Social Security provides at least half the income to Americans ages 65 years and older. For about 25 percent of that age group, it accounts for 90 percent.
And that's why the Social Security reform debate now under way in Congress is so heated. For so many Americans, Social Security is their lifeline.
But it's not just people living on the financial brink who should consider Social Security vital to their retirement planning. Most of us are paying into the system. We expect to receive benefits when we retire. Strategies exist that can maximize these benefits.
Consider my client, who I will call Jim. (All names have been changed.) Jim married his high school sweetheart while they were in college. She worked to put Jim through law school. The couple were about to begin their family when Jim's wife was diagnosed with MS, a progressive neurological disease. Her condition deteriorated, leaving her using a wheelchair until she died of complications at age 45.
By then, Jim was a partner in a large law firm, where Kimberly, a young associate, worked. Kimberly was single. She had put her career ahead of marriage and family. In 2002, Jim, the now 54-year-old widower, and Kimberly, 37, began dating. Two years later, they married. Their daughter was born in 2005. Their son followed two years later. The children are now 8 and 6 years old, and Kimberly is a full-time mom.
Jim is a healthy 65-old-old man who plans to work into his 70s. But he recognizes there is no way to predict the future. He wants to have a retirement plan that will continue to support his family and provide money for his children's college educations no matter how long he lives. A good saver, Jim erroneously had omitted Social Security in his planning.
I explained a Social Security strategy to Jim that would enhance both his retirement years and his children's future.
Next March, when Jim turns 66, the Social Security "full retirement" threshold, he will apply for Social Security. But he will ask to have his application "suspended." If he delays taking Social Security until age 70, he will get an 8 percent a year credit that will significantly increase the size of his monthly check.
But when he files next year, he also will apply for "dependent benefits" for his two young children. Here's how it will work: If Jim's monthly benefit at 66 would have been $2,200, each of his children will be immediately eligible to receive a $1,100 per month "dependent benefit" until they reach 18 years of age. Jim will place that money in an investment fund for the children to cover college expenses.
This is one of several strategies available to maximize benefits. The "file and suspend" strategy also can be used by husbands and wives to collect "dependent benefits," while postponing their retirements to maximize their monthly benefits when they eventually file for Social Security at age 70 or beyond.
Identifying ways to maximize Social Security benefits should be the goal of all individuals and their financial advisers. That requires understanding Social Security rules, identifying financial needs and developing retirement plans.
Steven Van Metre is a Bakersfield financial planner who specializes in retirement income strategies. He also is a Bakersfield College Levan Institute for Lifelong Learning instructor. These are his opinions, not necessarily The Californian's.