Written by: Corey Janoff
As people approach retirement, some of the biggest questions (or concerns) center around Social Security. Many of the younger readers of this blog may not be faced with decisions surrounding claiming Social Security benefits currently, but your parents might be. For those of you who are approaching retirement, or who have family members nearing that point, this post will be especially informative.
Claiming Social Security Benefits
Most people are unaware of all the possible ways Social Security benefits can be collected. I am rounding up when I say this, but there are approximately 14 billion different ways to collect Social Security benefits. If you do a quick Google search, BankRate.com claims there are 567 different ways to collect Social Security benefits. An article by CNBC indicates there are 81 different ways for married couples to collect Social Security benefits.
We won’t go through all possible avenues today, but we will focus on some of the more common strategies. Hopefully this will give you some ideas on ways you can collect benefits to maximize your lifetime payouts. We’ll focus on single and married people today, although there are even ways for divorcees and widows/widowers to collect benefits on a spouse’s account.
If you were previously married for at least ten years (to the same person), you can claim benefits on your ex-spouses account, even if they have remarried! See the Social Security website for divorcees for more information on that.
Some Quick Background on Social Security
Every year that you work and pay Social Security benefits, you accrue credits. You need a minimum of $1,300 of earned income to accrue a credit and you can earn up to four credits per year. Once you have amassed at least 40 credits, you are eligible to collect Social Security benefits. Currently, you pay 6.2% of your first $132,900 of gross income into Social Security. That’s part of your FICA tax. Your employer matches that. If you are self-employed, you have to pay 12.4% of your first $132,900 into Social Security. Earnings above $132,900 in a calendar year will not be subject to Social Security taxes. Click here for a historical reference of how much income has been subject to FICA taxes in the past.
If you earn more than the FICA limit, you may notice your take-home pay increases partway through the year and then your take-home pay decreases in January when you resume paying Social Security taxes.
In order to qualify for the maximum possible Social Security benefit, you need to work for at least 35 years and pay the maximum amount into Social Security each year. If you don’t have at least 35 years of credits by the time you retire, you are still eligible for benefits. The system simply inputs a zero for the non-worked years and your benefit is averaged out that way. Again, once you have at least 10 years of work under your belt, you are eligible for a benefit.
When Can I Collect Social Security Benefits?
The Social Security Administration defines full retirement as age 66 or 67, depending on when you were born. That is the age in which you are eligible to receive your full earned benefit. That being said, you can begin collecting benefits as early as age 62 (potentially as early as age 60 for widows/widowers). It is generally not advisable to begin collecting benefits at age 62, because your benefits will be reduced for collecting early.
Instead of collecting your full benefit at age 66/67, you could delay taking your Social Security benefit until age 70 at the latest and receive a larger payment as a result. If you are in good health and have longevity in your genes, this could be an optimal strategy. The benefit payment at age 70 will be 24-32% larger than it would be at full retirement age (age 66 or 67, depending on year of birth). Add that up over 20+ years and it could be a significant difference.
For example, let’s pretend you were born before 1954 and your full retirement is age 66. At full retirement, you are eligible for a $2,000 monthly benefit. If you wait until age 70, your monthly benefit would be $2,640. If you live past age 82, collecting the delayed benefits will result in a higher cumulative total benefit received. Age 82 is also the breakeven if your full retirement age is 67.
In the above example, we are assuming no inflation on benefits. Historically Social Security benefits have increased over time to adjust for inflation. While not guaranteed, the above example could actually result in much higher cumulative benefits if inflation is factored in.
If you are single, the choice is pretty straightforward. It really boils down to whether or not the delayed gratification is worth it to you. If you can afford to support yourself from the age you retire until age 70 and you expect to live a while, then delaying benefits until age 70 is likely beneficial. If you don’t have much in savings or investments, or you don’t expect to live a long time, then you might opt to collect benefits before age 70.
Benefits for Married Couples
Claiming Social Security benefits for married couples is where it gets more complex, especially if the two spouses have drastically different career earnings. If both spouses have a similar earnings history, then the choice is pretty much the same as it is for a single person in the paragraph above.
If you are married, once you reach full retirement age, you can either collect your own benefit, or you can collect the equivalent of 50% of your spouse’s benefit (if your spouse is already collecting benefits).
For example, let’s pretend both you and your spouse are the same age. If you were the stay at home parent when the kids were young and then you worked part-time when the kids were in school, your earnings history may not be as large as your spouse. Hypothetically, let’s say your benefit at full retirement age is $1,000/month. Your spouse on the other hand worked full time in a high paying job and is eligible for a benefit of $2,400/month at full retirement age. At full retirement, you have the choice of collecting your $1,000/month benefit, or collecting 50% of your spouse’s benefit, which would be $1,200/month. Obviously, you will elect to take the spousal benefit.
If your spouse pre-deceases you, you can continue to collect your spouse’s benefit. In the above example, if your spouse passes away, you would receive the $2,400/month from that point forward and your $1,200/month 50% spousal benefit would stop.
Spousal Benefits and Delayed Credits
One fun fact is that you can switch between claiming your own benefit and claiming a spousal benefit. This is especially useful for couples who differ in age and income history.
I know a couple who retired recently, and the above example is similar to their situation. The husband worked as a surgeon until age 66. The wife was a nurse and stopped working at age 34 after her second child was born (they have three adult children). Once the kids were older, she worked part time at her husband’s office. The husband is two years older than the wife.
The husband’s estimated benefit at full retirement age is around 2,600/month and will be around $3,400 at age 70. We are delaying having him collect benefits until he is 70 in order to receive the maximum benefit possible.
At age 64, we elected to have the wife collect her Social Security benefits early and she is receiving close to $1,400/month now. Because the husband has reached full retirement age at 66, he is eligible to begin collecting a spousal benefit equal to 50% of his wife’s benefit amount at full retirement age. As a result, he is receiving about $800/month (although his Medicare premiums are deducted from that). For the next four years, they will be receiving about $2,200/month from Social Security.
Once the husband turns 70, we will have him stop collecting spousal benefits on his wife’s account and begin collecting his roughly $3,400/month benefit. Once he starts collecting his benefit, his wife will stop collecting her benefit and begin claiming a spousal benefit on his account.
By collecting benefits on the smaller account first and delaying credits on the larger account until age 70, this couple is able to receive over $100,000 in Social Security benefits over four years while waiting for the larger account to reach its maximum benefit level. If they were unaware of this option of switching from one spouse’s account to the other (they were – we had to recommend it to them 😊) and simply waited until the husband reached age 70, they would have missed out on that $100,000. Or like many people, they may have collected benefits earlier at a reduced benefit, diminishing their long-term benefit potential.
Visit the Social Security Website
I strongly encourage everyone to create an account on the Social Security website: www.SSA.gov. You can review your earnings history (and report any inaccuracies) and view estimated benefits. At age 62, 66/67, and age 70.
The Social Security website has Social Security calculators to play around with to see what your benefits would look like under various scenarios.
You paid all those Social Security taxes throughout your career, so you better get your money’s worth! Feel free to get in touch with us if you would like some guidance.
Any examples are hypothetical and for illustrative purposes only. Please do not construe this as a recommendation for how to collect Social Security benefits. Each person is unique and should analyze their options to determine which strategy is optimal for their particular situation.