Are you nearing the time when you can begin receiving Social Security retirement benefits? You deserve it after paying into the system all these years. But the monthly amount you’re entitled to collect, as well as how long you receive benefits, depends on when you officially apply for benefits.
This isn’t an easy decision, and it can affect retirement and estate planning techniques for both yourself and the rest of your family. Let’s review the main options at your disposal.
Timing is everything
The Social Security Administration (SSA) says you’re entitled to receive 100% of the benefits based on your earnings history at full retirement age (FRA). The FRA, which is based on the year of your birth, ranges from age 65 for those born in 1937 or earlier to age 67 for individuals born in 1960 or later. For Baby Boomers born between 1943 through 1954, the FRA is age 66.
But you don’t have to wait until your FRA to receive benefits. In fact, you can elect to begin taking benefits as early as age 62, although monthly benefits will be reduced. The monthly reduction can be as much as 25% of the FRA amount. The closer you apply to your FRA, however, the lesser the reduction.
Conversely, if you choose to delay benefits, you’ll receive a higher monthly amount than the FRA amount. Essentially, your benefits are increased by 8% for each year you delay taking benefits until age 70. Thus, the maximum increase for Baby Boomers with an FRA of 66 is 32%. Once you reach age 70, the benefits are maxed out.
Factors to consider
Should you opt to begin receiving benefits before your FRA or hold off? One thing to consider is the fact that you may live longer than you initially thought because of medical advances. If this occurs, it’ll further stretch the resources needed to sustain a comfortable retirement. On the other hand, you might decide to retire early and rely on benefits while you’re still enjoying good health. Applying for benefits at your FRA may be a reasonable compromise.
Every situation is different, but let’s take a look at several key factors that may affect your decision:
Accumulated assets. Do you have enough funds to live on if you choose to apply for benefits early? You may have heard horror stories about people outliving their savings late in life. However, consider if you’ll be spending less in retirement, so your needs won’t be as great. Furthermore, if you’re investing at least part of the benefits, you’re putting more money to work for you.
Breakeven point. At some point, you’ll come out ahead dollar-wise if you delay benefits (and you live long enough). This “breakeven point” depends on the amount of your benefits and assumptions used to account for taxes and investment opportunities. The SSA provides an online calculator to help calculate your personal breakeven point.
Spousal benefits. Don’t forget to factor your spouse into the equation. The amount of survivor benefits for a spouse who’s earned little during his or her working years may reflect the record of a deceased spouse’s benefit.
Earnings test. If you receive Social Security benefits before your FRA, they will be reduced if you continue to work. Under this “earnings test,” you must forfeit $1 in benefits for every $2 earned above an annual limit ($16,920 for 2017) divided by 12. Thus, if you earn more than $1,410 per month your benefits will be phased out. In the year in which you reach your FRA, the reduction is $1 in benefits for every $3 over another limit ($44,880 for 2017), although it applies only for earnings prior to reaching your FRA. After you reach your FRA, there’s no reduction in benefits. Thus, in that year, if you earn $44,880 prior to your FRA and another $44,880 after your FRA, there’s no reduction. Also keep in mind that the reduction isn’t permanent. The lost benefits will be used in the determination of your monthly benefit upon reaching your FRA.
Estate planning considerations
Don’t discount the impact that Social Security choices can have on estate planning. Notably, a surviving spouse may be entitled to benefits based on a deceased spouse’s history. In some cases children are able to claim benefits based on a deceased parent.
The choice is yours
Besides the hard numbers, your personal preferences can affect the timing of benefits. For instance, if you’re simply ready to call it quits as soon as possible, you may choose to begin receiving benefits at age 62. Others might enjoy working into their 70s or beyond and don’t want to forfeit benefits under the earnings test. What’s more, you must coordinate this with other aspects of your estate plan. Discuss your options with your estate planning advisor.
Sidebar: Two Social Security loopholes closed
As you plan your estate and factor in your Social Security benefits, bear in mind that two popular strategies are no longer available:
- File-and-suspend strategy. Previously, a higher-earning spouse could first apply for benefits at full retirement age (FRA) and then suspend them, thereby earning Social Security credits until age 70. In the meantime, the lower-earning spouse would claim benefits based on the higher-earning spouse’s earnings history.
- Restricted application strategy. A spouse who was approaching FRA could file a restricted application for spousal benefits only. Then the spouse would wait until age 70 to apply for benefits based on his or her own history. This enabled the spouse’s Social Security credits to continue to grow.
Even though both strategies are no longer available, the laws still provide plenty of flexibility.
Source: JD Supra
Social Security benefits: When is the right time to begin receiving payments?
