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New rule changes allow opportunities to maximize Social Security retirement benefits
Every day, thousands of baby boomers reach their early retirement age of 62 years or full-retirement age of 66 years for Social Security retirement benefits. If you are among that group, there are planning opportunities to allow you to collect more income sooner from Social Security. These opportunities have remained relatively unknown until the last few years.
In 2000, the Senior Citizen’s Freedom to Work Act introduced several changes in 55 benefit rules that allow for the strategies cited below to occur. But the opportunity to increase monthly payments for yourself and your spouse from 55 is not automatic, and in some cases, not simple. Some of the rule changes can put more retirement dollars in your pocket.
Benefit concepts
One is eligible for full 55 retirement benefits based on his or her own earnings record starting at age 66 if born between 1945 and 1954. The age increases by 2 months at a time so if one was born in 1962 or later, then full-retirement age (FRA) is 67 years.
Kenneth W.
Rudzinski
You may start collecting as early as age 62 but the monthly benefit is decreased. For example, at age 62, you would receive 75% of your FRA/age 66 benefit. For younger beneficiaries, the percentage decrease can range to a low of 70%.
Spouses (to simplify, let’s use “wife” here) can elect to receive benefits based on her own earnings or choose to take benefits as a spouse based on her husband’s earnings. At the wife’s FRA, she can collect up to 50% of her husband’s monthly benefit assuming her husband files for his benefits. Electing sooner, for example her age 62, forces a 35% reduction in the wife’s spousal benefit.
You can choose to delay taking benefits beyond FRA. Although calculated monthly, each year of delay credits 8% (simple, not compounded) to the FRA benefit so that delaying until age 70 (after which there are no delayed credits) increases the monthly benefit by 32% not counting future increases due to inflation. As an example, the highest monthly benefit in 2014 for a newly retired beneficiary at FRA is $2,642. If you wait to take benefits to age 70, then the monthly benefit increases to $3,487. Spousal benefits do not also reflect that 32% delayed credit. The tables show the benefit percentages and reductions.
Planning strategy
With that background, there is a planning strategy to increase benefits. Let’s assume you and your wife have both reached FRA in 2014. Your wife’s spousal benefit is larger than her own benefit. You wish to delay taking your benefits to gather in the 8% annual credit. But your spouse cannot claim spousal benefits based on your earnings until you actual file for benefits. Strategy number one is called “file-and-suspend.” You sign up for your retirement benefit and then immediately suspend taking it. Because you have filed, even though you do not collect, your spouse can take her spousal benefit based on your earnings, or 50% of your FRA benefit. Using the above-cited maximum FRA benefit of $2,642, your spouse can begin collecting $1,321 per month, or $15,852 annually (not counting future inflation adjustments). This is found money.
In many instances, one spouse, let’s say the wife, chose to suspend working until the children were grown and therefore, her own 55 retirement benefit is significantly lower than the husband’s benefit. Assume also she is not working now. The husband’s benefit is the maximum and the spouse’s own monthly benefit is $850. Let’s also assume they are both age 62. Another strategy would be for the wife to elect her own benefit early (reduced by 25%, see chart). She would receive $638 per month while her husband continued working. I have met many couples who think they must wait and collect together when, in fact, the lower income spouse may start as early as age 62. Again, this is found money.
If we carry this strategy one step further, the spouse who takes her own benefits early ($638 per month) can switch to higher spousal benefits when her husband actually files, or files-and-suspends at FRA. She will receive slightly less than 50% of her husband’s benefit, the reduction being an amount equal to the 25% benefit reduction for taking early, or in the example above, $212 per month. However, she has collected early benefits for 4 years making the trade-off generally worth it.
A third and compelling strategy would be what some planners call, “claim-now-claim-more-later.” In this case, a higher earning spouse who has reached his FRA claims spousal benefits off his spouse’s lower earnings all the while allowing his or her own benefits to grow by 8% between ages 66 to 70.
Remember you cannot elect spousal benefits until your spouse files for benefits whether those are being taken or suspended. Also, if the wife’s benefits (again using the wife as lower-earning example) are greater than 50% of the husband’s and she elects to take spousal benefits before FRA, her benefits will be “deemed” to be filing for both her own earned benefit and the spousal benefit, a situation you would want to avoid. That is not the case after FRA as the spousal benefit only may be elected.
Other strategies
There are other strategies to maximize 55 benefits but space does not permit a full listing. The ones I have cited are the most common. Perhaps one of these strategies will help you collect more benefits sooner. The Social Security Administration (SSA) website is loaded with good information about all aspects of 55 retirement benefits, including signing up for benefit statements. Additionally, you can sign up for actual benefits online, except if you wish to “file-and-suspend,” whereby you need to go to your local SSA office. I suggest making an appointment, especially in busy metropolitan SSA offices.
Seek competent advice on 55 benefit planning. Your situation is specific to you and not everyone’s situation is the same. Ages of spouses, health and family longevity are among the variables that may dictate one strategy over another. My intention here is simply to make you aware of a few common planning opportunities. How those apply to you, if at all, depends upon your own situation, goals and objectives.
In the final analysis, you and your employer will have contributed tens of thousands of dollars to the SSA on your behalf throughout your working lifetime. Knowing the nuances in benefit rules can help you to derive maximize return on those “invested” dollars.