Social Security Timing: When to Take It
A financially secure retirement can be more than just a dream if you plan your finances accordingly. The dilemma is when should you retire? As early as possible, to enjoy life, or later, when benefits increase? A social security lawyer can help you figure out the sensible answer to this one.
When Should I Claim Social Security Retirement Benefits?
There is, of course, no one correct answer to this dilemma. Some may be tempted to take it as soon as you are allowed to, at age 62, even with reduced benefits, and it may be the correct decision for them, or, if it is about instant gratification, it may have disastrous long-term consequences.
Others may delay the start as long as possible, and reap the benefits of higher payouts, but miss out on extra years in retirement, slogging away for a perceived benefit that they will be unable to enjoy. So, what is the answer?
It is an extremely individual decision, and one that you should discuss with an experienced social security lawyer at Cochran, Kroll & Associates, P.C. to get clarity on the pros and cons of each decision and find your sweet spot somewhere on that continuum. To do so, you need to understand how Social Security Retirement Benefits are allocated.
Social Security Retirement Benefits
President Franklin D. Roosevelt signed the original Social Security Act into law in 1935 to create security for retirees. It is administered by the Social Security Administration and today encompasses several social insurance and social welfare programs.
The federal Old-age, Survivors and Disability Insurance (OASDI) program is commonly referred to as Social Security. The Federal Insurance Contributions Act (FICA) mandates payroll taxes, and the self-employed are covered via the Self-Employed Contributions Act (SECA) mandated tax, to contribute to Social Security.
Approximately 96% of workers in the United States are covered by Social Security.
You earn credits towards Social Security when you work and pay Social Security taxes. If you were born in 1929 or later, you require 40 credits to receive Social Security benefits, which translates to 10 years. If you stop work, you retain your credits and can add to them later if you return to work, however, until you have accumulated 40 credits you are ineligible for Social Security benefits.
How much you will be entitled to in a monthly Social Security payment in retirement will depend on a large number of factors, such as your age, the number of years you worked, how much you contributed, your full retirement age and when you start withdrawing, amongst other things. This is the reason you need to make personalized decisions to suit your lifestyle.
Full Retirement Age
The Act sets a Full Retirement Age (FRA) according to which year you were born, and it refers to the age at which you will receive full benefits. If you take early retirement, i.e. you start withdrawing Social Security Retirement Benefits before your Full Retirement Age, you will reduce your pay-outs significantly.
Full Retirement Age (FRA) is set as follows, year born and FRA:
- 1937 or earlier – 65
- 1938-1942 – between 65 and 66
- 1943-1954 – 66
- 1955-1959 – between 66 and 67
- 1960 – after – 67
These figures are approximate and intended as a demonstration. If you were born on the first of January, your age is calculated in the previous year.
If your spouse is entitled to Social Security Retirement Benefits based on your work credits, the age at which retirement benefits are claimed will affect the payouts too.
You may start receiving benefits as early as age 62, or as late as age 70, regardless of your FRA, however, early retirement will reduce the amount of your monthly payment. This depends on the difference in the number of months between your age and your FRA and will be a higher percentage the younger you are. For example, if born before 1938, it could be as low as a 20% reduction, or if born after 1960 as high as a 30% reduction if you start claiming at age 62. For your spouse, whose benefit can only be a maximum of 50% of the worker’s benefit, this difference will lie between 25% and 35%. This reduction is calculated based on the longer pay-out period and will be affected by your contributions too.
Delayed Retirement Credits
If you delay your retirement claims past your Full Retirement Age, up to the age of 70, your Social Security Benefits are increased by a certain percentage, based on your date of birth.
The annual increase falls away when you reach 70 years of age, but it could range from 5.5% to as much as 8% depending on your date of birth. If you delay, you can retroactively apply for up to six months in the past, but not for the period before your FRA.
Remember to sign up for Medicare within three months of reaching your 65th birthday, as you may risk paying more under certain circumstances.
Once you file for benefits, your spouse is allowed spousal benefits of up to half of your benefits. If the spouse is eligible for their own retirement benefits based on their work record too, the SSA will pay the retirement benefits to your spouse and should the spousal benefit be higher than their worker benefit; the difference will be added into the payment. If they start claiming spousal benefit before reaching FRA, the spousal benefit will be reduced according to their age. Sometimes a spouse will claim spousal benefits but delay their own payouts to earn incentive increases; however, this is now dependent on the recent changes to the Act.
Divorced Spousal Benefits
If your marriage lasted 10 years or longer before the divorce became final, you may claim spousal benefit even if your ex-spouse has remarried; if you are over 62, unmarried, the spouse is entitled to benefits and your benefits are lower than the spousal benefits assigned to your ex-spouse.
Children up to a certain age, or disabled children, may be entitled to benefits too.
Your spouse is entitled to the same amount of benefit you received or were entitled to upon your death.
Divorced Spouses’ Survivors Benefits
If you were married for 10 years or longer before your divorce came final, you are entitled to benefits if your ex dies and is entitled to benefits.
Spousal benefits taken before FRA are decreased and does not accrue increases if delayed after FRA. These calculations and eligibility criteria can become very tricky to calculate; even when using the online calculators provided by the SSA, however, an experienced Social Security lawyer would be able to retrieve your records and assist you with your planning or applications. With the rising divorce rate in America, the number of divorced spouses filing are increasing and consulting a good lawyer will help you stay on the right side of the law.
Closure of Unintended Loopholes – Recent Changes
Section 831 of The Bipartisan Budget Act of 2015 (Public Law 114-74; November 2, 2015) called “Closure of Unintended Loopholes” made changes to the Social Security Act that closed two complex loopholes used by married couples to maximize their payouts.
“Deemed Filing” – the timing of multiple benefits created a loophole where married couples could have the spouse start receiving benefits at FRA, while the worker’s benefits increased due to delayed retirement past the FRA date.
If you are entitled to benefits as a retired worker and a spouse (or divorced spouse) you have to file for both benefits and the higher of the two will be paid (called deemed filing). This was extended to beyond FRA so that you could not claim one before FRA while increasing the benefit in the other past FRA.
“Voluntary Suspension” – a worker past FRA could apply for benefits, then voluntarily suspend benefits to earn the delay incentives of higher payments, while the spouse continued to receive benefits – this is no longer allowed as they are suspended at the same time and prohibits you from receiving benefits on another’s record.
Things to Consider First
Remember that the amount you first receive when you start claiming will set the base amount for the rest of your life.
Earned income – if you are still working, it may affect your benefits, and you may be better off waiting until FRA.
Other income for retirement support – if you can support yourself, it is better to delay to earn the incentive increases.
Health – if your health is compromised, or you have been told you have a low life-expectancy, you may want to take benefits early.
Health insurance – if you are covered at work, you may be better off working until 65 at minimum as Medicare only kicks in then.
Expected longevity – if you come from a long-lived family you may outlive your annuity payments and will be better off delaying SS payments. On average, 25% of 65-year-olds today will live past 90, 10% percent past 95.
Eligible on another’s record – if you can claim both your own and benefits on another’s record there are several strategies available to maximize your benefits.
Eligible dependents – adding them to the equation may sway the decision.
Surviving spouse benefit – if you claim early, the surviving spouse will not receive the full benefit in the event of your death, but only what you were paid.
Social Security Claiming Strategies
Some people swear by delaying for as long as possible to gain the incentive increases. Others believe that the sooner they claim, the sooner they can reap the benefits of their tax dollars, and some believe they could invest it better for higher returns than the SSA could get and will claim at 62 even if they do not need it. For some there is no choice as they need the benefits early as there is no other income. Public discussions in 2018 regarding the possibility that the insurance fund may be insolvent by the ‘30s has created panic amongst some that are dependent on those savings and investments for their retirement and has many rushing to claim what they can before the worst happens. What is the logical way to approach this?
The fear of outliving your retirement resources is real and is referred to as the Longevity Risk, and everyone is keen to implement a claiming strategy that will maximize their benefits and minimize the longevity risk. However, you are in a better position to do this if Social Security is not the only source of income during your retirement, and you have invested in investment products or pensions during your working life.
Your optimal claiming strategy is dependent on several factors such as investments, longevity expectations and marital status. The three most common strategies include Restricted Application, Reset and Voluntary Suspension.
(as long as you reached age 62 by the end of 2015)
The younger spouse will file for benefits on their record. The older spouse, at FRA, will file a restricted application for spousal support only, until age 70. This allows the incentivized growth with delayed credits.
This strategy allows you to meet basic living expenses while growing some benefits. It is a good strategy if one of you has already claimed, or you are concerned with longevity risk, and particularly if one spouse’s benefits after a delay will be greater than spousal benefits.
You are entitled to change your mind about receiving benefits within the first 12 months from the date of your claim, as long as you repay all the benefits you received. When you claim then at a later date, you will have increased benefits.
You can use this strategy if your circumstances have changed and you have already filed, or if you believe you should have left the delayed benefits to increase.
The beauty here is that you are allowed to pay it back interest-free and it allows for a little bit of flexibility, but you are only allowed one change.
Start, stop, start or voluntary suspension
If the primary earner claims before FRA, then suspend benefits when reaching FRA, and claim again by age 70, the benefits will have grown due to the delay and the change in claiming date.
If you have already claimed, you still have a chance to increase payments and survivor benefits, but you need to be sure that you have the income to support your lifestyle during the suspension.
Widows and widowers, or divorcees entitled to spousal benefits will have additional requirements and slightly different strategies to consider and will do best to seek the advice of an experienced social security lawyer to assist with planning a retirement strategy.
Advanced claiming strategies are available for both individuals and couples, based on their particular circumstances and should be discussed with your lawyer.
A tax-efficient strategy is paramount when planning your retirement portfolio. Up to 85% of your social security benefits may be taxed, and the calculations are based on a provisional income (PI) formula, which requires further calculations and strategizing when planning your retirement strategy.
If you live in Michigan and need assistance with retirement planning, call Cochran, Kroll & Associates, P.C. at 1-866-642-4529 for a complimentary consultation to provide you with peace of mind regarding a financially stable retirement.