More Social Security Income
Imagine your retirement with more income.
Electing your optimum Social Security income benefit may be the most important financial decision you make in your lifetime. Although the Bipartisan Budget Act of 2015 closed some the strategies for clients born after May 1, 1950, there are still many options available. Born after May 1, 1950; no more file and suspend (File with Social Security, then immediately suspend your benefits so your spouse will get a portion of your higher amount). Born after Jan 1, 1954; no more restricted application (claim spousal benefits now, then claim on own Social Security record later). Retirees, especially couples, may
miss out on hundreds of thousands of dollars of additional income over their
lifetimes by making poor Social Security income election decisions. The Senior
Citizens’ Freedom to Work Act of 2000 ushered in some subtle rules that baby
boomers are now taking advantage of to receive extra income from Social
Security. You may be rewarded with significant additional retirement income over
your lifetime by applying these little known, yet creative claiming strategies,
At first glance, the election process and strategies can seem complicated and
confusing. It is. There are expensive, sophisticated software tools available to
help you make this important decision, but I recommend you consult a financial
professional who specializes in Social Security income planning and tie it in to
your other assets and income. Unfortunately few financial professionals
understand how to successfully navigate the Social Security income election
waters. I cannot stress how important it is to do a detailed analysis before making
your decision. Another aspect realize is that only 50% of your Social Security income counts towards MAGI, (Modified adjusted Growth Income), while most other income, including tax-free municipal bonds, count towards MAGI. A few exceptions are ROTH income, Inheritance, and non-MEC life insurance policy loans. This is why it is important to do a detailed retirement/Social Security income plan.
COMMON MISTAKES TO AVOID
#1 Mistake: Claiming Social Security Too Early
Research studies indicate that about half of all Americans file during their first
year of eligibility – typically age 62. Unfortunately for a good portion of these
folks, this could be a costly mistake. Filing early could mean forgoing tens of
thousands of dollars, and in some instances (especially with couples), over
hundreds of thousands of dollars of their total lifetime income stream.
Although you certainly can file at age 62 for benefits, most Americans will obtain
greater lifetime income amounts by waiting until they reach age 66 or even 70.
While this can, in certain cases, be a gamble, it is usually the most prudent
choice to make. To make matters worse, there is a penalty if your income is too
high while taking Social Security Income before Full Retirement Age.
Bottom line-If you decide to claim your benefit early at age 62, you will receive a
smaller check for a longer period of time. If, however, you claim later at 66 or 70,
you will receive a larger check for a shorter time period. Ages 78 to 80 are often
called the break-even age. If you assume that you and/or your spouse might live
beyond these ages, then it could make sense for you to claim Social Security at a
later age. Some statistics show that for a healthy married couple at age 65, at
least one person has a 50 percent chance of living to age 92.
# 2 Mistake: Not Harnessing Your Living Spousal Income Benefit
Married couples, in particular, can employ creative strategies to maximize their
lifetime Social Security income. To do this, you must pay close attention and
learn the rules. For example, you should consider the often overlooked, yet
powerful benefit called the “spousal income benefit.” Understanding how this
benefit works and correctly applying it in a Social Security income planning
strategy can be a significant generator of additional income for a couple. For
example, a spouse with a low earnings history, or a spouse who never worked,
can collect up to one-half of the primary earner’s (i.e. spouse with the highest
benefit) Social Security income. Had this lower-earning spouse filed on his/her
own record, he/she might receive very little or, in some cases, no Social Security
income. Please note that there are some rules, caveats and exceptions that
apply to the spousal benefit. Also, very few Social Security claimants – as well as
many financial counselors – are aware that you can switch from the spousal
benefit to your own benefit or vice-versa. Properly activating and timing the
spousal income benefit is an important part of maximizing your Social Security
Mistake #3: Neglecting the Survivor Benefit
Couples will often neglect planning for their Social Security income benefit in the
context of the survivor benefit. Women typically outlive their spouse by three to
four years. And, they often face longer periods of disability than men during the
latter years of their lives. These prolonged periods of disability (e.g. expensive,
chronic nursing care) can result in significant financial duress to the surviving
Following the death of a spouse, the survivor receives one Social Security
income check instead of two. And, in some instances, the survivor’s employment
pension income might be reduced or altogether eliminated. Therefore, it is critical
for the surviving spouse to maximize his or her Social Security survivor benefit to
make up for these potential income reductions. One benefit of Social Security is
that when a spouse passes on, the other spouse will “bump-up” to that spouse’s
benefit if it is higher than his or her own benefit. Typically, for the survivor to
capture the highest Social Security income benefit, it is advantageous to have
the spouse with the higher Social Security income benefit delay claiming benefits
until age 70.
A spouse can potentially drastically “short-change” his/her surviving spouse by
taking Social Security early. For example, let us say that Jim decides to claim at
age 62 for $1,725 per month. If Jim waited until age 70, his income amount
would step up to about $3,036 per month, a 76 percent increase above his age
The survivor benefit is a substantial planning consideration that should not be
ignored. The survivor’s benefit is especially important to females, because they
typically outlive their male counterparts. Planning for a strong survivor benefit is a
significant part of comprehensive, intelligent Social Security income planning for
Mistake #4: Not Getting It Right the First Time
The Social Security Administration implemented a very important rule change,
effective December 8, 2010, that places a limited timeframe constraint for when
you can fix and re-do your Social Security Income election. You now have only
12 months from the date you file your claim to choose a more favorable election
method. What does this important ruling mean for you? You should now be more
diligent than ever when choosing how and when to take your Social Security
income: If you have made your income election within the past 12 months, you
should consider reviewing it closely with a qualified financial advisor. You may
still have time to re-file if another strategy is a smarter choice. If you are about to
file a claim, be sure to evaluate your benefit election options thoroughly. If you
make a mistake, or if your financial picture changes, you now have only 12
months from your date of election to change it.
Early Retirement Age. An election between age 62 and full retirement age,
currently age 66. With this strategy the SSA will deduct $1 in Social Security
Benefits for every $2 earned above $14,640 per year. If you are still working and
anticipate earning over this threshold it is advisable to not select this option
because of the costly Social Security deductions you will receive. However, once
you reach full retirement age, the SSA will not deduct from your Social Security
check. Here is a breakdown of the rules from SSA.gov; the official website for the
Social Security Administration
The amount you can earn while receiving Social Security depends on your age. Your earnings in (and after) the
month you reach full retirement age will not affect your Social Security benefits. However, your benefit is reduced if
your earnings exceed certain limits for the months before you reach your full retirement age.
If you are under full retirement age for the entire year:
- • You can earn $14,640 gross wages or net self-employment a year and not lose any benefits in 2012.
- • We will deduct $1 in benefits for every $2 earned above $14,640.
- • In the year you reach full retirement age:
- You can earn $38,880 gross wages or net self-employment prior to the month you reach full
- retirement age and not lose any benefits in 2012.
- We will deduct $1 in benefits for every $3 earned above $38,880.
- The same earnings limits apply to a spouse or child who works and receives benefits on your
- record. You should report earnings to us for any months and years prior to full retirement age.
Full retirement age. With this election you will get 100% of your Social Security
benefit, and as stated above will not be penalized for earned income over
$14,640. If you are the higher income spouse you must be full retirement age to
claim the spousal benefit,
Delayed Retirement. With this election Social Security benefits are increased by a
certain percentage (depending on date of birth) if you delay your retirement
beyond full retirement age. If you were born 1943 or later your benefit will
increase 2/3 of 1% for each month you delay retirement. Age 70 is the latest you
can claim your Social Security benefit; in which will get you the maximum monthly
Popular Alternative Claiming Strategies
File-and-suspend, This where the higher-earning spouse files for Social Security
upon reaching full retirement age in order to entitle his spouse to her spousal
benefit, and then immediately suspends his or her benefit in order to earn delayed
credits to age 70.
Claim spousal benefit now, then claim more later. This strategy turns the
traditional way of claiming spousal benefits on its head by having the high
earning spouse claim his spousal benefit off the low-earning spouse’s earnings
record from age 66 to 70 while his own benefit builds delayed credits.
62 vs 70: Joe and John can begin collecting $1,500 monthly from Social
Security at age 62, or $2,640 a month at age 70. Let’s say both live to 92. If Joe
claims benefits at 62, his lifetime total will be $540,000. If John waits until 70, he’ll
net $696,960 — almost $157,000 more. If you look solely at monthly income,
claiming benefits at 62 looks smart; Joe is getting $1,500 a month for eight years,
and John is getting nothing. But again, longevity risk should be part of your
planning, especially if you believe you will live a long life. What are the odds that
you will live to 85 or 90 — or longer? The answer for many: increasingly good.
62 vs Full Retirement age: As in the above example Joe and John can begin
collecting $1,500 monthly from Social Security at age 62, or $2,000 a month at
age full retirement age. If Joe claims benefits at 62, his lifetime total will be
$540,000. If John waits until full retirement age (66), he’ll net $624,000 — $84,000
more than Joe.
Claim spousal benefit now, then claim more later: This is using spousal
benefits to your advantage. Now let’s look at a husband and wife: Bob 62 and
Carol, age 58. Bob is scheduled to receive $2,000 at his full retirement age of 66,
while Carol is scheduled to receive $1,600 at her full retirement age at 66. Each,
of course, can claim Social Security at age 62. If they do so — and Bob lives until
83 and Carol lives until 90 — their cumulative benefits will be $840,600.
But there is a more lucrative — and slightly more complex — strategy. At his full
retirement age of 66, Bob claims a spousal benefit of $800. (Yes, Social
Security allows this.) Carol, meanwhile, claims a benefit (based on her earnings)
of $1,200 at age 62. Finally, Bob, at age 70, switches to a monthly benefit of
$2,640, based on his earnings history, a move that falls under “delayed
retirement credits.” In this case, the couple’s lifetime benefits will total
$1,043,520, a gain of almost $203,000 over the let’s-jump-in at 62 approach.
The other interesting piece of these two strategies is survivor benefits. If both
spouses claim benefits at age 62, Carol — when Bob dies — will be eligible for a
survivor’s benefit (under Social Security’s rules) of $1,650 a month. But under the
second claiming strategy, she would get a survivor’s benefit of $2,640, an extra
$1,000 each month.
File and Suspend: Let’s say Bob and Carol are both at full retirement age and
he wants to file for his Social Security benefit so his wife Carol can claim her
spousal benefit off of Bob’s earnings, but wants to delay his benefits until age 70
so he can receive more monthly Social Security income when he turns 70. This is
where file and suspend comes in. Carol will receive $1,320 per month and Bob
will not receive any Social Security benefits until he reaches age 70, when he will
receive $2,640 per month.
Maximizing Survivor Benefits: Now, consider the options for a woman, age 60,
who loses her husband. Her benefit at full retirement age is $1,400; his would
have been $2,000. She could begin collecting a widow’s benefit of $1,430 at age
60. But it might be better for her to pursue a different strategy — claiming a
reduced benefit, based on her earnings history, of $1,050 at age 62 and
switching to a widow’s benefit of $2,000 at age 66. The difference in total benefits
if she lives until age 89: an extra $112,000.
As you can see from these examples it pays to do a thorough analysis before
choosing your claiming strategy.
Know the Rules
With more people learning about file-and-suspend and claim-now claim-morelater,
mistakes are being made – like trying to do certain things before full
retirement age. Make sure you understand the rules before going down to your
Social Security office. Here are corrections to some common misunderstandings.
You can’t claim a spousal benefit until your spouse has filed for his or her
benefit. This is a basic rule. Any spousal strategy, whether traditional or
innovative, requires that the spouse-on whose record the spousal benefit is
based apply for his own benefit first. This means the spouse must sometimes
wait. If Jack is only 64 when Jill wants to file for her spousal benefit, and if Jack
wants to delay filing in order to earn maximum delayed credits, Jill has no choice
but to wait until Jack is ready to file before starting her spousal benefit. However,
she need not wait until Jack is 70. As soon as Jack turns full retirement age, he
may file and suspend.
You must be over full retirement age to file and suspend. Anyone can file for
Social Security at 62. But to voluntarily suspend your benefit in order to earn
delayed credits, you must be over full retirement age – currently age 66 for
people born between 1943 and 1954. Many people want to file-and-suspend as
soon as they turn 62. Can’t do it.
You must be over full retirement age to receive a spousal benefit if your
own benefit is higher. Again, many people think they can claim-now claim more-
later as soon as they become eligible for Social Security at 62. So they go
into their SSA office saying they just want to receive their spousal benefit while
their own benefit builds delayed credits. Then they are surprised when the SSA
worker tells them that they have to take their own benefit because it is higher.
Under the deemed filing rule, anyone who applies for Social Security before full
retirement age is deemed to be filing for both the earned benefit and the spousal
benefit; you don’t have a choice. After full retirement age you do.
To receive a spousal benefit when your own benefit is higher, you must
restrict the scope of your application to your spousal benefit. Sometimes
people correctly wait until they turn full retirement age to claim their spousal
benefit and are still turned away by an SSA worker who says they can’t do it
because their own benefit is higher. In this case, the applicant did not issue the
correct instructions. If you are over full retirement age and want to receive a
spousal benefit while your own benefit builds delayed credits, you must say to
the worker, “I’d like to restrict the scope of my application to my spousal benefit.”
If you say these words, the worker will not even look at your own benefit and will
be obligated to start your spousal benefit.
Both spouses cannot claim a spousal benefit off the other’s record at the
same time. Here’s a case of people taking creative claiming strategies a step too
far. If Jack can claim spousal benefits off Jill’s record, why can’t Jill also claim
spousal benefits off Jack’s record while they each earn delayed credits to age
70? The answer is that in order for Jack to claim a spousal benefit off Jill’s
record, Jill must file for her own benefit. Remember, this is a basic rule for
spousal benefits: the spouse on whose record the spousal benefit is being paid
must have filed for benefits. Once Jill files for her own benefit, she can’t restrict
her application to her spousal benefit. If both spouses have relatively high
earnings records, the solution is for Jill to file and suspend while Jack restricts his
application to his spousal benefit. Or vice versa.
Work with a Social Security Specialist
It is essential that you make the effort to locate an advisor who specializes in
Social Security income planning. He or she will help you understand the
concepts and tools and will have dedicated software to help you evaluate the
myriad of Social Security income claiming possibilities to help you get more
income. Contrary to what you might assume, Social Security income planning is
an emerging area in the financial services industry, and the rules for electing
Social Security have been changing. Consequently, it is to your advantage to
take some extra time to find a qualified Social Security planning professional who
can help you with your decision. Unfortunately, a significant portion of preretirees
and early retirees do not “do the math” to make the optimal Social
Security income decision for their unique situation. First of all, many folks are not
aware that these Social Security claiming strategies even exist. And, if they are
aware, many do not take the time, or are not counseled by a financial advisor
familiar with how to maximize Social Security income. Failure to examine and
implement these advanced claiming strategies can result in a significant
reduction in lifetime income for many retirees. An important purpose of doing a
thorough analysis is to help married couples decide which spouse should claim
the spousal benefit and when. Maximizing spousal benefits through innovative
claiming strategies can help baby boomers gain an edge in retirement planning.
Just make sure you understand the rules.
Russ Brown, CFP
President, RNA Financial