By: Lori Eason, CFP(R)
Social Security Boot Camp
As a financial planner, the most frequently asked question when it comes to retirement planning is when should I start drawing Social Security benefits? And the answer is; it depends. Many factors need to be considered when determining whether to take benefits early at 62 or wait until full retirement age. This is especially true if you are married. There are some complex planning strategies that can really help couples maximize their benefits, but few people even know about them. I recently participated in a Social Security Boot Camp webinar and wanted to share the key topics as I think you'll find them very interesting.
Taking Benefits Early
I'll start out by saying that current government policies are such that it is usually best to wait until your full retirement age to begin collecting Social Security. If you start drawing benefits at age 62, your benefits are reduced 25% or more for the rest of your life. Also, if you collect benefits before full retirement age and continue to work, you lose $1 in benefits for every $2 over the limit until the year you reach full retirement age. For 2013, the limit is $15,120. The two most obvious reasons for drawing benefits early are poor health or if you really need the money and are no longer working or earn less than the earnings cap.
Waiting Until Full Retirement Age (FRA)
If you wait until full retirement age, you can collect your full retirement benefit even if you continue to work. Below is a chart that shows the FRA by birth year and the benefit reduction for drawing early:
Birth Year
|
Full Retirement Age
|
Benefit Reduction at 62
|
1943-1954
|
66
|
25%
|
1955
|
66 and 2 months
|
25.83%
|
1956
|
66 and 4 months
|
26.67%
|
1957
|
66 and 6 months
|
27.5%
|
1958
|
66 and 8 months
|
28.33%
|
1959
|
66 and 10 months
|
29.17%
|
1960 and later
|
67
|
30%
|
Furthermore, every year you defer collecting benefits past your FRA, your benefit increases by 8%/year up to age 70. After 70, there's no benefit to waiting. For married couples, it usually makes sense for the higher earning spouse to delay benefits as long as possible to lock in the maximum retirement benefit as well as the largest survivor benefit. The survivor benefit is 100% of the worker's benefit if collected at 66 but is reduced if claimed earlier. Creating the largest possible benefit for the surviving spouse should be main goal for most married couples. There is also a spousal benefit which is 50% of the worker's benefit if collected at 66 and less if claimed earlier. This is commonly used when one spouse has little or no Social Security earnings based on his or her own work history.
Widows and Widowers
If you are a widow or widower, you can collect survivor benefits as early as age 60, but your benefit is subject to reductions and the earnings cap if you continue to work. One option is to collect survivor benefits and later switch to your own benefit that continues to grow at 8% until age 70. Another option is to collect your own reduced retirement benefit early and switch to the full survivor benefit at 66.
Exes
As long as you were married at least 10 years and are not currently married, you may be able to collect on your ex-spouse's work history as long as you are both at least 62. I have certainly heard of couples not getting married because they don't want to forfeit their Ex's benefits. Even if your Ex has not yet started to collect Social Security, you can collect spousal benefits as long as you have been divorced for at least 2 years. If your Ex passes away before you, as long as you wait until age 60 to remarry, you can keep the survivor benefits, assuming they are larger than the spousal benefits for the current husband.
Dependent Minors
If you are collecting retirement benefits and have minor dependent children (unmarried children under 18 or 19 and still in high school), they are entitled to benefits, too. I don't really understand why your children qualify for retirement benefits, but it's not like the program is in jeopardy or anything. Each child is entitled to 50% of parent's FRA benefit even if parent collects reduced benefits early, subject to a family max payment (150-180% of parent's full benefit amount). If you starting drawing benefits before FRA and keep working, you are subject to earnings cap and both your benefit and your dependents' could be reduced.
Strategies
Now we get into the little known "magic" of Social Security planning. The two main strategies are "File and Suspend" and "Restrict Claim to Spousal Benefit Only". File and Suspend triggers benefits for a spouse but allows the worker to delay collecting. Both spouses cannot file and suspend. Restricting the claim to spousal benefit only lets you collect only your spousal benefit while deferring your own retirement and letting your benefit grow. Both spouses cannot file a restricted claim. So here's an example of how to use these strategies if both spouses have earned substantial retirement benefits. One spouse can file and suspend triggering benefits for the other. The other spouse files a restricted claim for spousal benefit only. They both defer claiming their own benefits until 70 but from FRA to age 70, they receive monthly income equal to the spousal benefit. It's free money.
Alternatively, if one spouse has little or no work history, the main breadwinner can file and suspend at 66 to trigger spousal benefits while deferring his or her own retirement benefits until 70. Ex-spouses can also use these strategies since they are eligible for spousal benefits. If you have dependent minors that are eligible for benefits, you can also file and suspend at FRA to trigger benefits for your spouse and children.
Do-Over
If you change your mid within 12 months of first claiming
benefits, you can repay the money received and that of any dependents and
restart your benefits at a higher rate later. If you wait until 66, you can
voluntarily suspend your benefits (but not repay them) and earn 8%/year in
delayed credits up to 70. This would basically put you back at what you would
have received had you waited until 66 to start.
In Conclusion
While this article just scratches the surface and doesn't fully
explain each subject, I hope it has shed some insight on Social Security
planning. If you have any further questions, please don't hesitate to contact
me.
