Social Security benefits are an important piece of the retirement equation for many Americans.  With the traditional pension plan fading into distant memory and being replaced by the 401(k), oftentimes Social Security is the only source of steady income that can be anticipated in retirement.  So it is no wonder that people want to make sure that they maximize that income stream.

Let’s quickly discuss a few key aspects of Social Security benefits and two important strategies available to you via the Social Security Administration:

Key Aspects:

      

      1)      Full Retirement Age (FRA) – this is the age where you can begin to receive your full Social Security benefit without being subject to a reduction.  For individuals born between January 2, 1943 and January 1, 1955 the FRA is 66.  If you initiate your benefits prior to age 66 then the Social Security Administration will reduce your benefit by 5/9 of 1% for the first 36 months  (year 66 down to 63) and 5/12 of 1% for the last 12 months (year 63 to 62).  However, if you delay your retirement benefits beyond your FRA to age 70 then you get a monthly increase of 2/3 of 1% - or 8% per year. 

      2)      Spousal benefits –married couples can qualify for the higher of your benefits based on your own work history or ½ of your spouse’s benefit at FRA.   Your spousal benefit is NOT impacted by when your spouse initiates their benefits but it is reduced if you take your spousal benefit prior to your full retirement age. 

For example, let’s assume Ken (65) and Rebecca (62) are contemplating when they want to take their benefits.  IF Ken decides to take his benefit today – at age 65 – he will receive a reduced benefit because his full retirement age is 66, so the SSA will penalize him for starting his benefits early.  However, the fact that Ken started his benefits at age 65 has NO impact on Rebecca’s spousal benefit.  If she waits until her age 66 then she will still receive one-half of Ken’s full retirement benefit – assuming it is higher than Rebecca’s own benefit.  It is worth mentioning that spousal benefits do not increase in value after age 66 so there is no reason to delay spousal benefits beyond age 66. 

      3)      Widower’s benefit – The surviving spouse will receive the higher of their benefit or their deceased spouses benefit.   If Ken has a benefit of $2,000/month and Rebecca has a benefit of $1,500/month Rebecca will receive $2,000/month IF Ken predeceases her.  On the other hand, if Rebecca predeceases Ken he will continue to receive $2,000/month since his benefit is higher. 

      4)      This has been written about a lot but it is worth mentioning again.  Your Social Security benefits are based on an actuarial table – meaning there is a breakeven point for whether “you win” or the “government wins.”  In order to know the best option, you need to know your life expectancy and the rate of return that you can earn on your money if you were to start your benefits early (and since you do NOT know either you can only make an educated guess). 

Under most assumptions, the breakeven is somewhere between ages 78 and 82.   This means that under any strategy where you start your benefits early means “you win” if you don’t live to age 78 (kind of reverse thinking in a world where you win by dying early) and the government wins if you live beyond 78 to 82.  On the other hand, under most strategies if you wait as long as possible, you win if you live beyond age 78 to 82 and the government wins if you die prior to that. 

Important Strategies

      1)      File and Suspend – this is a strategy that allows you to file for your Social Security benefits and then suspend them.  You may do this for any number of reasons.   One reason to do this is to maximize your benefits with your spouse.   The typical strategy would have one spouse file for their benefits at age 66 and immediately suspend them.  This then allows the other spouse to start their spousal benefits.  This strategy is only available once you have attained your Full Retirement Age (FRA).

      2)      File a Restricted Application – the Social Security Administration will automatically pay you the higher of your benefit or ½ of your spouse’s benefit – assuming you are eligible – when you apply.  It is great that they do that because many people do not know the rules governing Social Security benefits.  However, there may be times where you want to intentionally delay the higher paying benefit.  Once again, you can only file a restricted application at your full retirement age (FRA). 

Let’s assume that several years have passed and Ken is now 70 and Rebecca is 66.  Remember that Rebecca’s benefit was $1,500/month at age 66 and Ken’s benefit was $2,000/month at his age 66 – making her spousal benefit equal to $1,000 (50% of $2,000 is $1,000).  Since Ken is already age 70 he has started his Social Security benefits so Rebecca is now eligible for spousal benefits.  But why would she want to elect spousal benefits if her benefit is higher. 

Great question!  Rebecca MAY want to file a restricted application for just her spousal benefits and allow her benefits to continue increasing by 8% per year until her age 70.  This allows Rebecca and Ken to have an additional $1,000/month in income while letting her benefit increase by 8% per year until age 70 – essentially making her $1,500/month benefit at age 66 grow to $2,040/month at age 70. 

It’s important to work with a financial planner who is prepared to discuss these options though.  There are times when the strategy for Rebecca and Ken may not be right for you.  After all, Rebecca gets a step up to Ken’s benefit – which has also been growing – if he predeceases her.  This means that there are now three benefits to take into account when trying to determine the appropriate breakeven strategies.  Financial Planners who deal with these questions on a regular basis are likely to have some insight that is important in your decision making process.