October 11, 2016 — We just read a bunch of articles on how to “maximize” your Social Security benefit from some of the top experts in the field. Did we get enlightened? Actually we ended up more confused than ever. In fact we got so tangled up by the explanations that we almost think that one SS guru did it on purpose to sell his Social Security software. And we didn’t feel any better after reading that the same expert believes that employees at the SSA are not permitted to give out certain information (like breakeven points for various claiming options), and often give incorrect information to their clients.
This article provides 5 reasons why we think taking your Social Security retirement benefit is nowhere near as simple as you might think. We will also give you some ideas on how to gain the confidence that you are making the right decisions. Please note that we are not Social Security experts nor are we providing advice. We are merely providing you with some basic information – we urge you to carefully consult with your family and other advisors before you make any important financial decision.
A big reason for the confusion
First, we need to give you some background on why filing for Social Security benefits is more complicated than ever. As many Topretirements Members are aware, late last year Congress removed two loopholes that were enjoyed by some Social Security recipients – the File and Suspend and Restricted Benefit options. Another important change that many people don’t realize is the “deemed filing” rule, which applies to anyone born after Jan. 1, 1954. The deemed filing rules say that if you are eligible for a your own retirement benefit and a spousal benefit at the time you apply, you cannot claim one without claiming the other. You are “deemed” to be applying for both at the same time, so the SSA will decide for you which is the highest benefit and give that to you. All of that legislation changed the SS filing landscape, and people who thought they understood the system had to learn it over again. See “How the New Social Security Rules Affect You” from late last year.
File and Suspend essentially ended on April 30, 2016 – if you were eligible and hadn’t taken advantage of it by then, it is gone. For the record, this strategy allowed beneficiaries to “file” for their SS benefits, and then immediately “suspend” them. By filing, the person’s spouse could then receive spousal benefits. By immediately suspending his own benefits, the original spouse would continue to accrue an 8% per year increase up to when benefits are maximized, age 70.
The Restricted Benefit remains for some baby boomers, those born before born January 1, 1954. Those folks still have the right to file a “Restricted benefit application” and just claim benefits on the earnings of their eligible spouse. They can get the spousal benefit and continue to accrue 2/3% increase per month on their own earnings record. But again, their spouse must have applied for his or her benefit to be eligible. Even for people who are eligible for the Restricted Benefit, the decision to take it or not is highly individual.
5 reasons why claiming Social Security is a lot more complicated than you think
In some ways claiming is easier for single people – they just have to worry about when to claim their own benefits, and spousal benefits and surviving spouse issues are not a factor. Note that claiming rules for divorced spouses and widows and widowers are slightly different and not discussed here – See this SSA booklet.
1. Claiming at 62 is usually not the best strategy. But, and this is a BIG but, there are a whole host of reasons why it might be a bad, or a good strategy for you. Your expected lifespan (and that of your spouse), if you need the money, and whether you believe Social Security will run out of money all need to be considered. Without evaluating those, you can’t know if you are making the right choice. But do know this, if you file at age 62 you will only get 75% of what you would get if you wait to FRA.
2. Filing for a spousal benefit is a complex decision. Spousal benefits are maximized when the receiving spouse is at Full Retirement Age (FRA) – 66 for most boomers. At that age the spousal benefit will be 50% of the primary recipient’s benefit at FRA, assuming the primary spouse did not claim before that age (the spousal benefit does not increase if they claimed later). If your spouse claims his or her benefit at age 62, they only get 35% of your FRA payment as a spousal benefit. But remember, in order to get a spousal benefit the other spouse must currently be receiving Social Security benefits. So assuming both spouses have reached their FRAs, is it worth it for the primary recipient to file? If the primary waits until age 70, their benefit will have increased 8% per year, plus any COLAs. But by waiting the spousal benefit will have been forgone until that time too.
3. Earning histories and age differences and between spouses muddy the waters. Lets take 2 examples (assume the people in both examples were born after Jan. 1, 1954 – so the Restricted Benefit option is no longer available). In example 1 the wife eventually reaches her FRA at age 66 and so does her husband. The wife’s earning history is far higher than the husband’s. In this case if the couple is looking for income, the husband might be wise to start taking his benefit at age 66, but the higher earning wife should probably delay filing until age 70. The husband is forgoing some income by not waiting, but at least the couple has 4 years of benefits coming in. And by waiting to file, the bigger earner gets 8% a year on a much higher base.
In example 2 the husband is age 69 and the wife is 66. Neither has claimed yet, and their earning histories are identical. This couple has a confusing plethora of options. They can both claim now and forgo the bonus they would get by waiting until age 70. If they both claim SSA would give them each their own benefit, since it would be higher than the 50% of FRA spousal benefit. Or, one of them could claim now and the other could wait to age 70 (no spousal benefit). One of them could file and the other take the spousal benefit. Or, they could both wait until age 70 to file. The challenge is to know which of these options maximizes benefits and factors in life expectancy, financial needs, etc. Bottom line: this not an easy decision.
4. If you are married, your decision on when to file has a huge potential impact on your spouse. Let’s assume that you are the higher earner and you decide to file as soon as you are eligible, which is age 62. Your spouse is also 62 so she can also file. Because of “deemed filing”, her check will be based on the higher of her own record or a fraction of maximum spousal benefit, whichever is higher. Years later, you die at age 75, at which time your spouse now gets your benefit for the remainder of her life, if it is higher than her own benefit. Your wife, however, enjoys a long life to age 90. Unfortunately for her, when you made the decision to file at age 62 you were guaranteeing that your spouse gets a benefit that is a fraction of what it could have been if you had waited – for 15 more years!
5. The maximum age you might live to is a much more important consideration than your life expectancy. At age 65 a man has an average life expectancy of about 17 years. But what if you live to 100 – 35 more years. The worst thing that can happen to you is that you outlive your money. All we are saying is that when you decide at what age to take SS, think about how long you might live (if you and your spouse die early and leave SS money on the table, it won’t bother you, because you’ll be dead!) By the way, Abaris is an excellent life expectancy calculator that takes into account lifestyle factors to give you a more informed estimate.
So what can you do to eliminate this confusion?
First, you need to understand your options. There is plenty of information at the SSA website, including specific examples that might fit your situation. Many financial companies like Fidelity and Vanguard have helpful articles. If you do not carefully study what the rules are and evaluate them against your unique situation, you might make a choice you regret.
If you have a financial advisor, do not rely solely on their advice without researching the subject on our own. Few people are experts on SS – there is much bad advice out there.
Visit your Social Security office and ask about your options. But do not assume they understand your situation well enough to give you the best advice.
Lastly, here are some helpful links that can get you started:
Who Should Claim First
SS Gotchas Can Cut Benefits Forever
Vanguard: Married? Team Up for Social Security
Social Security Changes Explained
Think it doesn’t matter?
Think again. Here is what Senator Susan Collins (R-Maine) said: “Deciding at what age to begin claiming Social Security retirement benefits is the single most important financial decision that many Americans will ever make.”
What tactics are you planning to take in this changed claiming landscape? Please share your thoughts and ideas in the Comments section below.