Maximize Your Social Security Benefits
By: Tess Downing, MBA
One of the most important decisions a retiree faces is deciding when to file for social security benefits. This decision will not only affect the retiree in his or her lifetime but it will also have a significant impact on a spouse throughout his or her lifetime. Many people have begun to refer to social security as “Longevity Insurance,” as it is arguably one of the best “annuities” available to an individual, with its cost of living adjustment and 100% survivor benefit.
At FJY, we have done a considerable amount of research on social security and the new developments and strategies that have evolved within the program. We would like our clients to understand the importance of social security so they are able to optimize the benefits they receive.
Under normal circumstances, social security benefits can be claimed anywhere between the age of 62, with a reduced benefit, and as late as age 70, with the maximum benefit allowed. Many people today are working longer or are re-entering the workforce later in life. These individuals are able to continue to accrue retirement credits past the full retirement age of 66, thus increasing their age 70 benefit. Married individuals are also entitled to a retired worker’s benefit and/or a spousal benefit equal to approximately 50% of their spouse’s benefit. Other social security benefits to consider are the widow/widower’s benefit, divorced spouse’s benefit, minor children’s benefits, and disability benefits.
There are three key strategies available to individuals and/or married couples eligible for social security benefits: 1) File and Suspend; 2) Claim Spousal Benefits; and 3) File and Withdraw.
File and Suspend is a relatively new option for those eligible for social security benefits under the Senior Citizens’ Freedom to Work Act of 2000. It has the potential to increase lifetime benefits for married couples and allows more flexibility in claiming benefits. For example, if a husband earned more than his wife, he (the higher earner) would file for social security benefits at age 66 and immediately thereafter suspend those benefits. When the wife is at least 62, she would then claim and begin receiving spousal benefits on his record while he continues to work and increase his retirement credits until age 70, when he then begins collecting his benefits. In this scenario, if the husband were to die first, the wife would then receive his age 70 benefit (100% survivor’s benefit) for the rest of her lifetime.
A second strategy for married couples is Claiming Spousal Benefits. In this approach, one spouse claims spousal benefits while his or her own retirement credits increase until age 70. Let’s assume a two-earner couple where the earnings of the husband and wife have been similar throughout their careers. In this case, the wife would claim her own benefits at age 62, and when her husband reaches age 66, he would then claim and receive a spousal benefit (50%) on his wife’s record. Then at age 70, he would claim his maximum benefit. Studies have shown that the wife is more likely to maximize the couple’s expected lifetime benefits by claiming earlier due to the fact that women, on average, tend to outlive men and have lower benefits. Yet if the woman’s age 70 benefit is the higher of the two benefits, then the opposite of the example would hold true.
File and Withdraw is the third and final strategy to consider when filing for social security benefits. This tactic essentially states that if you are already collecting benefits, you have the option to change your mind and reset to a higher benefit. For example, if you began receiving social security benefits at age 62, but now at age 70, you wish to reset your benefits to an increased monthly amount, then you are allowed to pay back the full amount of the benefits you received and start receiving your higher, age 70 benefit. In essence, this strategy could be viewed as an interest free loan from the government. File and Withdraw can be appealing, yet it comes with many risks and potential pitfalls including liquidity issues in retirement, legislative risks, unexpected cash needs, health risks, and life expectancy risks.
Please note that every individual has a unique situation which requires special attention. Each strategy listed above has many assumptions and cannot be applied to everyone. We are here to guide you through the process of identifying the strategy that is best for you and your spouse. Please call us if you would like to discuss your specific situation. Other resources to consult are the Social Security Administration’s website at www.ssa.gov and your local social security office’s own Technical Expert or Claims Representative.