Sunday, May 12, 2013

How to make the most of your social security benefits

I recently attended a social security workshop that changed my views on when a retiree should begin collecting social security benefits. We’ve all heard the rumors, “Start collecting as soon as possible, before the Social Security fund runs out of money” or “don’t wait to collect benefits - if you die early you will lose out on retirement money you’ve earned.”

Here is what I learned at the workshop:

Despite the grim outlook politicians and the media like to portray, the social security fund actually has sufficient reserves to pay out full benefits until 2036. After that if nothing else changes additional tax income will cover at least 77% of promised benefits from 2036 to 2085.

This means a person who is age 55 today probably won’t have to worry about benefits changing until age 79 at the earliest. Future changes that may occur include:
  • Increased Social Security tax rates.
  • Higher earnings maximum subject to Social Security Tax.
  • Increase of Full Retirement Age
  • Decrease of future retirement benefits
  • Reduction of future Cost of Living Adjustments (COLAs)
Why should someone consider delaying benefits?
For people born in 1943 or later, each year you delay receiving social security your benefit increases by 8% per year up to age 70. After age 70, there is no additional monetary gain for waiting. Where else can you get a guaranteed 8% increase in earnings?  

Unlike many pension plans Social Security is adjusted for COLA:
Social Security payments are adjusted each year to keep up with inflation, as measured by the Consumer Price Index. Since automatic cost-of-living adjustments were added to Social Security in 1975, they have ranged from 14.3% in 1980 to zero in 2010 and 2011. The 2012 COLA increase was 1.7%. It is important to note some pension plans do not come with a COLA adjustment. Thus, a monthly pension payment that seems sufficient in 2013 may not go nearly as far in 2033.

You and your spouse should work together to make the most of your benefits:

The “Spousal Benefit”:
A married person who has little or no earnings history can receive spousal benefits equal to half of the working spouse’s primary insurance amount (PIA). 

- You must be age 62 or older to qualify.
- You can’t collect a spousal benefit until your spouse files for their own benefit.
- Your benefit will be reduced if taken before full retirement age, but it won’t increase if delayed past full retirement age.

The “File and Suspend” Strategy:
This strategy works best for the married couple who has one spouse with little or no earnings history. Begin by comparing the benefit this spouse would receive on their own to what they would receive for a spousal benefit; if the spousal benefit is higher consider the following strategy:

The higher-earning spouse files for social security at full retirement age then immediately suspends benefits. Once this spouse files, the lower earning spouse is entitled to 50% of the higher wage spouse's benefit. 

This strategy increases the lower wage-earner's monthly benefits now. It also allows the other spouse to wait until full-retirement age, increasing their benefit in the interim. Plus, it allows the lower wage earning spouse to receive the maximum survivor benefit.

The “Claim Now, Claim More Later” Strategy:
In this strategy the lower wage earner begins receiving his or her own reduced benefit.  The high wage earner files at full-retirement age for the spousal benefit. When this higher-wage earner reaches 70, he or she should switch to their own higher benefit. Note both spouses can’t receive spousal benefits on each other’s record at the same time. For this to work, the high-wage earner may not file for their own benefits before full-retirement age.

This strategy allows the low wage earner to start receiving benefits as early as possible. It allows the high-wage earner to receive a monthly benefit between the ages of 66 and 70 without having to reduce their own benefit. Plus, this allows the lower wage earning spouse to receive the maximum survivor benefit.

The Strategy for Two High-Earning Spouses:
One of the spouses files for the spousal benefit at Full-Retirement Age. Then switches to their own benefit at age 70. By collecting only a spousal benefit, this spouse can receive benefits at full-retirement age and still allow their own benefit to grow to its maximum.
The "Pay Back Strategy" is no longer allowed:
Previously you were allowed to begin collecting benefits at age 62 and then were able to pay all the dollars you had collected back, and restart your benefit at a new higher amount. As of December 2010, you are only allowed to do this if you change your mind and pay back benefits within the first 12 months of starting your social security retirement benefits.

The break-even age for collecting benefits at age 62 vs. full-retirement age is 78:
If you are in good health and have longevity in your family history, you will be better off in the long run to wait until full-retirement age to begin receiving benefits. 

I don’t think my husband and I will be able to utilize any of the above strategies, other than putting off collecting social security as long as possible, but I feel it is important to know what is available.

If you enjoyed this post, you may also like:
Do You Review Your Social Security Statement
Be Informed About Social Security
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  1. I hardly knew any of this I need to save this post for future references thank you for breaking some of it down.

  2. Good summary, Savvy. Here's another way to look at it. My husband is 11 years older than I, so retired well before me. In the interim my salary has thankfully surpassed his highest. (We both do administrative work, so not "highly compensated".)

    I turn 66 next month - my "ffull" retirement age - so I have filed and suspended my account, and have claimed 1/2 of his. I will collect that until i reach 70. That way, i am getting the wife benefit while i continue to work. (Am using it to pay off everything before i retire!) When i retire in 2 years will continue to collect half od his until i am 70 and then switch to mine, which will be much larger then. We will have two years when our income will be a bit tight, but by paying off all debt, we will be fine. And, i could work longer ... if something bad happens in the meantime.

  3. kita,
    That is a great idea. This really takes a lot of planning.

  4. Webb,
    My husband is also 11 years older than me. He is considering retiring at the end of this year. Our plan is to live on my salary until his full-retirement age. How old was your husband when he started collecting? Right now his benefit is a little higher than mine, but that could change depending on how long I work. We definitely need to map out the different scenarios and see what works best for us.

  5. This is really great info. I am so far from social security but it's good to know it will probably still be around at least in some form when I'm ready to collect.

  6. Anonymous6:54 PM

    Since my mom was a widow she had the choice of receiving her benefits or my dads. She was a stay at home mom and only worked off and on and only since his death has she worked full time consistently. My dad had a wonderful job that paid very well so of course she took his (her number was so low she asked why this was even a question. The caseworker laughed and said that she HAD to ask). If you're in a widowed situation make sure you ask to see both payouts so you can collect the higher one.

  7. Chasing Joy,
    Yes it is good to know SS will still be around at least in some form.

  8. Carli Alice,
    So true. Everyone needs to be aware that this exists. My mom's account is actually higher than my Dad's. He is probably better off using his spouse benefit. My Dad was a farmer whose earnings were filed under his mother's social security account while she was living.