Over the last several months, we’ve covered the ins and outs of Social Security. In this final post for our blog series we’re discussing the decision on when to file for benefits. We’re also going to review what remaining strategies exist (if any). I’ve included links to the previous posts in case you’ve missed any. With that, let’s get started.
The most common question we receive from clients regarding Social Security is – when should I begin taking my benefit? Like most financial planning questions, the answer is “it depends.” There are many variables that go into computing the benefits themselves. When it comes to the decision on when to start, the two most important considerations are (1) the need for income and (2) health & longevity.
There are dozens of online tools you can use for determining the “best” time to file for Social Security. The downside to many of these calculators is they require you to input your life expectancy. If you expect to live a long time, the results will almost always skew toward delaying benefits for as long as possible. Doing so will result in a larger cumulative lifetime benefit. Whereas if you are in poor health or your family history suggests you may not live well into your golden years, it will recommend taking benefits much earlier.
For a high wage earner, the breakeven point between filing for benefits early at age 62 vs. Full Retirement Age (age 66-67) is typically in your late 70’s. In this scenario, if it seems reasonable that you will live beyond that point, it is best to way until Full Retirement Age (FRA). Similarly, comparing benefits at FRA vs. the maximum benefit at age 70, the breakeven point is your early-to-mid 80’s. Again, if you expect to live a longer life, waiting until age 70 gives a greater chance of receiving a higher cumulative benefit from Social Security.
The difficulty is knowing how long you can expect to live. The need for income is much easier to determine. For many people, Social Security is the biggest retirement asset they have. While it may be ideal for these people to wait for a higher benefit, many may need the income at age 62 and must accept taking a reduced benefit. As we discussed in a previous post, it’s important to consider the earnings test if you plan to file early and continue to work.
If you do not have an immediate income need when you become eligible, waiting beyond FRA to receive Delayed Retirement Credits (DRC) has several benefits. You will receive a guaranteed 8% increase for each year you wait up to age 70. If you’re married, this increased benefit will rollover to your spouse as a survivor benefit when you pass away. Lastly, pushing your benefits out will likely help avoid paying additional taxes for those few years. As we covered in Part 4, the tax thresholds for Social Security benefits are low; most of us would prefer paying as little tax as is necessary, especially if you can make do without the additional income.
That said, some people just want to collect their Social Security benefits as early as possible. The rationale is that they’ve paid into the system their entire career and they’re ready to reap those rewards. In a way it’s hard to argue against this line of thinking. However, it’s critical to understand the consequences of filing early and how it can reduce not only the benefit you receive but also any spousal and survivor benefits as well.
To wrap up this series on Social Security, it is important to cover what strategies remain available. With the passing of the Bipartisan Budget Act of 2015, the most prominent filing strategies were put to an end. The most generous was the “file and suspend” strategy. This applied to married couples who were both eligible for retirement benefits based on their individual working records. Using this approach, each spouse upon reaching FRA would suspend their retirement benefit and simultaneously file for spousal benefits. Thus, each spouse was receiving 50% of the other spouse’s benefit while their own retirement benefit continues to grow. At age 70, they would roll over to their now maxed out benefit. This was a very fruitful strategy for those who knew about it, but it was permanently eliminated in April 2016.
The most notable strategy that remains is the Restricted Spousal Application. This is for married couples who each qualify for retirement benefits. To be eligible for this approach, you must have been born in 1953 or earlier. If you were born in 1954 or later, you’re out of luck. As with all spousal benefits, one spouse must currently be receiving their Social Security benefit for this strategy to work.
Let’s use an example to illustrate how it works. John and Mary are married, both were born in January 1952, and each qualify for $2,000/month from Social Security. At Full Retirement Age, John decides to file for benefits but Mary wants to wait. With John actively receiving $2,000/month, Mary suspends her own benefit and files the Restricted Spousal application. Doing so, she receives $1,000/month (50% of John’s benefit) and she also begins accumulating DRC credits. At age 70, Mary is now eligible to receive $2,640 per month (32% increase on her original $2,000/month benefit).
The Restricted Spousal application can be a powerful strategy for those who meet the requirements. As time goes by, fewer and fewer people will be able to use this approach. The goal of the 2015 legislation was to close these “loopholes” and make the filing process more streamlined.
Social Security is very complex and the decision on when to take these benefits can have a domino effect on your retirement outcome. You must consider a variety of factors including both your actual health and your financial health. There are a lot of uncertainties when it comes to retirement. The decisions you make regarding your Social Security benefits are one of the few areas where you have a lot of control. Armed with the right information, we hope you can make the best decision for you and your family.
If you have questions regarding your own Social Security benefits, please feel free to contact us today.
In case you missed it, here are the links to our previous Social Security articles: