Social Security Planning – Not as Easy as You Think

As more baby boomers approach their mid-60’s, these individuals are confronted with making decisions relating to Social Security benefits. Although the need for cash flow certainly trumps any more complex planning, persons who are married and do not need access to monthly cash payments need to spend the necessary time to determine when to take benefits. Furthermore, an individual who is single or who has serious health issues will certainly make different choices than a married couple.

The starting point is to examine the Social Security Administration website, which is www.socialsecurity.gov. Next, you want to review your “personal earnings records”, which were previously mailed to participants in the Social Security system. Presently, these statements are only available online at the website and can be reviewed at www.socialsecurity.gov/mystatement. Your highest 35 years of compensation are utilized to determine your retirement benefits, and you should review your “estimated benefits” along with your “earnings record”.

For those born in 1937 or earlier, the normal retirement age is 65. The normal retirement age then increases 2 months for each subsequent year until 1943, and persons born between 1943 through 1954 have a normal retirement age of 66. Commencing in 1955, that age increases 2 months each year so that persons born in 1960 or later have a normal retirement age of 67.

If you wish to receive early retirement benefits, you can do so at age 62, but a permanent reduction in your benefits will be applicable. If you claim your benefits at age 62, you will have a 25% reduction in your Social Security benefits, a 20% reduction if you commence receiving benefits at age 63, a 13% reduction if you claim benefits at age 64, and a 7% reduction if you claim benefits at age 65.

One of the most difficult decisions is to determine whether you should apply for retirement benefits at an early age, such as age 62, in lieu of waiting until age 66, and, thus, lose 4 years of Social Security benefits. Of course, health issues may play a part in this decision, but the break even age for a single person waiting until age 66 versus age 62 in taking a full benefit is age 78. The actuarial tables indicate that the likelihood of a 62 year old male living beyond age 78 is 78%, and the likelihood of a 62 year old female’s chance of living beyond 78 is 85%. Basically, you will have to consider your health, your available resources, your cash needs and your lifestyle in order to determine whether you should take Social Security earlier, at your normal retirement age or on a delayed basis.

Taking your Social Security benefits early reduces your benefits, but this also means you will receive monthly checks for a longer period of time. If you take Social Security later, this may result in fewer checks during your lifetime, but the delay may result in larger checks for you and larger checks for your surviving spouse. Clearly, how long you expect to live will greatly influence your decision. If you go to the Social Security website, you will find a calculator which will allow you to estimate your own benefits.

The next question is whether you should actually take benefits at your normal retirement age. If your normal retirement age is 66 and you wait until you attain age 67 to receive those benefits, your benefits increase by 8%. These benefits will continue to increase at 8% per year so that if you defer receiving your retirement benefits until age 70, you will receive a 32% increase over the benefit amount that you would receive at age 66. At age 70, you have reached your maximum benefit, and there is no reason to delay receiving your benefit beyond that age. If you delay receiving benefits, you earn delayed retirement credits.

There is a strategy which involves filing for retirement benefits for a married couple where the lower earning spouse files early at age 62 based upon his or her own benefit, and the higher earner later files at age 70. Where a lower earning spouse files for benefits at age 62, the benefits are reduced based upon the number of months before that person’s full retirement age. If the higher earner has not yet filed, the reduced benefit of the early filer would be based upon his or her own earnings record. If the higher earner has already filed for benefits at his or her own full retirement age, the lower earner would receive an amount equal to the greater of 50% of the higher earner’s full retirement age benefit (reduced for the early filing) or the lower wage earner’s own benefit. Alternatively, if both spouses are in good health and expect to meet or exceed life expectancy and can afford to wait, both spouses can delay filing until full retirement age. At the time of filing, the higher earner files and suspends his or her benefits until age 70 so that the higher earner can continue to receive delayed retirement credits. At the same time, the higher earner can also claim spousal benefits based upon the lower earning spouse’s record. When the higher earner attains age 70, the higher earner can then switch back to his or her own higher benefit.

An additional reason to delay receiving benefits relates to the application of the cost of living adjustments (“COLA”). COLA adjustments are based upon the initial base level of the payments you receive, and if you would like to receive benefits early, the COLA will be based upon a smaller number. Similarly, if you defer receiving your benefits until age 70, the COLA will be applicable to a larger amount.

What if you change your mind? If you have previously elected to receive Social Security benefits at a reduced rate, you have the option of paying back to the government what you have already received. You can then restart your benefits at a later date to take advantage of a higher payout. This option is limited to the period prior to the time that you have received 12 benefit payments.For example, if you file for early benefits at age 62 and you have received 8 Social Security payments, you can stop receiving benefits, and pay back the 8 months of payments that you have received and then wait until a later age to restart your benefit checks at a higher level. No interest is charged on funds that you have to pay back.

Another very important planning option is to consider whether you want to file and then suspend your benefits until a later date. As indicated earlier, the increase is 8% per year past the full retirement age up to age 70. For example, if you are the higher earning spouse, you may file for your benefits at full retirement age but suspend those benefits until such time you want to start receiving benefits.

A subsequent article will discuss the effects of your receiving Social Security benefits and continuing to work, the taxation of Social Security benefits and the ability to claim benefits by a divorced spouse and a surviving spouse.

If you have any questions in the interim concerning what strategy is best for you and you do not find an answer at the Social Security website, please feel free to contact me.