10 Ways for Federal Employees to Maximize Social Security Benefits

Over the last 10 years, Congress made some changes in the law regarding Social Security filing opportunities that have resulted in modifications to claiming benefit strategies for many individuals.

This column presents 10 suggestions for federal employees to maximize the amount of their lifetime Social Security retirement benefits, taking into account these changes in the law.

SEE ALSO:

• Quirks of Waiting Until Full Retirement Age to Claim Social Security Benefits
• How Social Security’s Earnings Test Can Affect Your Retirement Benefits

1. Delaying the start of one’s monthly retirement benefit as long as possible, ideally until age 70.

Delaying the start of one’s monthly Social Security retirement benefit will permanently increase the amount of the benefit, but there is a limit how far that increase will go.
A “fully insured” individual (an individual who has earned a minimum 40 credits of Social Security) can begin taking their Social Security monthly retirement benefit starting at age 62. However, starting at age 62 will result in a permanently reduced monthly benefit compared to the individual’s postponing the start of his or her monthly benefit until full retirement age (FRA) (age 67, for those individuals born after 1959). If the individual wants the biggest monthly check, the individual needs to wait until age 70 to start receiving Social Security.

Delaying the receipt of Social Security monthly benefits past FRA will result in an increase of 8 percent per year for every year postponed until age 70. An individual who has an FRA of 67 and who waits three years until age 70 will be able to receive 124 percent of their monthly benefit at FRA (called the Primary Insurance Amount or PIA) In addition, by delaying the start of the monthly Social; Security benefit, the individual gets another increase in the form of a Social Security cost-of-living adjustment that increases the monthly benefit payment over time.

For federal annuitants, it would make more sense for them to start withdrawing their Thrift Savings Plan (TSP) account in order to allow them to postpone collecting Social Security benefits. The reason is that Social Security benefits are guaranteed to increase by 8 percent per year (“delayed retirement credits”). On the other hand, there is no guarantee that the TSP account balances will grow from year to year.

SEE ALSO: Quirks of Waiting Until Full Retirement Age to Claim Social Security Benefits

2. There is no “marriage penalty” when it comes to Social Security benefits.

Contrary to a common misconception, there is no “marriage penalty” or offset for married couples when it comes to overall Social Security benefits. When both spouses are entitled to their own Social Security benefits, each spouse can collect his or her own full benefit with no offset or reduction to either benefit. However, there is an alternative way of collecting Social Security. If one spouse has a much higher benefit from that of the other spouse, then under the dual entitlement law, the spousal benefit is set at 50 percent of the higher earning spouse’s benefit.

For example, if a higher earning spouse is receiving $30,000 a year in benefits and the lower earning spouse’s annual benefit is $10,000, then the lower earning spouse is entitled to an increase of $5,000 in benefits to bring it up to 50 percent of the higher earnings spouse’s benefits, or $15,000 per year. Note that it makes no difference – even with the change in the claiming rules that took effect in 2016 – when the lower earning spouse was born (before or after January 2, 1954) in order to be eligible for this increase in annual benefits. The only requirements for this to happen is that the higher earning spouse would have to be receiving his or her benefit and the lower earning spouse has to be at least age 62.

3. Continue to work additional years – even after starting to receive Social Security monthly retirement benefits

While the average individual cannot always continue to earn a higher salary, the average individual can continue to work additional years (even part-time) and that is one way to help maximize one’s monthly Social Security check. The reason for that is that Social Security monthly retirement benefits are calculated based on the 35 years in which an individual’s Social Security earnings (wages) were highest. This is important because if an individual works in retirement, then the higher wages the individual is earning (as indexed to inflation) are higher than what the individual earned 25 to 35 years ago.

When the Social Security Administration recomputes the individual’s monthly retirement benefit (as they do every year), the monthly benefit will increase retroactively to the beginning of the year. Working longer also has another benefit, A retiree is able to amass more savings and delay the start of drawing down assets in one’s retirement plan (such as the Thrift Savings Plan) and IRAs.

SEE ALSO:  4 Benefits of Working Past Age 65 Federal Employees Should Consider

4. Even without the “file and immediately suspend” strategy that no longer exists, individuals younger than FRA should consider suspending benefits once they reach FRA.

Under rules that took effect in 2016, individuals between age 62 and their FRA and who are receiving a reduced Social Security monthly retirement benefit (because they elected to start receiving their monthly benefit before their FRA) can voluntarily suspend their benefits once they become FRA. In so doing, their suspended monthly benefit will earn delayed retirement credits equal to 8 percent per year until the individual becomes age 70. However, there is a downside to suspended benefits at FRA. The downside is that any family benefits (such as to a spouse or a to child younger than age 18) will also be suspended.

5. Maximizing Social Security earnings (especially before retirement) can lead to larger lifetime Social Security benefits.

The most obvious way for individuals to maximize their lifetime Social Security benefits is to earn more. The Social Security Administration uses a formula that is based on the fact that an individual has paid (via the FICA tax) through the years into the system. The more an individual has paid into the system, the larger will be the individual’s future benefits – up to a point. Social Security taxes (called the FICA tax) equal to 6.2 percent each year are imposed on an employee’s wages, and the individual’s employer pays another 6.2 percent up to the maximum Social Security wage base ($168,600 during 2024). An individual who for at least 35 years earned in salary at least the maximum Social Security wage base should receive the highest possible in Social Security lifetime benefits.

For example, those individuals turning 70 during 2024 who paid the maximum possible in FICA taxes during their working life and who are claiming their monthly retirement benefit this year, the starting monthly benefit payment in 2024 is $4,873 and will increase with future COLAs.

SEE ALSO:  Federal Retiree COLA Watch – FERS / CSRS / Social Security

6. A widow/widower can start collecting Social Security spousal benefits on the deceased spouse’s Social Security account as early as age 60.

This benefit was not changed by the 2015 Social Security “deemed filing” rule. However, there are a few restrictions that a widow/widower needs to be aware of.

First, if a widow/widower is younger than FRA, the widow/widower can collect on the deceased spouse’s Social Security starting as early as age 60 and then switch to his or her own benefit at age 70. In so doing, the widow/widower can enhance their own benefit (as much as 32 percent) compared to the monthly benefit he or she would receive had the widow/widower started collecting their own benefit at FRA.

SEE ALSO: Maximizing Social Security Benefits and the ‘Deemed Filing’ Rule

Second, if the widow/widower is younger than FRA, working and also collecting on the deceased spouse’s Social Security monthly benefit, then the Social Security benefit is subject to the annual Social Security “earnings test.” Violating the Social Security annual earnings test (a result of having a salary above the maximum allowed – $22,320 during 2024) will result in a temporary loss of monthly Social Security retirement benefits.

SEE ALSO: How Social Security’s Earnings Test Can Affect Your Retirement Benefits

7. Social Security monthly benefits and the law.

Social Security monthly benefits (including disability benefits and retirement benefits) are protected by law from most creditors. However, monthly benefits are not protected from debts owed to the IRS, federal student loans, other federal government claimants, from alimony or child support payments. Affected Social Security beneficiaries should be aware of this before they decide to file for their monthly benefit.

8. Not all Social Security benefits are taxable.

Single individuals with an adjusted gross income less than $25,000 or married couples whose adjusted gross income is less than $32,000 will not owe federal income tax on their Social Security benefits. Anything higher than these income thresholds will trigger a portion of the Social Security benefits subject to federal income tax (as much as 85 percent of the total benefits in their income and subject to federal income tax). Since qualified distributions from a Roth IRA and the Roth TSP are not included in adjusted gross income, it can be advantageous to start withdrawals from traditional (non-Roth) retirement accounts before starting to receive Social Security benefits. Holding off withdrawals from Roth retirement accounts until one starts to collect Social Security benefits may result in less taxation of Social Security benefits.

SEE ALSO: Proposed Legislation Would Repeal Social Security Tax

9. Marriage, divorce, death and remarriage.

Social Security offers lots of benefits to individuals in many different scenarios, and some of the most complex choices occur if an individual is married or divorced. Spouses and ex-spouses should therefore carefully consider their options and what works best for them, especially with respect to survivor’s benefits when one spouse predeceases the other spouse. As an example of some of the complexities involved, individuals who divorce after years of marriage and then remarry cannot collect on an ex-spouse’s Social Security. But there is an exception – individuals who remarry after age 60 can collect on a deceased ex-spouse’s Social Security benefit.

10. Work with a financial advisor who specializes in when to claim Social Security benefits.

There are many ways for an individual to receive his or her Social Security benefits. Most Americans claim their Social Security benefits with little thought into this decision that represents on average 40 percent of their retirement income. Only 4 percent of Americans choose the optimum claiming strategy that would give them the most in Social Security monthly retirement benefits over their life expectancy. For this reason, it makes sense to work with a financial advisor who specializes in claiming Social Security benefits, especially if someone has an unusual situation.

It is also important to mention that Social Security Administration employees are not allowed to give advice when it comes to claiming benefits. Also, the majority of financial advisors are not helping when it comes to giving advice on Social Security benefits. The main reasons for not giving advice: These advisors are not educated in this area or because they are not being compensated for giving any type of advice.