Claiming options for Social Security benefits, primarily the age type of Social Security benefit applied for.
At first blush, the optimal age to apply for Social Security retirement benefits can be easily determined by a “break even” analysis using:
- the starting benefit received at various ages
- the assumed increase in those benefits
- your assumed life expectancy
However, there are other factors that complicate the issue, including:
- the types of benefits available to you
- the assumed rate of return on investments
- assumed cost of living adjustments
- the income tax aspects.
A good decision will be based upon a thorough analysis that takes each of these factors into account.
Types of benefits:
Retirement benefits are benefits based on your own working record. To qualify for Social Security Retirement Benefits you must be age 62 or older and have earned 40 Social Security Credits. You can earn 4 Social Security Credits per year (as of 2018, $1,320 in earnings = 1 credit earned), so it takes at least 10 years of work to qualify. The amount of your Retirement Benefit is based on your Primary Insurance Amount (PIA) and the age you decide to collect. Your PIA is the amount of money you would receive from your Social Security Retirement Benefit at your Full Retirement Age (FRA). Your PIA is calculated based on the average of your 35 highest earning years adjusted inflation.
Your Full Retirement Age (FRA) is based on the year you were born. The table below shows your full retirement age.
At your Full Retirement Age (FRA) you will receive 100% of your Primary Insurance Amount (PIA). The table below shows how your retirement benefit will be changed if you claim earlier or later than your FRA. The earliest age you can collect is 62 and your benefit stops receiving delayed retirement credits at age 70. Although the table below shows annual changes, your benefit is actually adjusted on a monthly basis.
You can qualify for a Social Security Spousal Benefit if you are age 62 or older, have been married for at least one year, and your spouse has filed for their retirement benefits. The spousal benefit is based on your spouse’s earning record. Their benefit will not be impacted by you collecting a spousal benefit on their earning record. The amount you will receive is based on your spouse’s PIA and the age you decide to apply. You cannot claim both a Spousal Benefit and Retirement Benefit at the same time.
Restricted Spousal Benefit: If you were born before January 1st, 1954 you may be eligible for the “Restricted Spousal Benefit Strategy.” The Restricted Spousal Benefit works as follows:
- Once you reach your FRA you file an application for “Restricted Spousal Benefits” which allows you to receive a spousal benefit while your own Retirement Benefit grows.
- At a later age up to 70 you switch to your own Retirement that has continued to grow even though you were collecting spousal benefits. If you were born in 1954 or later this strategy is no longer available as Social Security will “deem” you to have applied for your highest benefit and simply give you the highest benefit available at that time.
The table below shows how your Spousal Benefit would be reduced if you collect before your FRA. Note the benefit does not increase after FRA, so there is no advantage to delaying beyond your FRA.
Divorced Spouse Benefit
You can qualify for a Divorced Spouse Benefit if you are age 62 or older, currently unmarried, were married to your ex-spouse for at least 10 years, and your ex-spouse is either collecting Retirement Benefits or is eligible to collect and you have been divorced for at least two years.
The reduction factors and other rules for the Divorced Spouse Benefit are the same as the Spousal Benefits listed above.
You can qualify for Widow(er) Benefits if you were married to the deceased spouse at least 9 months, the deceased spouse was “fully insured” by Social Security at death, you are at least 60 years old, and currently unmarried (unless married after age 60). Collecting Widow(er) benefits before your FRA will not impact your own retirement benefit, so you may be able to switch to your own benefit later if it is larger.
The amount you will receive is 100% of the deceased spouses’ PIA if the deceased spouse didn’t file for benefits and was younger than their FRA or you (the surviving spouse) claim at or after your own FRA.
If the deceased spouse claimed before their FRA, the amount you will receive is the larger of the amount that was received by the deceased spouse at the time of death or 82.5% of the deceased spouses PIA.
If you decide to claim the Widow(er) Benefit before your FRA the benefit will be reduced. At age 60 you receive 71.5% of the benefit and the benefit is reduced linearly until you receive 100% at your FRA. There are no delayed retirement credits for waiting past your FRA to claim this benefit, so do not wait past your FRA.
Surviving Divorced Spouse Benefit
You can qualify for a Surviving Divorced Spouse Benefit if you were married to the deceased ex-spouse for at least 10 years, the deceased ex-spouse was “fully insured” by Social Security at death, you are at least 60 years old, and currently unmarried unless married after age 60. Collecting Widow(er) benefits before your FRA will not impact your own retirement benefit, so you may be able to switch to your own benefit later if it is larger.
The amount you will receive is calculated the same way as the Widow(er) Benefit listed above. If you were claiming a Divorced Spouse Benefit and your ex-spouse passes away you should look into moving to the Surviving Divorced Spouse Benefit as the amount received is larger.
Spouses and children of someone receiving Social Security benefits, or that has passed away may receive Family Benefits. The benefit is calculated based on the PIA of the primary worker (retired or deceased person) and is subject to a family maximum (i.e. if you had 10 kids you would be capped at the family maximum). To qualify you must be a dependent of the worker; child, step-child, or adopted by the worker. You must also be under age 18 and not married or disabled with a disability that occurred before age 22. A spouse taking care of a child under age 16 will also qualify for the benefit.
Family benefits may provide income to the surviving family members in the event of death. They may also impact when you decide to retire. If you have qualifying dependents you may elect to start receiving your Social Security Retirement Benefits early so they can also claim Family Benefits.
Working and collecting Social Security benefits may cause your benefits to be reduced. If collecting benefits before your FRA, for every $2 in earnings above $17,040 (2018 amount) your benefit will be reduced $1. In the year of your FRA your benefit will be reduced $1 for every $3 above $45,360 (2018 amount). Once you reach your FRA there is no longer an earning limit, so you can have as much earned income as you would like and still keep your full benefit. Although, the benefits are reduced in the current year, the reduction amount goes back into your benefit pool.
The earnings limit may impact when you decide to collect Social Security if you are still working.
If you receive a pension from a job where you did not pay into Social Security, this will reduce your retirement and spousal benefits. This will also be the case if your employer contributes to a retirement account for you in lieu of Social Security contributions. There are two rules that impact benefits:
- Windfall Elimination Provision (WEP): Reduces your retirement benefits.
- Government Pension Offset (GPO): Reduces your spousal and survivor benefits.
If you have a non-covered pension you want to work with the Social Security Administration to understand how this will impact your benefits and integrate with your overall claiming strategy.
Taxation of Benefits
The amount of your Social Security benefit that is taxed is based on your provisional income. Provisional Income = 50% of your Social Security benefit + Modified Adjusted Gross Income (MAGI). Anywhere from 0% to a maximum of 85% of your Social Security benefit will show up on your tax return as taxable income. The amount is based the thresholds shown on the table below.
An analysis of your current and projected tax situations should be included in your Social Security Claiming Strategy.
There are many elements to consider when developing the best Social Security claiming strategy for you. Here are the highlights:
Longevity: The longer you think you will live the more you should consider delaying benefits. This will push your Social Security claiming break-even age later.
Opportunity Cost: The higher your opportunity cost (the amount you think you will return on other investments) the earlier your Social Security claiming break-even age. You should take investment risk into consideration.
Various benefits: Understand which benefits you are eligible for and employ the best strategy for you.
Put the pieces together: Integrate your Social Security claiming strategy with your overall financial plan. Examine liquidity, cash flow, risk, and tax projections to develop the optimal strategy.