With 10,000 baby boomers retiring every day, having a plan to maximize your social security benefits is an essential piece of your retirement plan. Most Americans believe that their options are limited in this area of financial planning, and I’m here to tell you that it’s quite the opposite. The timing and coordination of your benefits can have a major impact on several areas of planning including spousal benefits, survivor benefits and the total cumulative benefit amount that you receive over your lifetime.
Today we will take a look at 3 ways to maximize the benefits you are entitled to receive with the Social Security program. It’s important to note that these are not “blanket solutions”. Everyone who is considering filing for benefits should meet with a qualified professional to evaluate the best strategy for their specific situation. It is also to important to understand that, while Social Security personnel are very helpful, they are not allowed to analyze future benefits through scenario planning or advise on innovative strategies to maximize benefits. We at Snider Advisors are always happy to have a consultation with anyone who is moving into this phase of life.
#1 Work Longer and Earn More
While this may sound like an obvious statement, unfortunately this is where most Americans make their biggest mistake. Social Security benefits are calculated on your highest 35 years of earnings. This means that if you are still working and file for benefits at 62, you may be leaving your highest earnings out of the equation. Furthermore, if you are earning more today than your lowest years in the calculation, every year you work past 62 will replace the lowest earnings year with the current higher earnings amount.
This mistake can be easily avoided by analyzing what your potential earnings will be over the next several years, and then calculating the future benefit that you would be entitled to by including your future earnings into your benefit calculation.
#2 Apply at the Optimal Time
In this strategy, it is important to understand the implications of filing for benefits at each age breakpoint. Remember, as of last year the payback option or “do over period” was shortened to 12 months. After 12 months of receiving benefits, your decision becomes irrevocable and the current benefit amount will be locked in for life.
Everyone who is vested and eligible to receive benefits has the option of starting their benefits at age 62 with a reduction in benefits. We recommend that you wait until your Full Retirement Age at a minimum (assuming good health). Full Retirement Age varies between 65 and 67 depending on the year you were born, and applying for benefits prior to this age can significantly reduce your benefit amount for the remainder of your life. In fact, if you elect to begin benefits at the age of 62, there is a good chance that you may incur up to a 25% reduction of your benefit amount for life.
Assuming good health, many times the best scenario is to delay your benefit to age 70. At this age you may be eligible to receive up to 132% of your Full Retirement Age benefit amount. This can have a significant impact on the cumulative amount of benefits received when applied to 20 or 30 years in retirement.
#3 Coordinating Spousal Benefits
Spousal benefits may be one of the most misunderstood areas of Social Security. Millions of Americans miss out on receiving benefits they are entitled to through the spousal benefit program. There are two strategies in this area that we will briefly discuss, the “File and suspend” and the “Claim now, claim more later” strategies.
File and Suspend – In this method the spouse with the higher earnings will file for their own benefit at their Full Retirement Age, and then immediately suspend their benefit. This will allow their lower earning spouse to receive a spousal benefit based on their record, while still delaying their own benefit to age 70. At age 70, the higher earning spouse would then receive a higher benefit amount based on the delayed retirement credits they were able to accumulate.
Claim now, Claim more later – In this scenario the lower earning spouse files for his or her benefits at their Full Retirement Age. The higher earning spouse then files for spousal benefits based on the lower earning spouse’s record, and delays taking his or her own benefit until age 70. This allows the higher earning spouse to collect up to 50% of the lower earning spouse’s benefit, while allowing their own record to accumulate delayed retirement credits until the age of 70. At that time, he or she would stop receiving the spousal benefit, and switch to his or her own higher benefit amount.
It is very important to note two key factors when determining whether these are appropriate strategies for you. First, these strategies will not work if implemented before your Full Retirement Age. Secondly, this is a strategy which must be closely calculated by taking into account the various age differences between spouses. Spouses with large age differences must analyze whether or not these strategies are to their best advantage before implementing. Do not attempt these strategies without consulting with a qualified professional to analyze the impact of your decisions.
As you can see, deciding the best way to file for Social Security benefits can become a very complex planning situation. Minimizing the taxation of benefits, survivor benefit strategies and the examples mentioned above are only a few of the major elements to consider when planning for retirement. At Snider Advisors we are always happy to have these discussions with you in order to bring clarity to the integration of Social Security benefits with your overall retirement picture.