security announces the inflation adjustment for retirees in the upcoming year. In October 2023, they announced a 3.2% Cost of Living Adjustment (COLA) to take effect in January 2024. Here's a history of inflation adjustments since 1975 (source):

I began assisting clients with Social Security planning in the summer of 2013. Around 2016, clients would sometimes laugh when discussing Social Security inflation adjustments. Looking at the period from 2009–2016, you can see why — retirees' checks didn't increase much! Some argue that during this time, costs unique to seniors were rising faster than the CPI-W inflation index. However, inflation was generally cool and controlled. Since 2020, clients have witnessed the power of having their Social Security benefits indexed to inflation—they're not laughing anymore!

You won't find inflation protection features on many other retirement assets. Why? It's an expensive feature to add. If you're one of the few to have a work pension, it likely doesn't include an annual inflation adjustment. State of Tennessee employees with a TCRS pension do have inflation protection, but it's capped at 3% annually—one way for your employer to hedge against the significant costs of controlling inflation risk. Social Security's inflation protection often provides an additional incentive for married couples to prioritize delaying the higher-earning spouse's Social Security benefit.

2. Lifetime Benefits: Addressing Longevity Risk

One of the most common fears about retirement is running out of money. It may seem strange to consider living a long, healthy life as a "risk," but as a financial planner, I encounter this concern frequently. Studies show that the typical clients I work with—those in their 60s, usually married, with above-average net worth and access to healthcare and education—often have a higher life expectancy than the national average. For a healthy married retiree couple, especially if they have a parent who lived into their 90s, most insurance companies would likely predict a good chance of one spouse living into their 90s (perhaps even mid-90s!)

Social Security helps mitigate this financial risk, known as longevity risk (the risk of outliving your savings). When you sign up for Social Security, you receive a monthly check for as long as you live. If you're married, remarried, or were married for longer than 10 years and are now divorced, additional spousal benefit rules may apply. It's wise to work with a financial planner who specializes in Social Security claiming strategies to navigate these complexities.

Retirees are living longer than ever before. While filing for Social Security benefits at age 62 can be appropriate in some cases, it's important to remember that you might be around for quite a while! The longer you're able to delay claiming your Social Security benefit, the higher your guaranteed monthly payment will be for the rest of your life.

3. Survivor Benefits: Protecting Your Spouse's Financial Future

Understanding Social Security survivor benefit feature is perhaps the most important key benefit of Social Security for married couples. While many retirees are familiar (in a general sense) with the idea that Social Security will provide some protection for a surviving spouse, there’s usually gaps in understanding exactly how that plays out. This is a part of the Social Security planning process where it pays to slows down and make sure everyone is on the same page. Filing for Social Security is a once-in-a-lifetime decision and making sure you get it right the first time is important.

In Social Security terminology, the survivor benefit provision states that when one spouse in a married couple passes away, the surviving spouse is entitled to receive the higher of either their own retirement benefit or their deceased spouse's benefit, but not both. This is often referred to as the "widow(er)'s benefit" or "surviving spouse's benefit."

Ex. John and Jane are married and both receiving Social Security. John’s benefit is $3,500 per month and Jane’s benefit is $2,500 per month. While both are alive John and Jane are receiving $6,000 per month from Social Security.

Total SS Income while both spouses alive and on Social Security

If John dies first, Jane loses her own $2,500 benefit but is allowed to retain the higher $3,500 per month benefit.

Total SS Income remaining when husband dies first

If Jane dies first, John maintains his $3,500/m benefit but loses Jane’s $2,500 per month benefit.

Total SS remaining if wife dies first

In both cases, as soon as the first spouse dies, the household amount of $6,000 per month drops down to $3,500 per month (a 41.6% decrease in Social Security income!) In practical terms, I show clients how the higher earner's benefit becomes the survivor benefit. This often leads to discussions about strategies to maximize the higher earner's benefit, even if it means the spouse with the lower benefit claims earlier.

Bringing It All Together

For married couples, understanding these three key aspects of Social Security - inflation protection, longevity protection, and survivor benefits - often leads to a shift in perspective. Many clients come to recognize the advantages of delaying the higher-earning spouse's benefit, especially if that spouse is older or male (given the typically shorter life expectancy for males). This strategy can significantly enhance the overall value of their Social Security benefits.

Social Security is undoubtedly one of the most valuable retirement assets you own. However, it's crucial to remember that while these three aspects are incredibly valuable, they're just part of a larger picture. The optimal claiming strategy isn't one-size-fits-all; it depends on individual circumstances, health conditions, other income sources, and overall retirement goals.

In essence, Social Security is more than just a government program - it's a fundamental component of your retirement plan. With a thoughtful and informed approach, it can provide a solid foundation for a secure and comfortable retirement, tailored to your unique situation.