Barry and Adam wrote and published the book “Guided Retirement Income Planning” in November 2020 to create higher levels of financial literacy and to show a comprehensive and logical process for executing income planning in retirement. Since we believe that this subject matter is so important and relevant, we are going to roll out one chapter each month. While our approach and philosophy will remain consistent in every economic cycle, customization for each household will vary.
We want to emphasize that some of you are not close to retirement and it is never too early to plan. You may also have loved ones, friends, or colleagues that are in need of help. We would be pleased to send them a complimentary copy of our book. We simply hope to help as many people as possible. As we present these chapters, we invite you to circle back to us with any questions or concerns about the content and how it relates to you.
Please enjoy Chapter 15 below! If you missed any of the previous chapters, you can read them all on our blog here.
Your Partners at MGFS
Optimizing Social Security
“It’s paradoxical that the idea of living a long life appeals to everyone, but the idea of getting old doesn’t appeal to anyone.” (Andy Rooney)
There have been many books and regulations written about Social Security. This will be a very abbreviated and high-level review of basic definitions, types of benefits, and important points and strategies. Social Security is an important part of many retirement income plans to combat longevity risk. The rules are complex and the stakes are high. Whether you are collecting Social Security benefits or not, periodically, you should login to “ssa.gov” to review and understand your benefits. Please read this chapter carefully and consult with your advisor.
Basic definitions are important to understand so that you can maximize your benefits. These rules by themselves are simple, but when applied, are complex. They are helpful reference points to the straightforward and important strategies that follow.
- Eligibility for worker’s retirement benefits – You must earn 40 quarters of coverage credits (10 years) for qualified work to be eligible for benefits. There are minimum earnings required per quarter and workers must be subject to Social Security taxes.
- Full retirement age (FRA) – Your FRA will depend on the year you were born. It is the age you are entitled to receive full retirement benefits.
- Primary insurance account (PIA) – Social Security benefits at full retirement age are calculated with this formula. Benefits can adjust each year with inflation.
- Average index monthly earnings (AIME) – This is an amount that is used to help determine your PIA. The annual highest wages (indexed prior to age 60) for 35 years of employment are identified.
- Windfall elimination provision (WEP) – If you have been employed where social security taxes have not been withheld, this calculation will lower PIA benefits. Notably, your retirement benefits will be lowered if you have less than 30 years of substantial earnings when you pay social security taxes with other employment (as defined by the Social Security Administration).
- Early claim – Your full retirement benefits will be reduced between age 62 and your FRA by 5/9 of 1% for each of the first 36 months (6.66% per year) with an additional 5/12 of 1% for each month (5% per year) beyond 36 months.
- Delayed (deferred) claims – Full retirement benefits will be increased between your FRA and age 70 by 2/3 of 1% for each month or 8% per year. There are no more increases after age 70.
- Break-even analysis – This calculation determines the age at which the amount of lifetime benefits for two different starting dates are equal. Frequently, it is used to evaluate when social security benefits should be taken. (THIS IS AN IMPORTANT CALCULATION FOR RETIREES).
- Earned income and reduced benefits – If an individual works prior to FRA while receiving Social Security, benefits may be reduced. However, this reduction is not permanent. It is a deferred benefit. After reaching FRA, the reduced benefits will be recovered.
- Cost of living adjustments (COLAs) – Retirement benefits that are indexed for inflation as the Consumer Price Index (CPI) increases. Delayed or deferred credits will also receive these adjustments.
Retirement benefits – Single or married couples can apply anytime between age 62 and 70.
- Spousal benefits for working spouses – Those working spouses who are eligible for both their own benefits and those of their spouse, will receive the higher of the two amounts. For spousal benefits, both spouses must have applied for their own benefit.
- Spousal benefits for non–working spouses – The non-working spouse must be 62 years old and married for more than one year. The working spouse must have filed for his or her own benefit. The benefit is based on the working spouse’s Social Security benefit. The maximum benefit for the non-working spouse is 50% when at FRA and is less prior to FRA. No deferred credit will accumulate beyond FRA.
- File a restricted application – This is a strategy for married couples that is going away shortly. This strategy allows a person filing the restricted application to receive two benefits from Social Security- a spousal benefit and then a higher personal benefit later.
- Spousal survivor benefits – A surviving spouse’s maximum Social Security benefit is the greater of the surviving spouse’s own retirement benefit or 100% of the deceased spouse’s retirement benefit amount. Benefits can be reduced for the surviving spouse if benefits are received prior to FRA. Benefits can start at age 60 at a reduced rate. There can be potential survivorship benefits for younger children, as well.
- Divorced ex-spouses – They can receive both spousal and survivor benefits. Spousal benefits are based on an ex-spouse’s work record. A divorced spouse must have been married for at least 10 years, be unmarried, at least age 62, and not have a higher benefit based on their own record. The ex-spouse must have been divorced for at least 2 years and qualify for benefits.
Survivor benefits are based on the age of the ex-spouse. To be eligible, the surviving spouse must have been married for at least 10 years, be 60 years old, and not have a higher individual benefit. Benefits will end if the surviving ex-spouse remarries before age 60.
- Disability benefits – To be eligible, an individual must be unable to do any kind of substantial, gainful work, and the disability must be expected to last at least 12 months.
IMPORTANT POINTS AND STRATEGIES
- Factors to consider when to claim your benefits: health status, family history of longevity, marital status, employment record and status, financial needs, and availability of other assets. If you are unhealthy with a shorter life expectancy, then early claiming may work best. If you expect to live a long life, it may make sense to delay your benefits. Delayed credits mitigate longevity risk and provide greater spousal and survivor benefits. (Subject to limits).
- Strategies can differ for married couples if there is a large gap between the age of the spouses and their benefits. It may be appropriate for the higher earning spouse to wait until age 70 to receive benefits. Delayed claiming will provide longevity insurance for both spouses. Generally, the younger spouse may consider an earlier claim.
- If you defer taking social security benefits, you may experience a temporary income gap. You will want to review your income and determine how best to proceed: you may choose to work longer; work part-time and take distributions from various accounts; or tap into home equity in some form or another.
- Remember that only worker benefits receive deferred credits. Spousal and survivor benefits do not receive deferred credits past FRA.
- Social Security looks at your highest 35 years of earnings to establish the previously-referenced average indexed monthly earnings (AIME). If you want to increase your Social Security benefits, you can do so by working additional years or by earning more money.
- As related to the WEP, if you have more than 20 years but fewer than 30 years of substantial earnings, you can increase your retirement benefits by working more years.
- Claiming decisions are viewed as part of a comprehensive retirement income planning strategy. In doing so, you should try to focus on the later years in retirement (no-go years). New retirees (go-go years) can go back to work to make up income gaps while elderly do not have that luxury.
- You can withdraw your Social Security application if you have been receiving benefits for less than 12 months. If you do this, then all benefits received from Social Security will need to be repaid. This can be a viable strategy if, after further analysis, you realize it would be better to file at a later date for deferred credits.
- Voluntary suspensions may be considered if you have reached FRA, are not yet 70, and you have received benefits but realize that you do not currently need them. The advantage of doing this is that you will earn retirement credits and cost-of-living adjustments from where your benefits left off. Be aware, if anyone else is receiving benefits on your record, their benefits will be suspended as well.
- Another reason to defer claiming your Social Security benefit is that the delay creates a snowball effect for both the deferred credit and the compounding cost of living increases. You are ultimately increasing your flooring strategy. Think of this higher amount as an income annuity for life.
- If you have lower taxable income, some or all of your social security retirement benefits may be tax-favored. Please consult with your tax or financial advisors to determine if this tax treatment applies to you.
Social Security often provides the foundation for a retirement income plan and is considered a flooring strategy to help meet essential spending needs. It will need to be modified at some point in the future due to demographic changes and the Social Security Trust Fund projections. Many people believe that Social Security will fail and not be around, while experts believe Social Security is here to stay in some form or another. Increasing Social Security literacy will allow you to have the confidence to delay benefits if it makes sense. Although the rules governing Social Security are complicated and dynamic, take your time, analyze your situation, and determine the best claiming strategy as part of your overall retirement income plan.
Again, make sure you login to “ssa.gov” to review and understand your Social Security benefits. We also recommend that you consult and verify all strategies with your local Social Security Administration officer before implementation. Rules may change and impact the strategy chosen.
Words of Wisdom on Life
- From what we get we make a living. What we do however makes a life. (Arthur Ashe)
- A loving heart is the truest wisdom. (Charles Dickens)