Have you heard that there are over 560 ways to claim Social Security? Some experts peg it at 567 ways to take Social Security, to be specific. With so many options, how can you be sure that you have chosen the right Social Security claiming strategy for your situation?
To be clear, those are just numbers. Paul Simon knew 50 ways to leave your lover. Most sources cite somewhere between 567 ways, nine ways (for a single person), and 81 ways (for a couple).
However many ways there really are, and even the Social Security Administration doesn’t seem to offer a straightforward answer, the important thing is that you claim in the most productive way for you and your spouse if you are married.
Here are a few things to keep in mind as you explore different options for when and how you will collect Social Security. These factors can help you make the most of your benefits, whether claiming early or delaying past your age of full benefit eligibility to let your benefit grow more.
Full Retirement Age
For many people, waiting to claim until you reach full retirement age is often a very practical strategy. Full retirement age (FRA) varies depending on when you were born. For those born from 1943 to 1955, it is 66. For those born from 1955 to 1960, it increases gradually to age 67. For those born after 1960, FRA is 67.
FRA matters because when you claim affects the percentage of your “normal” benefit you and your spouse can expect to receive. If you claim at FRA, you will receive 100 percent of your regular benefits. Each year you wait to claim after FRA until age 70 increases your benefit by 8 percent.
Thus, if your full retirement age is 67 and you claim at 68, your benefit will be 108 percent of your standard benefit. In other words, you can increase your monthly benefit by nearly one-third just by waiting four years to claim.
Calculate Your Breakeven Point
On the other hand, you need to calculate when you will break even on that delay and if you are likely to do so. In other words, by waiting till 70, you have foregone at least 3 to 4 years of your full standard benefit. If your benefit would have been $1,500 per month and you have given up at least 48 months of that benefit, then you will need to earn $72,000 from the enhanced benefit to break even on your decision.
By waiting till 70, your $1,500 benefit will increase by nearly $500. To make up the $72,000 difference, you will have to collect 144 (12 years) at the higher rate. Of course, if your spouse is also collecting on your enhanced benefit, that period will be shorter. Various sources such as AARP say that your breakeven point is about 78 years and 8 months (claiming 62).
In considering your own timing, think about your health (are you likely to live much beyond 70), your immediate need for the cash flow, how much your spouse’s early benefit will add to your monthly income, and similar issues. Once you have considered all of these issues, the math will guide you to a decision.
Early Retirement Age
Leaving aside issues of disability, divorce, and possible dependent children issues, generally, the earliest you can claim Social Security is at age 62. Doing so will, however, permanently reduce your benefits by about 30 percent.
Similarly, if your spouse claims early, whether on your benefits or theirs, the benefits will always be lower. You may compare your immediate need for the month with the increased sum from waiting to decide what you should do. Of course, an experienced financial professional can help you work through these issues.
Another issue impacting the decision to claim early is whether you will continue to work after claiming. Those who are under FRA and still work are subject to an income limitation. This limitation updates every year, and the best source for the current number is the Social Security Administration’s website. On the SSA website, you can see what your limit will be, given your age and the month of your birth.
This earnings limit matters because if you exceed the limit in wages, self-employment income, bonuses, commissions, and vacation pay, you will lose $1 in benefits for up to every $3 over the limit you earned.
Waiting Until 70
As we mentioned previously, you gain 8 percent per year on your regular retirement benefit by waiting to claim. Thus, you can receive a benefit that is nearly one-third larger than your “normal” benefit simply by waiting to claim.
Similar rules apply to your spouse’s account. Remember, though, you will be forgoing those months of benefits entirely. Be sure to do your breakeven calculation before deciding what to do.
Of course, there are other factors to consider as well. You might use these questions to guide your decision-making process:
- Do you expect to inherit money in the future, which could be another income source besides Social Security?
- If you did collect your benefits early, would you invest any excess money above your monthly expenses?
- How could the growth of your invested money in that situation affect your timing with Social Security?
Your financial professional can help you think through these questions as well.
Will Your Social Security Benefits Be Taxable?
No matter what your income source, if your provisional income exceeds a set amount for a single person or a married couple, you will owe federal income taxes on some portion of your benefits. In addition, some states will also subject your benefits to income taxes.
Here is how you calculate provisional income. Add up the following to come up with your provisional income number:
- Adjusted gross income, including wages, investment income, rental income, pension and annuity income, and other income sources besides Social Security
- 50 percent of your Social Security benefits
- Tax-exempt interest from municipal bonds
Once you are above those income levels, somewhere between 50 and 85 percent of your benefits will be subject to federal income tax. Note that this doesn’t mean you will lose 50 to 85 percent of your benefits.
It means that a percentage of your benefits will count as taxable income and be taxed at your marginal tax rate. If you are in a relatively high tax bracket, this rule can take a big bite out of your benefits.
Spousal benefits can vary greatly depending on whether your spouse has their own earnings history or has never worked. If your spouse has never worked or hasn’t worked enough to gather the minimum number of qualifying quarters (at least 10 years of work or 40 Social Security credits), they will be entitled to 50 percent of your base benefit.
That entitlement is subject to the same early claiming impact as other Social Security claims as well. Be sure to examine your taxes and your ongoing work to find a breakeven point.
As a starting point, your spouse is entitled to a benefit equal to 50 percent of your primary insurance amount. Just as with your own claim, however, claiming before FRA will permanently reduce the percentage of your benefit that your spouse will receive on claiming.
Depending on timing and other matters, your spouse’s benefits could be permanently reduced. Of course, your situation will decide whether claiming now is worth the permanent slash in benefits.
Other Factors Supporting Your Decision
We talked earlier about the possibility of inheriting money or investing excess payments from Social Security. When deciding when and how you or you and your spouse should claim Social Security benefits, there are several other factors for you to consider.
Consider whether you or your spouse are likely to survive long enough to reach the breakeven point on waiting. Also consider whether getting benefits now might help pay ongoing medical expenses.
Need for the Money
Examine your current income and assets. Do you have enough to be comfortable until you reach FRA? Is your retirement planning falling sufficiently short that you need the money now, even if in a reduced amount? You should consider these issues in your claiming timing.
Plan to Continue Working?
If you are still working, the potential loss of benefits and taxation of benefits may make it simply unprofitable to claim early. You can lose benefits by making too much income before FRA, and the taxes on your benefits if you’re still working can also take a heavy toll.
Work with a Financial Professional
If you are nearing retirement and thinking about claiming Social Security for yourself, your spouse, or both of you, you should consider working with a financial professional to discuss your options. This experienced individual can help evaluate your retirement assets and potential income and then help you determine exactly how Social Security should fit into the mix.
Are you looking for a financial professional to assist you? On the other hand, you may want a second opinion of your current retirement strategy. For convenience’s sake, many independent financial professionals are available at SafeMoney.com to help you.
Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your goals, concerns, and situation, and to explore a potential working relationship. Should you want a personal referral, please call us at 877.476.9723.