Once they hit their sixties, it’s payback time for the tens of millions of Americans who have spent their working lives paying taxes to Uncle Sam. That’s when people who for years have been contributing their hard-earned dollars to the Social Security system finally can start recouping that money via monthly Social Security payments from the federal government.
But wait! Just because a person is entitled to receive Social Security payments doesn’t mean he/she should do so, at least right away. Indeed, while Americans can elect to start getting payments at age 62, oftentimes, to maximize their Social Security benefits, oftentimes it’s best for them to delay payments until later, unless they need the money immediately, said personal finance experts such as Jillian Nel, CFP®, Legacy Asset Management in Houston, Texas.
Choosing when to start taking Social Security — at 62, or at the normal retirement age of 66 or 67, or later — is one of a handful of decisions on which a huge sum of money could be riding. “The choices you make [about Social Security] could amount to a $200,000 or $250,000 difference for married couples,” says Nel. “And you have to make sure your choices are the right ones, because if you make the wrong decision, there’s not really anything you can do to fix it.”
With so much at stake, Nel strongly recommends that people approaching age 62 obtain a copy of their Social Security statement (a record of the earnings on which a person has paid Social Security taxes and a summary of estimated benefits) from the Social Security Administration (via www.ssa.gov/myaccount/), then seek the help of a financial advisor to devise a strategy to maximize benefits.
Armed with an understanding of some of the Social Security system’s key moving parts, you’ll be in a great position to develop a Social Security gameplan. Here’s a look at some of those key decision points:
Full retirement age is the age at which a person may first become entitled to full or unreduced retirement benefits. It ranges from 65 to 67, depending on a person’s birth year. For people born in 1937 or earlier, it’s 65; for those born in the 1943 to 1954 timeframe, it’s 66; for those born in 1955 and later, it’s 67. Full retirement age for people born between 1938 and 1942 is somewhere between 65 and 66, depending on their exact birth year.
A person can opt to start receiving Social Security payments before full retirement age, at age 62. The trade-off is that their benefits will be reduced a fraction of a percent for each month they take Social Security before full retirement age. The decision ultimately comes down to need and circumstances, Nel says, “Really the only reason to take it early is if you need the money to live off of, because if you start taking benefits before full retirement age, your benefits will be permanently reduced. Otherwise, it’s most likely going to be better, as far as getting the most out of your benefits, to wait” at least until full retirement age to start taking benefits. If your spouse is going to apply for spousal benefits, his or her benefits will also be reduced if the primary beneficiary’s benefits are reduced.
Choosing to delay benefits until after full retirement age can earn a person valuable “delayed retirement credits” that increase the monthly benefit when they do start taking payments. “Each year you wait beyond full retirement age through age 70, you get what amounts to an annual 8% raise in benefits,” Nel explains. “If you’re strictly looking at the math and don’t need the income [from Social Security], delay taking payments as long as you can. If you make a plan to get to age 70 before taking benefits, you’ll get the most out of the system.”
That entails working with a financial advisor to identity other income sources to rely upon as a bridge to Social Security.
For married couples with a large income gap, the lower-earning spouse can claim a “spousal benefit” that provides a benefit of up to half of the higher-earning spouse’s benefit.
The same general rules apply to divorced couples who were married for 10 or more years, notes Nel. The lower-earning ex-spouse can apply for a spousal benefit without impacting the higher-earning ex-spouse’s own benefit — and even though they are no longer married. If the lower-earning ex-spouse had multiple marriages of at least 10 years to higher-earning ex-spouses, then “pick the one with the highest benefit,” she recommends.
For married couples, when the higher-earning spouse dies first, the surviving spouse is entitled to receive 100% of the higher-spouse’s benefit as long as he/she waits until full his/her own full retirement age to take the survivor benefit. The benefit will include any of the higher earners delayed retirement credits and cost-of-living adjustments.
The “file and suspend” strategy can help married couples maximize Social Security benefits. Anytime after hitting full retirement age, a higher-earning spouse can file for his or her benefit, then request to suspend the benefit until age 70. Once that spouse files and suspends, the lower-earning spouse who is 62 or older can file for a spousal benefit. The lower-earning spouse gets the spousal benefit, while the higher-earning spouse can continue to accrue delayed retirement credits.
Resources: The Social Security Administration provides several calculators to help estimate benefits. Access them online via www.socialsecurity.gov/estimator/ and www.socialsecurity.gov/planners/benefitcalculators.htm.
This column is provided by the Financial Planning Association® (FPA®), the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning.
Photo Credit: LivingStudios (Flickr)