Social Security Benefit Claiming Strategies

 Social Security Benefit Claiming Strategies

Mahendra S. Rathore, MBA BA (Hon) CFP® ChFC® CRPC® CLU® CHE® PMP®

According to an AARP Study, there are 10,000 baby boomers reaching retirement age every day, additionally, 10,000 baby boomers are turning 65 every single day, and this trend is expected to continue into 2030. Providing guidance and navigating the convoluted, confusing and complex rules for Social Security benefits requires that an advisor possess an uncanny ability to cut through a myriad of complexities and help clients maximize their benefits.

Social Security represents a significant source of income for most Americans. According to a Govt. statistic, Social Security benefits contributes to about 40% of an average retirees’ income. Although most Social Security recipients escape income taxes completely on all their benefits, middle- and upper-income level retirees must count to 85% of their benefits as reportable income. Social Security is a major portion of retirement income for most people. When and how to claim is a major decision that can have a long -lasting impact on clients

Full retirement age (FRA) for retired workers is calculated based on the year of birth. Maximum monthly Social Security benefit: $2,788 for workers retiring at FRA in 2018. In 2019, the maximum benefit will increase $73 per month to $2,861. https://www.investopedia.com/ask/answers/102814/what-maximum-i-can-receive-my-social-security-retirement-benefit.asp However, Higher benefits are possible for those who work or delay benefit receipt after reaching FRA. The SSA has several handy calculators you can use to estimate your benefits. Ideally, if you wait until age 66 to take Social Security instead of taking it at age 62, you’ll come out ahead if you live to at least age 77-78. The break-even age goes up the longer you wait. For example, if you’re a top wage earner turning 62 this year, then your break-even ages are as follows:

Monthly MAX Social Security benefits Retirement Age Break-Even Age

$2101 62 vs. 66 Between 77 and 78

$2806 62 vs. 70 Between 80 and 81

$3721 66 vs.70 Between 82 and 80

Please Note: Higher benefits are possible for those who work or delay benefit receipt after reaching FRA Reference: https://www.ssa.gov/benefits/retirement/estimator.html

THE CURRENT LIFE EXPECTANCY:

According to the Social Security Administration, average life expectancy for a male reaching age 65 today is 84.3 years and a Woman turning age 65 today can expect to live on average is 86.7. Married individuals tend to live even longer, with a greater than average probability of at least one spouse living to age 90 and one out of 10 will live beyond age 95 years. To compute your life expectancy, use the life expectancy calculator at https://www.ssa.gov/oact/population/longevity.html

If you can wait even longer to claim, you can further boost how much you will receive each month. Your benefit may increase by an additional 8% each year you delay past your FRA, up to age 70. The maximum benefit for those who begin claiming at age 70 is currently $3,698 a month, about $1,500 a month more than for those who start claiming at age 62.1

The level of benefits at Full Retirement Age (FRA) is called the Primary Insurance Amount (PIA). The PIA is based on complex & detailed calculations. The Social Security Administration begins by calculating someone's Average Indexed Monthly Earnings (AIME) for the 35 years of highest earnings, where earnings for years before age 60 are indexed to reflect wage inflation.

FACTORS AFFECTING COUPLES

What factors affect married couples' decision concerning when to start Social Security? Perhaps, the most important factor is the applicability of the earnings test. Another is each partner's life expectancy. However, due to the rules governing spouse's and survivor's benefits, the life expectancy of the longer-lived spouse is the critical factor. Strategies for couples in deciding when to begin benefits revolve around spouse's and survivor's benefits.

There's no one-size-fits-all strategy for determining the best time to claim Social Security benefits. It will depend on several factors: your marital status, financial situation, tax exposure, health, and retirement goals. But understanding the

intricacies of how your Social Security benefit is determined can help you make thoughtful, informed decisions about how best to maximize it and ensure your financial security well into your retirement.

Source: ssa.gov

CONSIDERATIONS FOR MARRIED COUPLES

Determining the right time to claim Social Security benefits can be complicated, especially for married couples. Often, couples are misinformed or may misunderstand how the decision to claim or defer their benefits can impact their long-term financial well-being. They may not fully grasp the disadvantages of claiming their benefits too early, the impact of deferring benefits or the nuances of selecting a spousal benefit over an individual one.

When a married individual reaches their full retirement age and files a claim for benefits, their spouse becomes eligible for a spousal benefit. This allows the spouse to claim a benefit of up to 50% of the primary claimant's benefit. A spouse has dual entitlements to Social Security benefits. A spouse is entitled to the larger of 100% of benefits at Full Retirement Age based on his or her earnings record or up to 50% of the spouse's benefits at (FRA) Full Retirement Age.

UNDERSTANDING SURVIVOR'S BENEFITS

The widow has dual entitlements under Social Security. She is entitled to benefits based on her earnings record or survivor's benefits based on her deceased husband's earnings record. She can receive full survivor's benefits when she attains Full Retirement Age or reduced benefits as early as age 60. A disabled widow can begin benefits as early as age 50. The same rules apply for divorced widows who were married to the deceased husband for at least 10 years and did not remarry before age 60. For more information refer to “Survivors Benefits” at www.ssa.gov/pubs/10084.html and “What Every Woman Should Know” at www.ssa.gov/pubs/10127.html.

The structure of Social Security benefits does not appear actuarially fair to couples. Instead, it encourages the higher earners to delay the beginning of benefits. Usually, if their joint life expectancy exceeds 17 years, the higher earner should delay the beginning of benefits. For couples where one partner depends on the spouse's benefits, that partner should consider delaying the beginning of benefits until he or she reaches Full Retirement Age—unless he or she has a short life expectancy. Source: https://www.ssa.gov/pubs/EN-05-10024.pdf

KEY CONSIDERATIONS FOR INDIVIDUALS

How much money you receive in Social Security benefits depends mainly on two factors: Your lifetime earnings. The primary insurance amount is based on the average indexed monthly earnings for the 35 years of your career in which you earned the most money. Claiming Social Security benefits at age 70 can increase the primary insurance amount by 32%. This is because the government offers individuals delayed retirement credits, an increase of two-thirds of 1% to the PIA for every month benefits are unclaimed beyond the full retirement age — an 8% increase every year.

INCREASE FOR DELAYED RETIREMENT Year of Birth* 12-Month Rate of Increase Monthly Rate of Increase 1933-1934 5.5% 11/24 of 1%

Year of Birth* 12-Month Rate of Increase Monthly Rate of Increase 1935-1936 6.0% 1/2 of 1% 1937-1938 6.5% 13/24 of 1% 1939-1940 7.0% 7/12 of 1% 1941-1942 7.5% 5/8 of 1% 1943 or later 8.0% 2/3 of 1%

1. https://www.ssa.gov/pubs/EN-05-10127.pdf

HIGHER EARNING SPOUSE SHOULD DELAY THE BENEFITS:

A long-life expectancy also encourages delaying benefits. However, for a married couple, the life expectancy of the longer to live is usually the critical factor. In general, if either partner has a long-life expectancy, the higher-earning member should postpone the beginning of benefits based on his or her earnings record until after FRA.

▪ Since survivor's benefits reflect delayed retirement credits (DRCs), it usually pays for the higher earner to delay the start of benefits beyond Full Retirement Age (FRA). The advantages of the higher earner delaying benefits are especially strong if the lower-earning partner is much younger and healthy.

▪ Usually, between couples where one partner relies on spouse's benefits, that partner should delay the beginning of spouse's benefits until Full Retirement Age, since the benefits are reduced by almost 20 % for beginning spouse's benefits earlier is penalizing unless the lower-earning spouse has a short life expectancy.

▪ Married spouses can switch from survivor's benefits to benefits based on his or her record, or from benefits based on survivor’s benefits. It often pays for the widow or widower to begin survivor's benefits and then switch to benefits based on his or her record at age 70. By delaying benefits based on his or her own record until age 70, he or she maximizes the size of the delayed retirement credits.

Other considerations:

It is best for the higher earner to start converting assets from their 401 K and traditional IRAs into Roth 401 K a few years before they retire or after retirement when Markets are in correction thereby they can save taxes on conversion and later ROTH IRA distributions are tax free withdrawals that do not count toward Income for Social Security purposes as well excluded from calculation Required Minimum Distribution (RMD)

If your client receives a pension for work not covered by Social Security (such as government employment), any Social Security benefits you may be eligible to collect on your spouse's record may be reduced. This type of benefit reduction is called GPO. Some individuals are exempt from the offset. If you want to know if you meet the requirements for an exemption, please read the "When won't my Social Security benefits be reduced?" section of our "Government Pension Offset" factsheet.

Your Social Security retirement or disability benefits can be reduced. The Windfall Elimination Provision can affect how we calculate your retirement or disability benefit. If you work for an employer who doesn’t withhold Social Security taxes from your salary, such as a government agency or an employer in another country, any retirement or disability pension you get from that work can reduce your Social Security benefits.

Summing-Up:

Social Security is an integral part of clients’ retirement income and understanding various claiming strategies can help maximize benefit. It's important to evaluate individual benefit amounts and any potential spousal benefits to fully understand the impact that a strategy can have on your client’s future wealth. It's also important to recognize the Social Security is a significant topic in political and public policy debates. The strategies and views described above could change in future due to legislative, administrative or economic changes resulting in lower Social Security benefit payouts, higher taxes or both. An Advisor should look at life expectancy, total lifetime benefits, retirement spending levels/cash flow, other savings, pensions, the impact of inflation to design an optimal strategy for client’s specific situation & retirement income goals.

References:

I. For rules determining eligibility for spousal benefits, see https://www.socialsecurity.gov/OP_Home/handbook/handbook.03/handbook-0320.html

II. For additional details on early claiming reduction factors, see https://www.socialsecurity.gov/OP_Home/handbook/handbook.07/handbook-0724.html.

III. For rules on when an individual can claim benefits on his or her spouse's earnings record, see https://www.socialsecurity.gov/OP_Home/handbook/handbook.03/handbook-0305.html.

IV. https://www.dol.gov/agencies/ebsa/about-ebsa/ask-aquestion/ask-ebsa

Disclosure:

The views expressed in this article are the writers own understanding and knowledge and nothing contained herein should be considered otherwise. The Article is a general educational and informational piece and is provided exclusively for the educational purposes only. This article is not written for or endorsed by any Company and nor is it intended to constitute legal, tax, investment or financial advice. Nothing contained in this publication should be considered as accurate and information or current information. Please know that this material is not intended to be a full and exhaustive explanation of the Social Security Income, law in any area or of all the tax, investment or financial options available. The information discussed herein may not be applicable to and/or appropriate for every advisor and should not be relied upon as authentic and accurate information to be used for client consultation since each client unique will warrant due diligence, individual consultations and advise from the experts in the specific situation.