Few things are certain in life or financial planning, but one decision we all face eventually is when to begin taking Social Security benefits. Of course, most of us don’t consider this decision until it appears on the horizon. But, because people are living longer than ever, a little advance planning is well worth the effort. The key is to weigh all the factors that can help maximize your retirement benefits. Here are four ideas to get you started.
1. Consider carefully whether or not to take benefits early
When you start taking your benefits impacts the amount of benefits you receive. Many people associate beginning their benefits with the current full retirement age of 66. However, you have the option of taking retirement benefits as early as age 62 or waiting until later.
The downside to taking benefits early is that each month you receive benefits before your full retirement age brings a permanent reduction to your total retirement income. This reduction is 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month. Early benefit reductions also affect spousal benefits.
There is a flipside, though. If you decide to delay your benefits until age 70, an 8% annual increase is applied to your full retirement benefits for each year after full retirement age. For married couples, if the spouse with the higher benefit delays their benefits but predeceases their spouse, the survivor will still receive the higher benefit over the course of their lifetime.
For these and other reasons, we generally recommend that clients wait as long as possible to start taking their benefits, though every situation is unique. For instance, if one spouse is not eligible for benefits, they cannot apply for spousal benefits until the other spouse begins taking their own benefits; in this case, it doesn’t make sense to delay. Depending on life expectancies, health considerations, age differences and a number of other factors, this can be a very complex and unique decision for couples and individuals to make. All things considered, it’s prudent to speak with your advisor about the best time to apply for your benefits.
One more point to keep in mind: starting in 2021, full retirement age will begin gradually increasing by two months per year until it reaches age 67 in 2027, a change which will affect people born in 1955 or after.
2. Plan ahead to manage your income
For many wealthy families and individuals, Social Security benefits are likely to be only one source of retirement income. Thus, it’s important to understand how they impact your particular financial plan. If you don’t need Social Security benefits to meet your living expenses, you enjoy much greater flexibility in your decision making.
Those planning to continue working during retirement will also want to carefully review the impact of their monthly earnings in the benefit calculation. While additional work can increase your monthly benefit amount (depending on your earnings history), if you work and start your benefits early you will be subject to an earnings limitation and your benefits for that year will be reduced based on those earnings. Waiting until full retirement age removes the earnings limitation, which can be viewed as another incentive for delaying benefits until at least your full retirement age.
Another aspect of planning ahead: we recommend reviewing your Social Security statement on an annual basis to confirm your earnings. You will have a far easier time remedying errors now than going back and correcting problems years down the line.
3. Realize that two popular strategies for maximizing benefits are no longer available
Due to Congressional action at the end of 2015, two popular benefit strategies are no longer available: the “file and suspend” and “restricted application.” (Those who were already receiving benefits were not affected by the change.) Most people can also no longer solely claim spousal benefits if they are eligible for benefits of their own, and spouses cannot receive benefits based on suspended benefits. However, those people who reached age 62 by the end of 2015 are still eligible for restricted application, assuming that their spouse had either filed and suspended before the final deadline (April 29, 2016) or that they had already begun taking benefits.
4. Understand how marriage affects Social Security benefits
One of the most important aspects of Social Security is how it applies to married couples. For one, taking spousal benefits at full retirement age pays half your spouse’s full retirement benefits. Even those people not eligible for benefits (e.g., stay-at-home parents) can apply for spousal benefits. However, it’s important to be aware of certain limits. For instance, any years during which you decide to take family leave count as zero in the Social Security formula.
There are unique decisions to make relative to divorcees, widowers and those who remarry. Social Security pays benefits to survivors as early as age 60 (at a reduced rate) or full benefits if they delay until their full retirement age. However, if a widow is eligible for their own benefits and their widower’s benefits, there are multiple strategies to consider. Divorcees can receive spousal benefits as well if certain requirements are met. However, you cannot receive spousal benefits on an ex-spouse if you remarry. Because the rules are complex and detailed, it’s best to consult your advisor.
Finding good answers to good questions
As important as timing is when it comes to taking Social Security benefits, you should also keep in mind your health, life expectancy, lifestyle and tax implications. In assessing these and other factors, you will almost certainly have questions. Your advisor is here to help you find the right answers when the time is right for you. Just remember, a little advance planning can go a long way.