Oscar and Karen are clients of mine who are approaching retirement age. They’ve invested smartly and are both healthy and looking forward to many years together in retirement. Both Oscar and Karen understand that Social Security benefits will provide a steady and vital income stream in retirement, but they had lots of questions about the program during a recent visit.
Social Security is one of the most essential income sources for retirees. Almost four in five Social Security recipients use their benefits to pay for things like food, utilities, and mortgages – necessary living expenses, according to a recent study published by Fidelity Investments. So it is important to understand that the decisions we make before and once we become eligible to claim Social Security can have a profound effect on the amount we will collect. This week I want to share a bit of what we discussed in the hopes it will help you.
I find that a lot of folks leave money on the table when claiming Social Security retirement benefits before reaching their Full Retirement Age (FRA). The Social Security Administration defines FRA as “the age at which a person may first become entitled to full or unreduced [Social Security] retirement benefits.” In fact, according to the same Fidelity survey, only about one in four of us even knows our FRA, which is based on each individual’s birth year. Oscar turned 65 this year, while Karen turned 62. Neither of them has reached their FRA.
Regardless of a person’s FRA, age 62 is when a qualified individual can first claim benefits, albeit at a reduced rate. In other words, claiming benefits early reduces lifetime earnings permanently. The Social Security Administration reduces benefits by as much as 30% depending on birth year and age upon retirement. So technically, Karen can claim now, but she has chosen not to because she does not want to permanently reduce her benefit. It is also important to understand that if a person collects Social Security before reaching their FRA and have earned income over a certain limit, their benefit may be further reduced.
Because he was born in 1953, Oscar reaches FRA next year, at age 66. He can receive 100 percent, or Primary Insurance Amount (PIA), of his benefit beginning in 2019. Oscar is choosing to defer payment. But he has decided not to collect at his FRA. Let me explain why.
You see, many of us are working longer than ever before, and Oscar is no exception. The Social Security Administration offers an incentive for people to continue working long after they hit their FRA, in the form of delayed retirement credits for every year that a person delays collecting. Those credits increase a retiree’s benefit beyond that PIA, to a maximum of 132% of PIA by age 70. The increases stop at age 70 regardless of whether a person is taking his or her Social Security benefits, at that point there is no reason to continue to delay collecting.
The formula the Social Security Administration uses to calculate benefits is derived from a person’s highest 35 years of earnings, indexed to inflation. Many of our later years also happen to be some of our highest-earning, and Oscar is in that boat. He’s continuing to make good money in his consulting business, so the income that he’s producing now will be factored in to the calculation of his benefit.
What’s more, Karen stayed at home for years while their family was young. Even though she’s working part-time, her income will also be factored in to the calculation of her final benefit, filling in the gaps in her work history to buoy her 35-year earning record.
In fact, Karen recently discovered an error: A previous employer failed to report her earnings accurately. Without correcting that mistake, that would have been reflected as a year of zero earnings on her record. Because benefits are based on earnings, it’s imperative that you regularly review your Social Security earnings statements to make sure the information is accurate and up to date. Keep pay stubs and tax documents for each year you have worked until you have verified that the Social Security Administration has the same information.
Because they are each over 60, the Social Security Administration mails statements to both Oscar and Karen every year before their birthdays. These statements show their reported earnings records. If, however, you are under age 60 or you want to review your earnings records at a different time of year, you do not need to wait: Go online at SSA.gov, create an account, and review your information to make sure it’s accurate.
Oscar shows no signs of slowing down, and he plans to continue working for a few more years. He wants to maximize that Social Security benefit not only for himself, but also for Karen. Married beneficiaries can claim Social Security benefits based on their own earnings record, or they can receive up to 50% of the amount for which their spouse is eligible.
A higher-earning spouse like Oscar can delay his benefit until 70, for example, earning delayed retirement credits of 8% a year, while Karen could take a spousal benefit to bring in some income in the interim (but keep in mind that any benefit she collects, either on her own work record or on Oscar’s, would be reduced if she starts collecting before her FRA).
Oscar and Karen can benefit from a strategy called restricted application. If you were born before January 2, 1954, as Oscar was, and you wait until your FRA to start collecting, you can file what is called a “restricted” application for spousal benefits only. If, when Oscar reaches FRA, Karen is receiving benefits, Oscar could file for benefits based on Karen’s lower earnings while continuing to grow his untouched benefits. Oscar receives 50% of Karen’s benefit, then can switch to his own once he’s ready.
Another critical consideration for spouses involves the survivor benefit. At FRA or later, the survivor benefit is worth 100% of the amount received at the time of death. By Oscar delaying his own Social Security benefits past his FRA, Karen’s survivor benefit will include any delayed retirement credit Oscar accrues. That benefit will last for Karen’s lifetime and will be adjusted for inflation. That extra income could be worth thousands of dollars, at a time Karen will need it the most.
Social Security is essential for most of us. There is a multitude of strategies individuals and couples can utilize to make sure they get the most from their Social Security benefits, and each situation is unique. That’s why it’s critical for you to consult your retirement specialist before making any decisions.
And it’s also why I say to you every week, be vigilant and stay alert – because you deserve more.
Have a great week!
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC. A wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at email@example.com.
Cutter Financial Group LLC (“Cutter Financial”) is a SEC Registered Investment Advisor.
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