Social Security: Answering the Big Question
The number one question soon to be retirees ask is: When do I start collecting benefits? The first step is determining your Full Retirement Age (FRA) when you qualify for 100% of your Social Security benefits known as your Primary Insurance Amount. The FRA is based on the year you were born.
*If you were born on Jan 1, use the prior year for “year of birth.” Source for the chart above: socialsecurity.gov, “Understanding the benefits,” 2016.
The second step is reviewing the three main options when you can start collecting:
1. You can choose to collect benefits early, as early as age 62 up to your full retirement age; however, the benefit may be reduced by up to 30%.
2. The second option is to collect at full retirement age, 100% of your benefits.
3. The third option is to delay collecting beyond your full retirement age so that your benefits increase monthly. For each month you delay, your benefits will increase to the tune of 8% annually until age 70.
It is important to calculate the true cost to start collecting early compared to delaying it and what the breakeven number is.
How long one expects to live certainly plays into the decision on when to file for benefits; however, longevity is just one consideration of many when deciding when to file. The average life expectancy is now 84.3 for a 65-year-old male and 86.7 for a 65-year-0ld female.1 For example, you many choose to delay filing for social security and instead, use other assets earmarked for retirement to bridge your income while you allow your monthly benefit to increase. This may or may not be the right choice for you; the fact of the matter is that the decision should factor in more than just the monthly benefit. This is why it gets tricky.
Spousal Benefits are another factor to consider. If you are married, you will receive the greater of: your benefit based on your individual earnings record, if applicable, or the spousal benefit, up to 50% of the spouse’s full benefit. The spousal benefit is based on your spouse’s Primary Insurance Amount at his or her Full Retirement Age. If your spouse waits to start collecting benefits in order to receive delayed retirement credits, these credits will not increase the amount of your spousal benefits. This may, however, increase the amount you collect if you are a survivor. The reason I think this is important to know, is because couples often don’t realize that
if the higher earner chooses to delay claiming, and earns delayed retirement credits, the surviving spouse does benefit from that decision.
Here’s an example that shows the impact of collecting early (at age 62). It assumes your spouse’s monthly benefit at Full Retirement Age is $1,000 and you are not entitled to any Social Security benefit based on your own earnings record. If you start collecting the spousal benefit prior to your own Full Retirement Age, the spousal benefit is reduced by up to 35%. Please note the reduction (calculation) will differ if you are also entitled to benefits based on your earnings record.
Often another concern to address is continuing to work once Social Security benefits are turned on. This is an interesting one. If you retire at 62, can you still work? The short answer is yes, BUT there is a limit. If you work and you are younger than full retirement age for the entire year you can earn up to $17,040 and still collect your entire benefit. However, if your earnings exceed this amount, a $1 for every $2 above the threshold will be held back from your benefit. However, in the year you reach full retirement age, you can make up to $45,360 and still collect your entire benefit. Once your earnings exceed this threshold, your benefit will be reduced by $1 for every
$3 above the threshold. After Full Retirement Age, no earning limit and no reduction in benefit exists.
Though there is no penalty to Social Security benefits after full retirement age, the biggest timebomb to your retirement is taxes. Consequently, understanding how your benefits may be taxed is critical. This is why it is so important to have a retirement income strategy that considers all these factors and the potential impact of taxes on your overall income. We can run an optimization report to explore various claiming ages that could potentially result in thousands of dollars of additional benefits over a lifetime. So it is a decision that should be made carefully.
Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. Shala Financial, LLC and Sound Income Strategies, LLC are not associated entities. Insurance and Annuities offered through SHALA FINANCIAL, LLC.
1 Source: Social Security Administration – Benefits Planner; Life Expectancy. 2018.
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