How and when to claim Social Security

EFE’s Jason Cowans shares vital money-boosting tips

Ric Edelman: One of the primary themes of this show, as you know, is retirement security. There is no question that one of the most important vital areas of retirement security is Social Security. And so I'm really happy to bring on to the program my good friend Jason Cowans. Jason is Executive Director of Financial Planning at Edelman Financial Engines, and he's here to talk with us about Social Security. Jason, great to have you with me on the show today.

Jason Cowans: Well, thanks for the invite. I appreciate it.

Ric Edelman: Jason began his career as a financial planner back over 20 years ago, and before that, he was a high school math teacher and coach. And so, Jason, I assume that today education remains a pretty significant part of the work you do.

Jason Cowans: It's been instilled in me since day one.

Ric Edelman: Most of your clients, I'm guessing, are in their 50s and 60s. Is that about right?

Jason Cowans: Yeah, about average 55 seems to be the typical new client these days.

Ric Edelman: And one of the questions that people begin to ask as they're thinking about retirement five or ten or 15 years away, is the notion of Social Security. And the big number one question that people have is when should I, in fact, start taking my Social Security?

Jason Cowans: And clients really hate my response because it really depends. It depends on your need, your drawdown, your other source of income and unfortunately, your longevity. All those factor in to go, 'let's find a strategy unique to you and your needs on when to take Social Security'.

Ric Edelman: And part of the reason that there is such complexity to the answer and why your answer is it depends, is because workers have options. You're allowed to start taking it. How early?

Jason Cowans: 62 for a worker.

Ric Edelman: And you don't have to start taking it until when?

Claiming Social Security at 62 can cut your total benefit by almost 50%

Jason Cowans: You can delay it all the way till 70. I've always had the argument that started at 70, even if you don't need it, because that's the most you're going to get as an increased benefit amount. And what I've found is, having the conversation when people go, "I want my money as soon as possible," I have to be the bearer of bad news. If you start it at 62 your earliest age, you may be permanently reducing that amount for the rest of your life and potentially your spouse and/or survivor.

Ric Edelman: Give me an idea of what that spread is. A typical worker who starts at 62 compared to waiting to age 70. How much money are we talking about?

Jason Cowans: It may be almost 50%. So you're almost discounting your potential earnings by 50% for the rest of your life and/or your spouse's life.

The Social Security “Do-Over” – if you make a mistake

Ric Edelman: Once you make that decision as to when you want to begin starting benefits, that's a permanent decision you're going to have to live with the rest of your life.

Jason Cowans: Well, except for the first year, you get one redo. So if you start at six months through a year and go, you know what, I started it too early, I'm still gainfully employed, I don't need the money... You can pay it back one time only. Then it's no more options.

Ric Edelman: So if that describes you, if you started your benefits within the last 12 months, or go talk to your parents, if they started their benefits within the last 12 months and now you're beginning to get suspicious that maybe that wasn't the smartest financial decision for the course of your personal finances, I'm going to give you a quick opportunity to call Jason and his colleagues at Edelman Financial Engines. Jason, how would people reach you if they want to talk about their Social Security benefits?

Jason Cowans: They can reach any planner nationwide at 833-PLAN-EFE.

Ric Edelman: So let's talk about folks who are still working. Can they start taking Social Security benefits even though they're still working?

Jason Cowans: Oh, absolutely. And the way it works is if you started earlier than your full retirement age, they start to take back for every $2 you make over $19,560, they take back $1.

Ric Edelman: So I guess what the real message here is, we need to stop the focus on Social Security and instead put the focus onto your income need.

Jason Cowans: Oh, absolutely. And tell me how much you actually need. Let's see how we fill that. Are you filling it with pension? Are you filling with Social Security? Are you feeling with investment? Let's find that gap. And if the withdrawal rate is pretty low, you may be able to just take it from your investments if you have enough wealth to do so.

Teacher, civil servant, or government employee? Now it get complicated.

Ric Edelman: Now there are millions of American workers who work for a government, federal government, state or local government, and they are qualified to receive a government pension. Talk about the impact of getting that government pension on your Social Security eligibility.

Jason Cowans: So there's two distinct phases of that government pension. There's what's called the windfall elimination provision that you should think affects you as the worker versus the government pension offset that affects your spouse or your survivors. And so if it's you and you have your own Social Security amount after you've worked in the government, what they do is they say, we're going to look at your number of years working out of the government sector, in the private sector. And if you work less than 20 years, whatever your Social Security amount from the private sector, we're going to reduce by, I think this year's number is, $512. So although you paid into the system for that period of time that you're working in the private sector, your own Social Security amount will be reduced because you're eligible for a government pension.

Ric Edelman: So the simple takeaway is if you are a government employee receiving or going to receive a government pension, you need to get advice from a financial adviser before you begin your Social Security benefits or before you even take your government pension to make sure you understand the full implication of all this.

Jason Cowans: Oh, absolutely. I mean, because to that end, if you look at the other side of it, which is the government pension offset, really understanding how your pension affects your spouse's spousal amount or survivor amount.

Ric Edelman: What's the best way to optimize Social Security benefits given all of this?

Jason Cowans: It's the answer that nobody wants to hear: work longer. That's the easiest, controllable answer for most, unfortunately. And that becomes the unique challenge that if they don't have the job where they can physically work up to that age, we have to find a solution.

The future of Social Security – will money be there for me?

Ric Edelman: And a lot of folks and a lot of surveys suggest that people, frankly, and the younger they are the more they believe this, Social Security is not going to be there in the future. More people believe in ghosts than they believe in the Social Security system. So you tell us, is the Social Security system going to be there for future retirees?

Jason Cowans: Yes, with an asterisk. We're confident that it will be around. And if you prefer to act as if Social Security isn't going to be there, let's talk about saving for your retirement. And if it is, in fact, there and you accidentally have saved too much money, right, nobody complains about having too much money in retirement.

Social Security claiming strategies for divorced singles or couples

Ric Edelman: We've talked a lot about the benefits when you can collect them, how much you're likely to receive, the complexity in determining when you should start. And a lot of that complexity has to do with people who are married. What about people who are divorced?

Jason Cowans: Yeah. So it's an interesting conversation. So the reality is if you were married to someone for 10 years and now you have subsequently been divorced for two years, you are still eligible for a percentage as a spousal benefit.

Ric Edelman: We've talked about singles. We've talked about those who are married, we've talked about those who are divorced. When a spouse passes away, what impact does that have on receiving Social Security benefits as a widow?

Jason Cowans: A widow could start it as early as 60 as opposed to 62, but they're potentially locking in about 70% of what their deceased spouse would have earned.

Ric Edelman: What you're discovering here in this conversation is that Social Security is far more complicated than you ever thought. I'm incredibly impressed not only with the fact Jason is aware of all of these different nuances, but just rattling off the top of his head, all the answers. In other words, this is the value of going to a professional financial advisor who can help you work through the complexity. You know what your family dynamic is. You understand your income, your life expectancy, and that of your spouse if you've got one or a former spouse. All you've got to do is take that basic info to Jason or his colleagues and they'll lay out for you the things you ought to be thinking about and the best strategies you can adopt to maximize and optimize your own Social Security benefits. So I encourage you to contact Jason or his colleagues at Edelman Financial Engines. Jason, again, tell us, how can people reach you?

Jason Cowans: Our national number is 833-PLAN-EFE.

Ric Edelman: That's Jason Cowans, Executive Director of Financial Planning at Edelman Financial Engines 833-Plan-EFE. And Jason and I actually had about a 30 minute conversation. You can watch or listen to the entire dialogue, just go to my website: TheTruthAYF.com.

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