Maximize Your Social Security Benefit at Retirement
So you’re approaching your 62nd birthday and that long-awaited monthly Social Security benefit. Wow, won't that extra income make a big difference in the household cash flow? Let's explore the wisdom of taking the money and running with it. Many options exist for receiving your Social Security, so inform yourself before making a lifetime, albeit complex, decision.For the most part, your decision is irreversible. An informed choice will likely be worth the effort of some education and planning.62 is the earliest age most participants in the Social Security system are eligible for benefits, regardless of other employment or investment income. Those factors can play into how much your benefits will be and their taxability, but they don't affect your eligibility.First let’s look at some fundamentals of how much your benefits are adjusted by starting as early as possible or waiting until a later age. Full Retirement Age (FRA) is the starting point to determine the base amount of your benefits. For each year you start your benefits before your FRA you receive about 6.25% less in monthly benefit (about 25% less if you’re currently 62). But if you can be patient till age 70, you can add about 8% for every year you wait after your FRA (about 32% more if you’re currently 66).Determine your FRA from your birth year: if you were born in 1938 or before, your FRA is age 65. From 1938 through 1942 the FRA gradually increases until it becomes age 66 for persons born in 1943 through 1954. Beginning in 1955, the age ramps up until it reaches 67 for those born in 1960 and later. Annual cost of living adjustments must also be considered. The thinking here is if you start early you receive a small monthly benefit for more years, and if you retire later you receive a larger monthly benefit for fewer years. Making this decision should be based on factors such as your health, your family's longevity, whether you will be continuing to work during these years, your eligibility for other federal pensions, and your spouse's own benefit entitlement. We said it was complex!Here’s something else to consider if you start to draw benefits before your FRA: you may limit the benefits you receive. If you haven't passed your FRA birthday for the entire year, $1 will be deducted from your benefit payments for every $2 you earn above the annual limit. For 2014, that limit is $15,480.In the year you reach FRA, you will lose $1 in benefits for every $3 you earn above a different annual limit, but that rule counts only earnings through the month you reach your FRA; the limit is $41,400 in 2014. For any month after reaching FRA, no restriction exists based on earnings.Maximizing Benefits between SpousesAs married couples approach their FRA, a strategy commonly known as "file and suspend" may increase their Social Security benefits. Implementation sometimes requires educating our public servants working in Social Security offices though, as it can’t be set up using standard forms. Essentially this approach calls for the older spouse, or in some cases the one with the higher projected monthly benefit, filing for his or her benefits when he or she reaches FRA, and then suspending the option to collect until age 70.When the other spouse reaches his or her FRA, he or she applies only for the spousal benefit. When that second spouse turns 70, he or she can apply for the full benefit, which will be the higher of that from personal work history or half of the spouse’s, whichever is greater. So what is the point of this odd approach to selecting Social Security entitlements? Both spouses glean the maximum monthly payment by waiting until each is 70 years old, but one spouse can start drawing limited benefits at their FRA (age 66 for those born starting in 1943). Basically one starts drawing off the other's earnings record without affecting the accrual of either with another 32% increase (plus any cost of living adjustments) over the next four years. Waiting past age 70 will not add any accrual of benefits, so certainly don't delay after that birthday.Claiming a Spousal BenefitThere is much confusion as to how spousal retirement benefits actually work. For a wife to claim a spousal retirement benefit on her husband's record, he must have filed for his benefit. If so, then her benefit would be half of his Primary Insurance Amount (PIA), which is the full, unreduced benefit at his FRA. (Note it isn’t half the benefit he’s actually receiving. If he’s older and receiving a larger benefit because he delayed claiming benefits past his FRA, her benefit is still calculated on his PIA, not his actual benefit.)If she has reached her own FRA, then she receives her full half share. There is no increase in her half share for delaying past her FRA. If she’s only reached age 62 she’ll receive the half share of her spouse's benefit (reduced for claiming before FRA) or her own benefit (also reduced), whichever is greater. If you're going to claim a spousal benefit, there's no advantage to waiting beyond your FRA. What often gets lost in the details is a wife's ability to claim a spousal benefit on her husband's record at her FRA, while delaying her own benefit; then, she can switch from the spousal benefit to her own, increased benefit any time before age 70. There’s no advantage to waiting past age 70 to switch, since her benefit will only increase for cost of living adjustments after that. Remember, she must reach her own FRA to choose the spousal benefit versus being obligated to take the larger of her own or the spousal benefit.The benefit of this approach is the wife (or husband, it works for either spouse) can collect spousal benefits for four years while also earning delayed credits by waiting to claim her own benefit until age 70.There are some other minor rules, such as you must be married to an individual more than 10 years to draw any benefits from their account, regardless of your age. This rule represents just one more example of why retirement planning should begin no later than your early 60's to maximize your benefits and minimize the tax bite (yes, Social Security benefits are often taxable) in your transition from worker/saver to retiree/beneficiary. (Note: how your "Normal Retirement Benefit" is determined is too complicated to explain here. If you haven't received an annual Statement of Benefits in a while, it’s because the Social Security Administration no longer routinely mails them; go to SSA.Gov to sign up for an account where you can view it online any time.)Eyes glazed over? Contact the pros at Patrick & Robinson CPAs if we can help you figure out all this: Office@CPAsite.com or 904-396-5400. June 11, 2014
