In 2015, 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 takes into account the recent changes in the law to Social Security retirement benefits claiming opportunities.
1. Do not start taking Social Security retirement benefits too early.
A “fully insured” individual is someone who has at least 40 credits of Social Security and can elect to start receiving his or her retirement benefits as early as age 62.
However, it is advantageous for a “fully insured” individual to delay the start of his or her retirement benefits to at least his or her full retirement age (FRA) – age 65 to 67 depending on which year the individual was born. Ideally, an individual will wait until age 70 to start receiving Social Security benefits in order to maximize lifetime benefits. But according to a recent survey by the Nationwide Retirement Institute, 30 percent of pre-retirees expect to start receiving Social Security retirement benefits before their FRA. A quarter of those who started receiving their Social Security benefits before their FRA in recent years say they now regret doing so.
For someone born between 1943 and 1954 and whose FRA is age 66, a $15,000 annual benefit at age 62 would be a $20,000 annual benefit at age 66. If the individual waits until age 70 to start receiving his or her Social Security benefit, the annual benefit would be $26,400.
For federal annuitants, it would perhaps 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.
2. There is no marriage “penalty” when it comes to Social Security benefits.
Contrary to a common misconception and even with the new Social Security claiming law passed in 2015, 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 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 benefits. The only restriction 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. Social Security has death benefits for eligible family members.
When one spouse dies, the surviving spouse is eligible to receive the deceased spouse’s entire Social Security benefit, called a widow/widower benefit. This benefit can start when the widow/widower is age 60, provided that the widow/widower did not remarry before age 60. If the widow/widower is eligible for his or her own Social Security benefit, then that benefit can be delayed until the widow/widower is age 70, thereby resulting in the maximum benefit for the widow/widower. If the deceased individual at the time of death had children younger than 18 years of age, then each child is entitled to a death benefit equal to 75 percent of the deceased parent’s monthly benefit at the time of the parent’s death. The children’s benefit continues until the child becomes age 18 or 19, if the child is still in high school. If the children are younger than age 16, then the surviving parent or the ex-spouse who is taking care of the children is eligible for a survivor benefit equal to 75 percent of the deceased spouse’s or ex-spouse’s Social Security monthly benefit at the time of the spouse’s death.
4. Even without the “file and suspend” strategy that no longer exists, individuals younger than FRA should consider suspending benefits once they reach FRA.
Under the new rules that took effect in 2016, individuals between age 62 and FRA and who are receiving their Social Security benefits can still voluntarily suspend their benefits once they become FRA. In so doing, their suspended benefits will earn delayed retirement credits equal to 8 percent per year until age 70. However, there is a downside to suspended benefits at FRA and that is any family benefits such as that to a spouse or to a child will also be suspended.
5. Maximizing one’s earnings before retirement can lead to larger lifetime Social Security benefits.
Each year, the Social Security Administration calculates an individual’s primary insurance amount (PIA) which is the amount of an individual’s monthly retirement benefit at his or her FRA. The PIA is calculated by averaging the top 35 years of Social Security earnings during the individual’s working life after adjusting the earlier years for inflation. What this means that if after 35 years of service an individual earns a larger salary compared to a salary earned earlier in his or her working career, then the previous lower earning year is deleted from the calculations, leading to higher overall averaged earnings and larger Social Security benefits. This is perhaps another reason for employees to work longer – either in federal service or in private industry, and even after they start receiving their Social Security retirement benefits as benefits will be recalculated and be larger.
6. A widow/widower can start collecting Social Security spousal benefits on the deceased spouse’s account as early as age 60.
This benefit was not changed by the 2015 Social Security law. However, there are a few restrictions that widow/widowers need to know. First, if a widow/widower is younger than FRA, the widow/widower can collect on the deceased spouse’s Social Security and then switch to his or her own benefit at age 70 and earn an enhanced benefit, as much as 32 percent more compared to the benefit at FRA. Second, if the widow/widower is younger than FRA and working and also collecting on the deceased spouse’s Social Security benefit, then the Social Security benefit is subject to the annual Social Security “earnings test”.
7. Social Security benefits and the law.
Social Security benefits is protected by law from most creditors, but not debts owed to the IRS, federal student loans, other federal government claimants, from alimony or child support payments.
8. Not all of Social Security benefits are taxable.
Single individuals with adjusted gross incomes less than $25,000 or married couples whose adjusted gross income is less than $32,000 do 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 to as much as 85 percent of the total benefits being 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 collecting Social Security benefits may result in less taxation of Social Security benefits.
9. Marriage, divorce, death and remarriage.
Individuals who divorce after years of marriage and then remarry cannot collect an ex-spouse’s Social Security at a later time. But there is an exception – individuals who remarry after age 60 can collect on a deceased ex-spouse’s Social Security benefit. This means that a divorcee who is serious about marrying an individual who has less Social Security benefits than an ex-spouse’s benefits should delay their nuptials until the divorcee is at least age 60.
10. Higher earning spouse should delay collecting for the sake of the lower earning spouse.
If the higher-earning spouse retires early a few years before his or her FRA, then he or she locks in a lower retirement benefit amount. If the higher-earning spouse then dies, the lower-earning spouse will receive this locked in amount (subject to cost-of-living adjustments or COLAs) for life. On the other hand, if the higher earning spouse does not retire early but dies before reaching FRA and before filing for his or her Social Security benefit, then the surviving (lower earning) spouse will nonetheless receive a widow/widower benefit of whatever the deceased (higher earning) spouse’s benefit would have been at FRA.