Smart Moves to Consider Before Claiming Social Security
Image Credit: The Art of Thinking SMART
Social Security is not a one-size-fits-all solution.
Knowing when to take your benefits could be the difference between hundreds of thousands of dollars over your entire retirement.
Below is an introduction to everything from knowing your full retirement age, to how to partner together to optimize your benefits with your spouse. But first, let’s start with what Social Security isn’t.
Social Security is anything but straightforward
Unfortunately, Social Security is not as easy as:
- You retire
- Fill out the required paperwork
- And then Poof, Presto, Voila …
Your check comes in the mail every month for the rest of your life.
There’s a bit more to it. But don’t worry, we’ve got you covered.
Here are 10 critical details you need to know before deciding to take your Social Security benefit.
1. Read Your Social Security Statements While You’re
Still Working
Every year, the Social Security Administration (SSA) updates your benefit amount as you continue to work and earn income. You don’t have to be in your late 60s or nearing retirement to obtain these statements. By law, SSA will begin mailing you statements starting after your 60th birthday.
However, if you’re like me and are curious, you can go to their website at any time and download a statement.
Having these statements is really helpful because they can show you:
Your estimated monthly retirement benefit.
Your yearly earnings history since you began working.
Note: This is especially important to see if they missed anything or if a current/former employer misreported your income.
How much your children or spouse could receive in benefits if you pass away before retirement.
The amount of “spousal benefit” your spouse is entitled to receive at retirement — More to come on this later.
Helpful Suggestion # 1 : If you’ve spotted an error on your statement, reach out to the Social Security Administration and notify them of any incorrect earnings history.
2. Know Your Math
Understand How the Government Calculates Social Security
According to a recent Forbes article, the average retirement age is 64 years old, which means most people work for approximately 42 years before retiring. A common mistake is thinking that all of your working years are counted towards Social Security. This is not the case.
Social Security benefits are based on the highest earnings 35 years of your working career.
This is particularly helpful when trying to figure out how many years you’d like to continue working before retiring and what the impact of one extra year will do to your benefits.
Alternatively, if you do not have 35 years of working credits, every year you did not work will reduce your benefits.
Technically speaking, achieving 10 years of work will earn you the right to be entitled to a Social Security benefit, however, Social Security bases your retirement benefits on your highest 35 years of earnings, so having a few zero’s in the earning’s column could negatively impact your benefits.
3. Know Your Math - Part II
Understanding Your Full Retirement Age (FRA)
Isn’t your Full Retirement Age (FRA) whatever age you decide to retire from your job at? No.
In addition to Income (as discussed above), age is another key factor in determining your benefit amount.
Though you can begin collecting benefits starting at Age of 62, your Full Retirement Age is the age at which you’re eligible to start collecting the full Social Security retirement benefit you’re eligible for. Your FRA is based on the year you were born and for most people, that figure falls between Age 65 and 67.
Helpful Suggestion # 2 : Social Security will add an extra 8% to your benefits for every year you decide to delay taking Social Security after turning 67. See the chart below. Said another way, your monthly benefits increase the longer you wait to claim.
Notice anything else? For every year you take Social Security early, you’re penalized by having your benefits reduced.
4. Work together with your spouse to achieve the most optimal Social Security Benefit for you.
How does the saying go? “If you want to go fast, go at it alone, but if you want go to far, go together.” This saying holds true for Social Security as marriage is rewarded when it comes to Social Security and collecting benefits.
Learning how to align your benefits is crucial for married couples and each situation is different. Some couples want to solely work on how to maximize their total lifetime benefit while others want more money upfront in the early stages of retirement while they’re young and able to travel.
That’s why working together with your Financial Planner is so critical in determining what is best for YOU.
Helpful Suggestion # 3 : Spouses are eligible to choose between the higher of either:
Their own full benefit amount OR
50% of their spouse’s Social Security benefit
Note: Certain rules do apply and the higher-earning spouse must apply first for their own Social Security benefit first.
5. Know the Rules — Having a Pension Could Reduce Your Social Security Benefits
It is very common for public employees such as teachers, firefighters, police officers, and Federal government employees to have jobs where their earnings are exempt from Social Security benefits because they will already be receiving a Pension come retirement. Losing out on Social Security benefits occurs because you are not having Social Security taxes taken out of your paycheck. Thus, whenever you log in to view your Social Security Statement, you’ll see zero’s in all of the columns.
Beware: There are two legislative provisions that can negatively impact your Social Security benefits:
Windfall Elimination Provision (WEP) - As a result of having a noncovered Pension, if eligible for Social Security, the WEP Provision will reduce your Social Security benefit based on how many years you worked in jobs that did not withhold Social Security taxes.
Government Pension Offset (GPO) - Similar to WEP in reducing your benefits, GPO aims to reduce any spousal or survivor benefits by two-thirds of the amount of your noncovered pension.
Here’s an article written by AARP explaining the difference between WEP and GPO - Click Here
6. Your Health Matters
Everything is subjective, right? What may make sense for one person, it’s going to apply to another.
Now, objectively speaking, we know that deciding to take Social Security early can reduce your lifetime benefits by as much as 30%. That said, should your health fail you, early benefits could be a great decision as in exchange for discounted benefits, you’ll begin receiving monthly checks sooner, and for the rest of your life.
Research studies suggest that the “breakeven” point between deciding to take benefits early or wait until Full Retirement Age is between Ages 77-84, depending on when you first start receiving benefits. Meaning, that if you think you’re going to live past Age 80, then it is significantly in your benefit to delay your benefits.
Helpful Suggestion # 4 : Focus on the bigger picture and keep your perspective. Life is best lived with family and community and through experiences, not spreadsheets. So if you find yourself in a dire situation whether your health is failing or you’ve received a terminal diagnosis, take the benefits sooner rather than later.
7. Working in Retirement and Taxes on Your Social Security Benefits
Taking a side job once you’re retired is a great way to take the burden off of drawing down your portfolio too quickly. In fact, one popular strategy to consider before applying for Social Security benefits is to retire from your full-time job and then take a “passion job” for 15-20 hours per week.
If you do decide to work while collecting Social Security Benefits or have Income above a certain threshold, the chart below is a helpful guide to knowing just how much you are eligible to earn before your Social Security Benefits begin being taxed as Income.
Keep in mind, that your Social Security benefits count toward income, just as normal wages or employment earnings do.
8. Made a Mistake and Need to “Undo” Your Decision to Claim Social Security?
Need a do-over? Or are you having second thoughts about your retirement and your decision to begin taking Social Security Benefits? If you find yourself in this situation, take comfort in knowing that Social Security gives you a 12-month grace period to withdraw your application.
You will still be required to pay back all of the benefits you received, this applies to spousal benefits as well.
Here’s the good news though, once you decide to “restart” your benefit years down the road, you’ll receive a larger amount, as if your original decision to start collecting benefits early never happened.
If you’re past the 12-month grace period, this is where it gets a little more complicated as you cannot withdraw your application and undo your decision. Instead, assuming you return back to work and are earning income, you’ll also be earning delayed-retirement credits and Social Security will then suspend your benefits and delay them until retirement.
Once retired, you will have a new benefit amount as Social Security will have adjusted your benefit amount to account for the extra years worked and suspended benefits.
9. Your Social Security Benefits
Following the Loss of a Spouse
A common misnomer people believe is that upon the passing of a spouse, the surviving spouse is eligible to receive both their own benefit and the Social Security benefit of the deceased. This is not the case. See below:
Assuming you are at Full Retirement Age, surviving spouses are eligible to chose between the higher of:
Their own full benefit amount OR
100% of their late spouse’s Social Security benefit if they were already receiving benefits or 100% of what they would have been eligible to receive
The earliest age at which a widow is eligible to begin taking a survivor benefit is at Age 60. Normal rules still apply and benefits will be reduced for taking them early and before full retirement age.
Helpful Suggestion # 5 : One strategy worth considering to maximize your benefits, assuming the surviving spouse has benefits of their own available (from working) and hasn’t begun collecting them is to:
Take your survivor benefits as early as possible (at Age 60) and then switch over to your own retirement benefits starting at Age 70 … assuming the math lines up and you’ve run the numbers. Each case is different.
The initial survivor benefits will be reduced because you will have filed for them before your full retirement age, but this strategy will allow your own benefits to grow and increase until Age 70.
10. Divorce Benefits
Similar to the regular spousal benefit (See Tip #4), you may be eligible to choose between the higher of your full benefit or up to 50% of your ex-spouse’s benefit. As always, normal rules apply and this amount will be reduced if you decide to collect benefits early.
To apply to receive these benefits, there are a few requirements you must meet in order to be eligible:
You need to have been married for at least 10 years
You are currently unmarried
You are over Age 62
Last, if you’re worried or concerned about financially damaging your former spouse, rest assured, that taking a benefit from your ex-spouse’s social security benefit has no effect on the amount they’re eligible to receive.
Final Thoughts
Focus On What You Can Control Today
The sooner you get started mapping out your retirement, the more control you’ll have over your retirement and the timing of when to take your Social Security benefits. I recently wrote a blog post on all the ways you can start preparing today for retirement. One of my favorite strategies to use is beginning to fund your brokerage account 5-10+ years before your retirement. I call this “Building the Bridge”.
Adequately funding a brokerage account will allow you to potentially:
Lower your taxable income in retirement
Have the resources to be able to choose to delay Social Security
Keep your Retirement assets growing longer and uninterrupted
Create other favorable tax planning opportunities
Planning for retirement can be confusing, but it doesn’t have to be. Like most things in life, it’s an ongoing process and your plan for retirement will shift, move and adjust as life and circumstances change. When that happens, we’re here every step of the way to be your guide, teacher, resource, and educator.
Happy Planning — Nick
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