Social Security: When and How to Claim

Managing all the pieces of your prospective retirement can seem like a house of cards at times. Social Security and the options around when and how to claim your benefit pose critical questions in planning. It can be a complicated and confusing decision, and not knowing your options can cost you money.

As I wrote last time, those eligible to collect Social Security benefits may start as early as age 62 and as late as age 70, with benefits increasing with your age at your start date. But for many, there are additional twists to the law that can be used to your advantage and an overall higher amount of benefit received over your lifetime. Let’s take a look at some scenarios. I’ll use names to help follow along.

Our first couple, Frank and Claire, are the same age and both high earners, earning more than the maximum amount of wages taxed for Social Security. It means that in 2015 they each earned more than $118,500. That means that their Social Security primary insurance amount (will be about even. Frank and Claire can each choose the age to begin receiving benefits, whether it’s the same age or different. Since they are high earners they likely have investment assets that could support them in early retirement, and can wait until age 70 to claim, giving them a higher benefit.

Maximize combined benefits

However, they may wish to try to maximize their combined benefits by using “file and suspend” and “restricted application.” What this means is that Frank, upon reaching his full retirement age of 66, files for Social Security and immediately suspends his benefit, effectively saying thanks, but I’ll wait. Claire now may file a restricted application, meaning she does not want her own benefits at this time but only wants her spousal benefits, which are 50 percent of Frank’s.

When Frank and Claire turn 70 (or any time in between), they will go back to Social Security and ask for benefits based on their own working record, at the higher amount that grew in the meantime. Claire’s spousal benefit was additional income they would not have received had they not known about this option and had both just waited until age 70.

The strategy employed by Frank and Claire can work with any couple with alternative means of support until age 70, such as pensions, rental income or savings. Before drawing from savings to delay claiming social security, the long term viability of your investments must be assessed.

Let’s look now at a couple with one spouse whose income was higher through the working years: Garrett, 66 and Patricia, 62. Patricia pursued the unpaid career of raising their family, and even though she worked outside the home for a few years, her benefit is still less than half of Garrett’s. It may be advantageous in this case for Garrett to file at his full retirement age of 66 and suspend his benefits to allow his to grow, and for Patricia to claim her spousal benefit as early as 62. Her benefit would be reduced of course, but for this couple, circumstances are that they would like to receive Patricia’s spousal income while waiting for Garrett’s benefit to start.

Although it is possible for Patricia to file and suspend at age 66 like Frank did, and for Garrett to claim a restricted benefit, taking half of Patricia’s full social security amount before switching to his own at 70, that option would not be available to them because of their age difference until Patricia is 66, and at that point Garrett will be turning 70. No advantage there. Garrett’s waiting until age 70 however provides Patricia with a higher survivor benefit, since that is equal to 100 percent of what Garrett was receiving.

What about divorce?

How about Peter and Madelyn, who are divorced? They were married for more than 10 years and now are both still single, and both age 60. Although Madelyn had covered earnings, her benefit is lower than Peter’s. As long as Madelyn is still unmarried and the divorce was at least two years ago, she has the choice of taking her own benefit, or taking her spousal benefit based on Peter’s record. Since hers is lower, she would like to take the spousal benefit. She can do so as early as age 62 for a reduced benefit. And good news; Madelyn doesn’t need to wait for Peter to start his benefit, or even talk to him about it. Even if Peter remarries, or even remarries and divorces again, Madelyn is still entitled to benefits based on his record because they were married more than 10 years.

By the same token, should a tragedy befall Peter and he passes away, Madelyn is also entitled to survivor benefits as if they were still married at the time of his death. That means Madelyn can receive 100 percent of Peter’s full benefit at her full retirement age, or she can take a reduced benefit beginning at age 60. Madelyn may also switch over to her own benefit later if that amount is higher. Even if Madelyn remarries after age 60, her survivor benefits remain unchanged.

Finally, let’s not leave out the never-married Zoe. Unfortunately these claiming and switching strategies are not available to her, since it is only her earning record on which she can claim. Still, she can choose her beginning date. Since she is not concerned about maxing out her benefit for a surviving spouse, she may wish to claim earlier than our couples above. The reality for Zoe is that if she meets an untimely death before having the opportunity to claim any social security benefit, the taxes she paid into the system are absorbed and used to fund other claimants’ benefits. Cases like Zoe’s help to offset others who may live longer than actuarially predicted.

Claiming early

Is it better to claim as early as possible, in case Social Security runs out of money? In my opinion, we should be able to fix Social Security through means like a higher payroll tax rate or higher wage caps.

Setting aside solvency fears, it’s best to take a rational and calculated approach to the timing decision. The main factors to consider are your health and life expectancy, whether or not you are still working, your financial situation and your lifestyle. The first two are fairly straightforward: If you are sick or have serious health issues, then collecting sooner rather than later is probably the way to go.

Beyond that, you’ll need to do a break even analysis, and weigh the merits of collecting an increased benefit through delaying and pulling additional income from your portfolio versus taking payments early or on time and allowing your portfolio to grow.

A key factor is that cost of living increases have more of a compounding impact when the starting benefit amount is higher. Your personal tax situation enters into this decision as well, which I will address next time.

There are a number of calculators and tools available on the Social Security website to give you a start.

Frank and Claire

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Part 2A & B of Form ADV: Firm Brochure