May 27, 2017 — If you thought you knew everything you needed to know about when and how to claim your Social Security benefit – think again. For those who have not yet claimed their benefit as of 2017, two major developments probably affect you. This 2 Part article will help educate you on how to best navigate this new world. Part 1 explains how benefits are different (lower and later) for people born in 1955 or later, and how those folks might cope with that. Part 2 explains the 2016 changes affecting the popular claiming strategies called “file and suspend” and “restricted benefit”.
Where you born in 1955 or later?
The first item affects those who will celebrate their 62nd birthday in 2017 (or in a later year). If that describes you, the age in which you are eligible for full Social Security benefits is on its way from age 66 to 67. The Full Retirement Age (FRA) will steadily increase from age 66 in two-month increments over the next six years – eventually reaching age 67 for those born in 1960 or later. Note that this is not a new development. The increase in claiming age was made the last time the Social Security program was overhauled. When these changes were made in 1983 the idea was to help save Social Security by extending the age in which benefits were paid. It also reflects the fact that average life expectancies are now much higher than they were when Social Security was created.
But wait, there is more bad news for boomers born in 1955 or later. Your Social Security benefits are also taking a hair cut compared to your fellow boomers who were born prior to 1955. For example, if your FRA is 67 you can still take your benefits when first eligible at 62, but you will now be getting 70% of your FRA instead of the 75% that someone who turned 62 last year or earlier received. And if you wait until the age where you can get your maximum benefit, age 70 (also unchanged), you will now get 124% of your FRA benefit instead of 132%. This means there is slightly less benefit for waiting to age 70 to claim, although you still get more by waiting. You might want to speak with your financial advisor about how this impacts you.
What can you do about it?
Well you can’t change your birthday. But you can do a few things to try to mitigate the increase in your FRA and reduced benefit. One is to delay your claiming date to at least your new Full Retirement Age – 66 years and 2 months for those born in 1955 all the way to 67 for those with a 1960 birthday. At least that way you won’t have to take a financial haircut. Delaying to age 70 is almost always an even better idea, unless you absolutely need the money or don’t think you or your spouse will live past age 80. A person born in 1955 who claims at age 70 would get a check 75% higher than if they claimed at age 62 – plus cost of living increases, and even without working during that period.
Working longer is another thing to consider. If you continue working you will be paying into Social Security along the way. But remember that your benefit is based on your highest 35 earning years (and you need at least 10 earning years to be eligible in the first place). Consider this example:
Susan worked from 1981 to 1990, then took off 20 years to raise a family, rejoining the paid workforce in 2010. With only 17 earning years, that leaves 18 zeros next to her computation. Every year she can work until age 67 (or 70) knocks off some of those zeros, thereby increasing her benefit, possibly up to 20% or more.
For those who already have 35 years of earnings history at high income levels, the benefit of working longer is less powerful. It is hard to move your average unless you can replace some low earning years with higher ones. But for most people, who typically don’t have 35 earning years at the maximum contribution (adjusted for inflation), you can still increase your benefit somewhat. For example, the maximum amount of earnings subject to the Social Security payroll tax in 2017 is $127,200; most people haven’t been earning at that level throughout their careers.
Know where you stand
The one thing you should definitely do before you make a claiming decision is to find out how much you would receive in retirement SS benefits at various claiming ages. SocialSecurity.gov has a great Quick Calculator that will do this for you. It will not only show your benefit claiming at age 62 vs. 67 vs. 70, but if you are still working it will show you how much extra your continued work might be worth. For example, we used it to run this calculation for a hypothetical person born in August, 1955 who currently makes $50,000 a year. Since that amount of earnings is well below the maximum subject to withholding, continuing to work won’t move this person’s benefit up much. But waiting to claim to age 67 or 70 will increase the monthly benefit significantly – $1042 at age 62 vs. $1904 at age 70.
Mo. Benefit – No Work
Mo. Benefit-Keeps Working
Mo. Diff – Work vs. No Work
* If you claim at age 62 but keep working anyway your benefit could go up if you can replace some low earning years in your 35 year calculation. Up to age 67 your benefit will be reduced (but not after that), but you will get all of that back afterwards.
Note that the Quick Calculator bases its estimates on your reported current earnings. If you had long periods where you didn’t work or most of your earning years are very different from your current, its estimates will be off. In that case Social Security has a variety of other Calculators that can give you a much more precise estimate.
Claiming strategies Curtailed
In Part 2 of this article we will explain a major change affecting two popular Social Security claiming strategies that was announced in late 2015. Those are file and suspend and restricted benefit.
Comments? Is this new information to you or have you realized this all along? Will it affect either when you elect to receive your benefits or how long you will work? Please share your thoughts in the Comments section below.
For further reading:
Part 2: 2016 SS Claiming Changes
Money: Full Retirement Age Starts Going Up This Year
Woman Get a Bigger Social Security Bump
5 Reasons Why Filing for Social Security is More Complicated Than You Think
How the New Social Security Claiming Rules Affect You