Contributed by: Robert Ingram, CFP®
Social Security is still a key source of income for most retirees. At the same time with the program’s many nuanced rules and options, just understanding your available benefits can be confusing enough, let alone figuring out how to make the most of those benefits throughout retirement. Additionally, there are some strategies not as widely publicized and they can easily fly under the radar.
Here are five Social Security rules to keep in mind as you plan your Social Security filing strategy.
1. Delaying Social Security Can Increase Your Benefit Amount
Under the Social Security retirement program, you can collect your full retirement benefit at the designated Full Retirement Age (FRA), determined by your birth year. Individuals born from 1943 to 1954 reached FRA at age 66. In each year from 1955 to 1959 the FRA increases by 2 months (e.g. 1955 = age 66 and 2 months, 1956 = age 66 and 4 months, and so on). Those born in 1960 or later reach their FRA at age 67.
Think of your full retirement age benefit as your baseline benefit. You can begin collecting benefits as early as age 62. However, your benefit amount would be reduced by a small percentage for each month that you collected early. This can add up to a sizable reduction. For example, if your full retirement age is 67 and you begin collecting as early as possible at 62, you could see your benefit reduced by 30%.
Now, the opposite is also true if you begin collecting your benefits after your full retirement age. For each month that you delay taking your benefits beyond your full retirement age until age 70, your benefit amount increases by 2/3 of 1%. (Are you thinking that doesn’t sound like much?) These delayed retirement credits would yield an 8% increase over 12 months. For clients that are concerned about longevity in retirement (a.ka. living a long time needing retirement income), this can be an effective way to help protect themselves.
2. Delaying Social Security Can Impact Benefits To A Surviving Spouse
For married couples that are receiving their Social Security retirement benefits, when one spouse passes away, the surviving spouse will receive only one benefit going forward. It is the larger of his or her benefit or the deceased spouse’s benefit.
By delaying Social Security to increase your benefit amount while you are living, you are also locking in a higher benefit amount that could be available to your surviving spouse. Conversely, taking benefits early at a reduced amount may leave a smaller benefit available to your surviving spouse. These different possible scenarios present both unique challenges and planning opportunities for maximizing the value of your benefits over both spouses’ lifetimes.
3. Withdrawal of Social Security Application (The “Do-Over”)
Suppose you have started collecting your benefits and then you changed your mind. Perhaps you had collected early at a reduced benefit. Can you go back and reverse the decision to claim benefits? Well, if you are within the first 12 months of claiming, you can.
You can withdraw your application for benefits and then reapply later. This resets things as if you had never started benefit. Keep in mind there are also some important requirements.
You must repay all of the benefits you and your family received from your original retirement application, including:
Benefit amounts your spouse collected based on your earnings record or benefits dependent children received
Any amounts withheld for Medicare premiums
Voluntary tax withholding
Anyone who receives benefits based on your application must provide written consent
You can only withdraw your application once in your lifetime.
4. Voluntary Suspension
Ok, you may be wondering if it has been longer than 12 months since you claimed your benefits and you change your mind, are you completely stuck? Well, not exactly. There is another way to increase your benefit amount.
Once you reach full retirement age, you can request a suspension of your benefit payments (regardless of when you started them). By doing so, the benefit you were receiving earns those delayed retirement credits of 2/3 of 1% for each month that your benefits are suspended. This results in a higher amount when you resume your benefits, no later than age 70.
This strategy of suspending benefits can be an effective tax planning tool for years in which you anticipate other outside income, like a pension that recently started or a lump sum from the sale of a business.
5. Benefits Based On An Ex-Spouse’s Earnings
If you are divorced, you may be able to collect benefits based on your ex-spouse’s Social Security record. Similar to the benefits for married couples, you can receive up to one-half of your ex-spouse’s full retirement amount by waiting until your full retirement age to apply. Collecting earlier than your full retirement age still results in a reduced benefit.
You can collect based on your ex-spouse’s record if you meet the following criteria:
You were married at least 10 years and you have been divorced for at least 2 years
You are unmarried
You are age 62 or older
The benefit you are entitled to on your Social Security earnings record is less than the benefit you would receive based on your ex-spouse’s record
If the amount you could receive based on your ex-spouse’s record is larger than the amount from your record, you have the opportunity to receive the higher benefit.
Decisions around when and how to collect Social Security benefits can be complicated and depend so heavily on your unique circumstances. Your health, your retirement spending needs, your income sources, and financial assets are just a few that come to mind. If you have questions about how Social Security fits within your overall retirement income plan, or if we can be a resource for you, please reach out to us!
Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.
This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Prior to making a decision, please consult with your financial advisor about your individual situation.