There are 567 ways for a couple to claim Social Security, the Securian Financial Group pointed out in a recent communication to its financial planners, but only 18 percent of couples are making plans to maximize benefits.
According to the Social Security Administration, among those receiving retirement benefits:
- Some 52 percent of married couples and 74 percent of unmarried persons get half or more of their retirement income from Social Security.
- About 22 percent of married couples and 47 percent of unmarried people rely on Social Security for 90 percent or more of their income.
In other words, if you’re not looking for ways to make the most of your Social Security benefits, you’re probably making an expensive mistake.
Here are some tips for when and how to claim courtesy of Mary Beth Franklin’s new booklet for financial planners, Maximizing Your Clients’ Social Security Retirement Benefits.
File and suspend
Franklin calls 66 “the magic age” for collecting Social Security benefits. For many couples, a strategy to “file and suspend,” available after one of the spouses reaches age 66, provides the most flexibility. This is particularly the case, she says, for a traditional couple — one where the husband made substantially more income than the wife. It often makes sense for him to file for his benefit at 66, so his wife can file for a spousal benefit, but defer his own payments until they are worth more later. The wife must be at least 62 to claim the spousal benefit. If she waits until she is 66, she’ll get 50 percent of her husband’s full benefit. If she is younger, she’ll get proportionately less.
Here’s an example: If the husband’s Social Security benefit at 66 is $2,400 a month, then his 66-year-old wife would be eligible for $1,200 a month. But if she filed for her husband’s benefit at 62, she would receive only $840 — 35 percent of his full benefit — because she collected four years early.
Maximizing benefits for a two-income family
If you are a two-earner couple, there are other lucrative possibilities. Franklin points out a strategy that is particularly good if both halves of the couple are about the same age and have similar earnings. At 66, one spouse can file and suspend to trigger benefits for the other spouse. That spouse can file a restricted claim for spousal benefits only. Both can continue to work, allowing their benefits to grow at 8 percent a year until they are age 70.
Here’s how this strategy can result in a super-sized retirement benefit. At 66, the husband files and suspends his $2,400 per month benefit, planning to claim nothing for another four years. His 66-year-old wife files a restricted claim for spousal benefits only and receives $1,200 a month or $14,400 per year for the next four years. She allows her own worker benefit to continue to grow by 8 percent a year.
When they are both age 70, they would be eligible to collect two maximum benefits of $3,168 per month (this includes the delayed claim credit) for a total of $76,000 a year — plus any cost of living adjustments that are added in the intervening years.
That’s a great reward for having the patience to wait.
Here are five other facts about Social Security.
Most Americans watch their money go into the Social Security trust fund in the form of payroll deductions as soon as they begin working, when retirement seems a long way off. As a result, many go through their working lives without giving it much thought.
Here are a few facts everyone should know about Social Security benefits before making any decisions about retirement.
Just about anybody who has worked for 10 or more years is eligible for Social Security retirement benefits.
You need 40 credits or quarters of coverage, earning a minimum income of $1,200 per quarter, according to the Social Security Administration.
The income requirement is so low that “it could be met with seasonal work,” says Richard W. Stumpf, a Certified Financial Planner at Financial Benefits Inc. in Wichita, Kansas.
There are some exceptions. Most federal employees hired before 1984 aren’t eligible to participate, says Brett Horowitz, principal and wealth manager at Evensky & Katz/Foldes Financial Wealth Management in Coral Gables, Florida, Stumpf adds that pastors may choose not to pay in.
Also, railroad workers and their families generally get benefits through a separate retirement system.
The size of your monthly check is arrived at by a series of calculations.
Your primary insurance amount, or PIA — the benefit you would get at full retirement age — determines the size of your monthly retirement check. According to the Social Security Administration’s website, the PIA is based on the Average Indexed Monthly Earnings, or AIME, as applied to an inflation-adjusted formula. The PIA is then adjusted for whether you take retirement before or after your normal retirement age — 66 for those now reaching retirement age, but gradually adjusted to age 67 for those born after 1960.
You can begin drawing reduced Social Security as early as 62. For every month you delay after reaching full retirement age, up to age 70, the monthly benefit increases.
According to a 2010 report of the Senate Special Committee on Aging, for someone with an AIME of $5,000 in 2010, the PIA would total $1,971.
In keeping with the original intent behind Social Security — a way to lift seniors out of poverty — lower-wage earners get a higher proportion of their earnings than higher-wage earners. The maximum monthly benefit that can be received in 2014 is $2,642 for a worker retiring at full retirement age.
3. What are spousal benefits and widow benefits?
If one partner in a marriage earns significantly less than the other, the lower-earning spouse can collect spousal benefits rather than payouts based on his or her own earnings history.
“The spouse can get the greater of their own or 50 percent of the other spouse’s PIA,” Horowitz says. “The lower-earning spouse is not eligible until the higher earner starts getting benefits, but both can start as early as 62.”
Stumpf says this option can be a financial planning tool.
“Imagine a high earner whose spouse is his employee,” he says. “If they cut her pay and transfer the rest to him, when she reaches retirement age, one-half of his income will be significantly higher than what she earned.”
A divorced spouse who was married for more than 10 years and has not remarried can draw against the ex-spouse’s work history. Widows and widowers can receive the higher of their own or their spouse’s monthly payment, but not both.
“That’s why it’s important for the higher earner to delay taking benefits for as long as possible,” says Horowitz.
According to the 2014 annual report from the Social Security Board of Trustees on the financial status of the program, without policy changes, the combined Social Security trust funds will become depleted and unable to pay scheduled benefits in full on a timely basis in 2033. After that, Social Security could pay about three-fourths of scheduled benefits through 2089.
The year that funds fall short varies somewhat in each annual report depending on economic, demographic and other variables, according to the Center on Budget and Policy Priorities, but it has ranged between 2029 and 2042 for the past two decades.
In theory, they’re held in trust by the government. But it’s not as if your money sits there in the Social Security trust fund waiting for you to retire. After current beneficiaries are paid, surplus dollars are used to buy bonds from the U.S. Treasury. So the trust has the bonds, but the money is now in the Treasury, where Congress can use it for any purpose.
“The Social Security trust fund is … a piggybank holding paper IOUs from Congress,” Stumpf says.
For the trust funds to remain solvent over the next 75 years, the 2014 Trustees Report says, one of these measures would have to be implemented immediately:
- Payroll taxes would have to increase by 2.83 percentage points, from its current level of 12.4 percent to 15.23 percent;
- Benefits would have to be cut by 17.4 percent to all current and future beneficiaries;
- If applied only to beneficiaries enrolling in 2014 or later, benefits would have to be cut by 20.8 percent;
- Or some combination of the above should be adopted.
According to the report: “The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them.”
Lawmakers have been dragging their heels to make any fixes to Social Security, in part because it’s such a hot-button issue.
AfterFiftyLiving thanks Bankrate.com and Jennie L. Phipps for providing this article.