The number one question asked about Social Security is “when should I file?” Mostly this is looked at as a multiple choice question with only 3 possible answers. Should it be 62, 66 or 70?
It could be none of the above.
In general, how much you will receive in lifetime benefits depends on:
- your earnings history
- how & when you elect
- how long you live
You can’t control how long you live and you can’t go back and change your earnings history so there is only one thing that you really control. That is how and when you elect benefits.
Before we get too far let’s review the chart of filing ages and reductions or increases in benefits. For workers born between 1943 and 1954 the Full Retirement Age is 66. That is the age at which you can get the full Primary Insurance Amount (PIA).If you elect prior to that age you will take a reduced payment amount. If you file later than age 66 your PIA will grow by 8% for every year you wait up until age 70.
Traditional “when to file” calculations” would use the data above and create a “break even” analysis. This analysis would show you the age at which you would catch up to the other election ages in the total amount of benefits paid. If you think you would live longer than the “break-even” age, you should elect at a later time. The chart illustrates that 77 is the “break even” age for filing at 62 as opposed to filing at 66. If you live beyond 77 it would have been better off to have filed at 66. If you live beyond 82 it would have been better to have filed at 70.
The BIG problem with using this strategy is that it does not consider the two benefits that married couples have available to them.
• Spousal Benefits
• Survivor Benefits
These benefits are some of the most generous benefits that Social Security provides. As a result they turn the question of, “When should I file?” into the complex decision of “When and how should I file?”
When and how you should file.
Unfortunately, there is no single “best” age or easy answer. There are multiple things that must be considered that may impact you such as spousal benefits, survivor benefits and switching strategies.
Let’s take a brief look at each of these:
• Spousal Benefits
As a spouse, you can claim a Social Security benefit based on your own earnings record, or you can collect a spousal benefit that will provide you 50% of the amount of your spouse’s Social Security benefit as calculated at their full retirement age (assuming that you are also at full retirement age).
• Survivor Benefits
The benefit available to the surviving spouse is simply the highest benefit that was being paid at death. If the husband had the highest benefit that would become the wife’s new benefit amount and her old benefit would simply go away or vice-versa.
• Switching Strategies
A “switch strategy” allows a spouse to switch from a spousal benefit to their own or vice versa. This type of strategy is usually used to delay the benefits of at least one spouse to allow the delayed retirement credits to build. There are two basic switch strategies:
- File & Suspend:
Spousal benefits are not available until the primary earner has filed for his or her benefits. The Senior Citizens’ Freedom to Work Act of 2000 allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. As a result, a higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits. In the process, he will have made his spouse eligible for spousal benefits under his earnings record.
- Restricting the application
Once you reach Normal Retirement Age, you have the option to restrict your application to exclude certain benefits. If a benefit is excluded, it will continue to build delayed retirement credits. As an example, a higher-earning spouse, who may want to wait until age 70 to collect his own benefit may be able to file at 66 for only the benefit available under his spouse’s work record, while still allowing his own benefit to build delayed retirement credits. At age 70, he would switch to his own benefit. Alternatively, a lower earning spouse could restrict his or her application to only spousal benefits while continuing to claim delayed credits on his or her own earnings record.
Certain combinations of the two switching techniques are also allowed. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for only spousal benefits. This would allow both earners to earn delayed retirement credits on their own earnings records while one spouse still collects benefits now.
With these moving parts you can see that this is a very complicated decision. But I often tell people that although this decision is complex you should have a basic understanding of the “whys” in doing this planning even if you intend to hire a planner. It’s much like driving my car. I understand that if I press the accelerator I will begin to move or move faster. Understanding the intricacies of the internal combustion engine is not necessary to perform this basic action. I understand that if I turn the steering wheel my automobile will change direction. However I do not understand caster angles, steering linkages or the variation of Ackermann steering geometry that my vehicle uses. In short, I have enough knowledge to keep me safe and allow me to perform the basic operations that I need. But when it’s time to dig deeper, I go to a professional.
How to find someone to help you.
So where do you turn for advice? One place to start would be to find a financial planner that is knowledgeable about Social Security benefits. You can go to www.socialsecuritytiming.com** and look at their directory or just call a local financial planner to see what they know. Here are a few qualifying questions to ask them:
• “How much of a cut in benefits will I take if I apply early instead of the normal retirement age?”
• “If I decide to go back to work after starting retirement, how much can I earn before my benefits are reduced? Does that apply prior to age 66 or after?”
• “What is provisional income?”
• “How will it impact my spouse if I elect now and then die?”
• “What is the file and suspend strategy?”
• “What is a restricted application?”
If they make it through these questions without too much bumbling around they may know more about Social Security than the average financial advisor. A word of caution here, expect to pay for this. If they offer Social Security planning for “free” there will most likely be an investment pitch tied to it.
If you have any questions about this or other financial planning topics please don’t hesitate to contact me at email@example.com or find me online at http://www.carrollinvestmentmanagment.com
*Income of the Population 55 and Older, 2008—Social Security Administration
**Social Security Timing is not affiliated with or endorsed by Carroll Investment Management or LPL Financial.
Chart 2: This illustration assumes the following benefits:
Age 62 $1,500 per month to age 91
Age 66 $2,000 per month to age 91
Age 70 $2,640 per month to age 91
The opinion voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.