By Tom Breiter, Integra Capital Advisors
Currently, more than 61 million receive Social Security benefits, the vast majority
of which are retired or at least old enough to be retired, even if they choose
to continue working. The program affects virtually all Americans and you would think recipients would be knowledgeable about their benefits, but unfortunately that isn’t the case. According to recent Nationwide Insurance survey 63% of recipients are unsure of how Social Security works and 88% don’t understand how their benefits are calculated.1
With lifetime benefits possibly reaching $1,000,000 or more, and maybe even over $2,000,000 for high wage earning couples who enjoy long lives, understanding the system and how to best file for benefits is an important part of retirement income planning. This guide is a beginning primer
on Social Security benefits and meant to prompt you to ask questions pertinent to your personal situation.
How Are Social Security Benefits Calculated?
Your Social Security benefits are calculated from your lifetime earnings record. The Social Security Administration tracks your wages for your entire working career and uses the 35 highest wage years to determine your benefit level. You must work a minimum of 10 years to be eligible for benefit payments. If you do not work 35 years, zeros are averaged into the calculation. Your earnings
from the past are indexed for inflation in the calculation to represent today’s dollars.
Once your average monthly earnings are calculated a formula is applied to determine your PIA - Primary Insurance Amount. This is the benefit you’ll be eligible to receive when you
reach full retirement age (FRA) - which varies from age 66 to 67 depending on when you were born.
The amount you actually receive will depend on when you choose to claim benefits. Taking benefits early results in a reduction and waiting until after FRA will increase your monthly benefit. It is important to note that benefits are
adjusted for inflation starting at age 62.
Married individuals are eligible to receive benefits based on their spouse’s work record if their primary insurance amount is more than twice your own benefit. To receive this benefit your spouse must be at least 62 and already have filed for their own benefit. This comes into play when your spouse’s benefit is more than double your own and Social Security will automatically pay the higher of the two benefits.
Divorcees may also receive spousal benefits based on your ex-spouses record. To be eligible your marriage must have lasted at least
10 years, more than two years since the divorce and you must still be single. In addition, you must be 62 years old or older and not eligible for higher benefits based on your own earnings record. It does not matter if your ex-spouse has filed for their own benefit or not.
When Can You Claim Social Security Beneﬁts?
You can claim Social Security Benefits as early as age 62, and as late as age 70. When you choose to claim will affect the amount of your monthly benefit, either discounted or added to your primary insurance amount based on your age when you file.
What Is The Best Time To Begin Collecting Beneﬁts?
For the average recipient, Social Security accounts for about 40% of their retirement income. The decision of when to collect can make a large difference in total lifetime benefits. By the time you are eligible to collect, it is too late to
change what you’ve paid into the system and possibly increase your benefit level. This makes the claiming decision an important one for your retirement income plan.
Social Security Statement
The first step in deciding when to claim is to gather the appropriate information to make an informed decision.
While working you will receive a statement from the SSA every five years, and once a year once you turn 60. This paper statement will arrive about three months prior to your birthday. You can also access your benefit information any time by establishing password protected access at www.ssa.gov or request a paper statement on-demand.
Your statement will provide estimates of your benefit level at age 62, your full retirement age and your maximum benefit at age 70. Statements also contain information related to disability, survivor benefits and Medicare. The amounts provided are estimates based on your date of birth, earnings history and future estimated earnings. Also included is a detailed analysis of your earnings record by year. A review of this section for accuracy is worth your time,
especially if you spent time out of the workforce during your career. Remember, your benefit is calculated off
your 35 years of earnings. If you have less than 35 years of work history, working a few additional years in your sixties can increase your benefit.
Life expectancy is the one variable which we cannot know for sure when making the claiming decision. Other than life expectancy, another factor to consider is rate of return. The Social Security Trust Fund is invested in Treasury Bills, which tend to keep up with inflation. If you have sufficient income from other sources that you don’t need the Social Security income to live on, collecting earlier and investing the benefit in investments that earn more than T-Bills may make sense for you. Of course, taxes on your benefits and the investment profits needs to be considered in this scenario. The website, www.ssa.gov/estimator, contains some helpful calculators where you can see your benefits under different scenarios based on your earnings record.
It is important to distinguish between “retirement” and collecting Social Security benefits. You can retire from working and still delay claiming benefits if your level of assets or other income sources provides sufficient cash flow for your lifestyle. Conversely, you may choose to claim benefits while you are still employed. Claiming while working before full retirement age may result in a partial loss of benefits. Never wait past age 70 to claim benefits even if you are still working! Your benefit amount will not grow any larger by waiting past this point.
Maximizing Beneﬁts As A Married Couple
Married individuals who are younger than age 66 on January 2nd, 2020 will
receive the higher of their own benefit or 50% of their spouses primary insurance amount when they choose to file for benefits. Based on age differences between spouses and benefit level differences, claiming strategies can be developed to maximize total monthly and lifetime benefits by choosing the time to file
Generally, the lower-earning spouse should begin collecting benefits before the higher earning spouse. This allows
the higher benefit to grow with delayed filing credits and inflation adjustments.
Often, the male spouse will have the higher benefit due to the woman taking time
away from work to raise children or care for aging parents. Combining this with generally longer life expectancies for women makes the female claiming first with the male claiming a spousal benefit and letting his own benefit grow a good strategy for many. The woman will likely end up with her husband’s higher
benefit at some point after he passes away.
Of course, individual life expectancies and other personal factors play into the decision. Obtaining an analysis of a married couple’s benefits and ages is easy to do and will help in the claiming decision.
For those who turned age 66 before January 2nd, 2020 and not yet claimed benefits,
an option to file a restricted application exists. Unlike the spousal benefit where you automatically receive the higher of your own benefit or 50% of your spouse’s primary insurance amount, the restricted application allows you to file, then suspend your own benefit and claim the spousal benefit. This strategy allows your own benefit to grow through delayed filing credits as far out as age 70, while receiving immediate income.
Spousal benefits do not affect the payment to the spouse whose benefit the payment is based on.
A small segment of “sixty-somethings” will be able to employ this strategy, also known as “File and Suspend”, for the next few years. To file and suspend, your spouse must already have filed for his or her own benefits.
How To Get Help
As you can see from this guide, making the correct Social Security claiming decision can make a large difference in lifetime benefits, in particular for surviving spouses who end up with the higher of the two benefit amounts. Rules are not overly complex, but not intuitive either. Consulting with a financial advisor who is knowledgeable on the topic and employs Social Security planning software can easily answer a lot of questions and customize a claiming strategy for your personal situation. According to a Nationwide Insurance Survey, those seeking professional guidance on how to best claim benefits reported receiving more than 20% more than those who did not.2 You paid your fair share into the system and deserve to get the most out of it in your retirement. If you are over age 55 and starting to think about your retirement income plan, the time is right to consider your options.
Integra Capital Advisors works primarily with clients who desire our personal, yet structured process for planning and investing that relieves them of the day-to- day worry of the financial markets with freedom to pursue what they value most and allows them to feel confident and reassured. We call this process the “Waypoint FORMula”. Call us today at 941-778-1900 or email at firstname.lastname@example.org to schedule an introductory call.