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Expert Perspective

News, research and market insights from our team of experts.

e.Insight

Current Issue | November 16, 2017

Social Security In a Nutshell

By: Kathleen Kuehl, J.D., Managing Director and
Debbie Martz, CFP®, Family Office Service Technical Analyst


Millions of Baby Boomers have or will soon reach the age when they need to make decisions regarding their Social Security benefits. Since these benefits can total well over a million dollars depending upon longevity and earnings record, it is important to be aware of the many nuances involved to determine the optimal manner and time to file for these benefits. Consider some of the factors that need to be addressed when evaluating benefit claiming strategies, including:

  • What is the advantage of taking benefits at the earliest possible age?
  • What is the opportunity cost of waiting to claim benefits?
  • How long do you intend to work and how does that affect the taxation of Social Security benefits?
  • Is it best to claim benefits earlier if there are health issues?
  • Are you married and if so, is your spouse working or non-working?
  • Should the higher earning spouse delay taking benefits until age 70?
  • How does death or divorce affect claiming strategies?

Before discussing some specific claiming strategies, let’s review the following important ages to remember:

Age 60
Earliest age to receive widow(er) benefits, although they would be reduced significantly if claimed prior to the Full Retirement Age (FRA), which is age 65-67 depending upon your birthdate.

Age 62
Earliest age to claim your own or spousal retirement benefits, again at a reduced amount.

Ages 65-67
Earliest age to receive 100% of your own Primary Insurance Amount (PIA) or 50% spousal benefit, or 100% widow(er)’s benefit (Make sure to go ahead and apply for Medicare at age 65, however, or you will be subject to increases in premium payments if you fall outside the application window).

Age 70
Latest age you should delay benefits, as there are no additional increases from Delayed Retirement Credits (DRCs) beyond age 70 (PIA is increased at 8% per year between FRA and age 70).

Now let’s look at some common (but often overlooked) claiming strategies that could significantly enhance lifetime benefit amounts.

File and Suspend
Strategy where the higher earner files for benefits at his/her FRA, but immediately suspends benefits until age 70 in order to allow their spouse to claim spousal benefits (50% of spouse’s PIA) while their own retirement benefits continue to grow. In fact, benefits increase by 8% each year between your FRA and age 70 – not a bad guaranteed annual return.

Restricted Application
Strategy for the higher earner to claim spousal benefits at his/her FRA (if their spouse is already receiving benefits), then switch at age 70 to his/her own retirement benefits. This strategy has two goals: maximizing expected lifetime benefits while minimizing longevity risk.

Great care should be taken to document your filing and to ensure you are not deemed as applying for two benefits at the same time (own & spousal) or it could result in a permanent reduction of your retirement benefit. Mistakes have been known to be made by the government, so be prepared to be your own advocate.

Finally, let’s say you’ve employed one of the claiming strategies, but circumstances have changed or you later change your mind. There are a couple of alternatives that might be available.

Withdrawal of Benefits
You may request cessation of benefits within the first year, pay back any benefits received, and wait until a later age to restart benefits at a higher level, thus basically erasing your early filing status.

Start Stop Start
If you filed early but later determine you do not need benefits yet, you may request your benefit to be suspended until age 70, allowing your benefits (albeit a reduced amount) to increase from the DRCs until age 70.

Here are a few other things to consider as you prepare to collect Social Security benefits:

  • If you intend to continue working while collecting benefits, you should know the following:
    • If you claim at age 62, you can earn up to $15,720* per year without any temporary reduction in benefit payments. One dollar in benefits will be withheld for every $2 in earnings above that limit.
    • In the year you reach your FRA (and up until the month you reach FRA) you can earn up to $41,880* with no reduction. One dollar in benefits will be withheld for every $3 in earnings above that limit.
    • There is no limit on earnings beginning the month an individual attains age 70.
  • If you are divorced and were married for at least 10 years before getting divorced, you can claim Social Security benefits based upon your ex-spouse’s work record.
  • You can, and probably should, download your online Social Security benefit statement annually to verify that your earnings history and Social Security taxes paid have been accurately recorded by the Social Security Administration.Go to www.ssa.gov/myaccount/ and create an account. You must be able to verify some information about yourself and have a valid email address, Social Security number, a U.S. mailing address and be at least 18 years of age.

In general, for those not needing these monthly benefits to support their living needs, it is usually advantageous to defer the higher earner’s receipt of retirement benefits until age 70 to allow at least one spouse to benefit from the maximum DRCs (which can amount to a 32% permanent increase!). Then, based upon your specific situation, decisions can be made regarding if and when you should apply for spousal benefits.

Of course, decisions will vary for each individual based upon their marital status, health history, earnings record and cash flow needs, with additional considerations necessary if a divorce or early death is involved. Therefore, you should discuss your specific variables with your financial advisor to determine the most optimal manner and timing for your particular situation. Do not depend on the employees of the Social Security Administration to offer advice on optimal strategies, as they are only to provide information on the rules, not make recommendations regarding your personal plan.

*earning limits applicable for calendar year 2015