Why Is Social Security Planning Very Important?

Social Security has been around since the law was passed in August, 1935.  The first monthly benefit check was issued in 1940.  What people didn’t realize at that time was that Social Security benefits would be one of their largest financial assets, if not their largest asset.  

Because of this fact, it becomes very important for everyone to plan for the most advantageous elections (choices) of benefits upon approaching retirement age.


To make a proper selection of Social Security benefits, it’s important to understand the various age-related aspects under Social Security.

Various Social Security Age Rules

Age 60
Sixty is the earliest age to claim a widow or widower benefit if there are no minor children or the claimant is not disabled.


Age 62 
Sixty-two is the earliest age a covered worker can begin to receive Social Security benefits.  The benefit is 75% (70% for workers born after 1959) of the worker’s full retirement age benefit (generally between 66 and 67 depending upon your year of birth)  (See chart to the right.)
Age 62
Sixty-two is also the earliest age a spouse of a worker can receive a Social Security spousal benefit.  The benefit amount for people born before 1955 is 35% of the workers full retirement benefit.  For a spouse born after 1955 the amount is lower depending on the year of birth.  The minimum spouse benefit is 32.5% of the worker full retirement benefit.

Age 62
Sixty-two is the earliest age a divorcee who was married for at least ten years can file a claim on the ex-spouse benefit.  The ex-spouse must also be at least 62 years old.


Age 66
Sixty-six is the age to receive full retirement benefits for workers born between the years 1945-1955.  (See the chart above to find the earliest age to receive the full retirement benefit for workers born after 1955.)

Age 66
If the worker has reached full retirement age of 66, the spouse can receive the maximum spousal benefit of 50% of the worker.  The spouse must also be 66 to avoid the early deduction of benefit discount.

Age 66
Sixty-six is also the age when the Social Security rules stop penalizing a person who continues to work while receiving their monthly Social Security benefits.  Before age 66, a worker’s monthly benefit will be reduced $1.00 for every $2.00 earned above a threshold for 2014. The threshold is $15,480.
All or a portion of a worker’s or spouse’s monthly Social Security benefit is subject to Federal Income Tax.      
             
Married Filing Jointly: 
50% if the Social Security benefit is taxable if the earned income exceeds $32,000.  
85% if the earned income exceeds $44,000.

Single: 
50% if the Social Security benefit is taxable if the earned income exceeds $25,000     
85% if the earned income exceeds $34,000.


Age 70
Seventy is the age at which workers, if they have delayed electing their Social Security benefit, receive the maximum payout benefit.  The worker should begin claiming their Social Security benefit beginning at age 70.  There is no financial gain by delaying past age 70


How to Maximize Your Social Security Benefits?

Many workers, upon reaching age 62, elect to begin receiving their Social Security monthly benefit.  Some of the reasons given to start early with Social Security include: 

• a fear that Social Security may run out of money; 
• the loss of job; 
• the need for extra cash, and
• the desire to retire early.  

The average retirement age is the US today is 62.  To enjoy retirement, everyone should consider various strategies to maximize their monthly Social Security benefits. In making an election, workers should consider their potential longevity plus the potential longevity of their spouse.  There are several strategies that would help maximizing not only the worker’s benefit, but also their spouse’s benefit. 
  
Strategy 1: Delay Claiming

The longer a worker delays claiming Social Security, the larger the monthly benefit will be for his or her life.  How does this work?  Every year a worker delays Social Security beyond age 62, the benefit increases, and between the ages of 66 and 70, the yearly increase is 8%.  Therefore, planning to use other income or assets between age 62 and age 70 once a worker retires is an excellent strategy to substantially increase a worker’s benefit and provide a substantial survivor spouse benefit.

Social Security also has a cost-of-living adjustment (COLA) to help maintain your standard of living once the Social Security benefit begins.  Delaying to age 70 does not cause a worker to lose any COLA increase between age 66-70.  The cost of living increases help to reduce any longevity risks (living too long) or running out of money.

Strategy 2: File and Suspend
UPDATE: FILE AND SUSPEND STRATEGY NOT AVAILABLE SINCE 2016.

If you are married, you can receive income immediately while also increasing the benefit by delaying your election to age 70, which also provides a large survivor benefit.  However, the worker (the higher earner) must be at full retirement age to use this strategy.  Once the older worker files with Social Security for benefits, the worker then suspends the claim, and the worker’s spouse (age 62 or above) makes a claim for spousal benefits.  Keep in mind, if the spouse is younger than full retirement, the benefit will be reduced.  This strategy provides the higher earner with an increase of 8% yearly until age 70.

The spouse receives the extra income from Social Security but has a choice to make upon reaching full retirement age: whether to continue the spousal benefit or claim the individual benefit.

Strategy 3: Claim Now, Claim More Later 

UPDATE: RESTRICTED APPLICATION STRATEGY IS NOT AVAILABLE TO ANYONE WHO WAS NOT AT LEAST 62 YEARS OLD BY DECEMBER 31, 2015.  I BELIEVE THE ONLY EXCEPTION IS FOR WIDOWS(ERS). 

This strategy requires that both spouses to have worked and both to qualify for Social Security.  One of the spouses must have reached his/her full retirement age or older.  In order to maximize the benefit, the higher earning spouse should also be the oldest.  The younger spouse elects to take a spousal benefit and defer or delay claiming his/her benefit until age 70.  At age 70, the younger spouse switches to his/her own benefit (if higher).

All of these strategies work if there are no health issues or only minor ones.  Each person’s situation is different; therefore, personal planning becomes very important.

How Can A Worker Increase Their Social Security Benefits?

The following are some ideas:

1. Work at least 35 years paying into Social Security.
2. Increase your earnings.
3. Wait until full retirement age to claim benefits.
4. If your current earnings are higher than years past, continue to work to replace lower year earnings with higher earnings.
5. Delay benefits to age 70.
6. Don’t earn too much if claiming Social Security benefits prior to age 66.

Other areas that you must consider in proper Social Security planning are:

1. Current health status of the worker and the spouse:  If a worker is in poor health, it may be better to claim sooner than later.
2. Longevity factors: If your parents lived into their late 80s or 90s, you probably will too.
3. Other retirement income, such as pension benefits.  Many people retiring do not have a pension benefit from their employer.  If you are receiving a pension benefit then this benefit could help in delaying any Social Security monthly benefits.
4. If you are still single, the possibility of claiming from a divorced spouse 

Because Social Security planning is confusing and sometimes complex, we encourage you to meet with your financial advisor to assist you in reviewing your options.