Maximizing Social Security benefits is one of my favorite workshop topics. It doesn’t matter how big or small your retirement account is everyone has questions when it comes to Social Security retirement benefits. With a little thought and planning, individuals and couples can significantly increase their life-time income from Social Security.
I get asked a lot of questions during my workshops. Three of the most frequently asked are outlined below. Understanding the answers to these questions can improve your financial plan.
Q: Should I claim my benefits early?
A: The decision of when to begin receiving your benefits is a personal one, and it can be complex. In my experience there is generally not one right answer, but there is often a best answer. The decision often comes down to two variables: do you need the income now and are you in poor health? If the answer to either of these is yes, then claiming your benefits early is probably the right answer. However, if your answers to these two variables is no, then claiming early can have severe economic consequences.
To understand the pitfalls, let me provide some background on claiming options (note: the following is meant to be a high-level summary and does not elaborate on certain nuances). There are three types of benefits that relate to income for life from Social Security. If you worked and met the forty quarter test then you are entitled to a retirement benefit based on your earnings history. If you are married to someone who has met the test then you are entitled to a Spousal benefit. And finally, if you are married and your partner who also was receiving a retirement benefit dies you are entitled to a Survivor benefit. If you begin receiving your benefit at your Full Retirement Age, which is 66 for most people retiring today, you will get 100% of your monthly benefit. You can claim your retirement or spousal benefit as early as 62 and your survivor benefit as early as 60, but the amount you receive will be permanently reduced. For every year you claim early, the amount is reduced by about 8%. You can also defer your retirement benefit up to age 70. For every year of deferral, your benefit will be increased by at least 8%. If you are still working and claim your benefit early, Social Security will hold a portion of your income back until you reach your full retirement age. Finally, couples can implement a strategy called “File and Suspend” to coordinate their benefits.
By claiming your benefits early you significantly reduce the amount of income you will likely receive over your life, and possibly your spouse’s life too. This is especially true if you are in good health. The life expectancy of a healthy 65 year old male is 85 and 92 for a female of the same age. For the average couple retiring today, claiming early could cost them $300,000 in lost income over their lifetimes!
Q: Do I pay taxes on my benefits?
A: Yes, Social Security benefits can be taxable. Beginning in 1983 Congress enacted legislation that called for the taxation of benefits (along with increasing the retirement age). Not all benefits are taxed. To figure out how much of your benefit will be taxed, you have to first figure out what your Provisional Income is. Provisional Income is equal to one-half of your benefit plus your adjusted gross income. Once you know this amount you can compare it to the following chart to determine how much of your benefit will be taxed.
As you can see, the tax is progressive. The more Provisional Income you have, the more of your benefits will be taxed. The key to reducing your exposure to taxes is reducing your adjusted gross income.
Q: Can I claim a spousal benefit on my ex-husband’s earning?
A; Yes, it may be possible to receive Spousal and Survivor benefits based on your ex-spouse’s earnings record. In order to receive a spousal benefit you must be at least 62, you must have been married for at least ten years, you must have been divorced for two years, and you cannot be currently married. Survivor benefits are a little different. You must be at least 60 and you must have been married for at least ten years. Provided you are 60 you can be married or unmarried and receive a Survivor benefit.
Interestingly, it’s possible that one ex-spouse can support up to five spousal benefits, or more if they live long enough and continue racking up ten year marriages. None of the spousal benefits will be reduced because of multiple recipients.
Social Security can be complex and unfortunately the answers aren’t always simple. If you have a question about your specific situation, please let me know and I’ll be happy to help.
For additional information on Social Security benefits, please visit www.ssa.gov.