Social Security – It’s Complicated!

7183670_sA sound retirement plan consists of three essential pieces: an advanced tax plan (ATP), an income plan, and an investment plan. While the investment plan should be the nucleus, proper income and tax plans are critical and are often overlooked.
Social Security is a very important piece of the income strategy. Over the past few weeks I have received several questions concerning this benefit that I want to share with you. It is important to understand that benefit calculations can be complex and should be carefully evaluated before making any decisions.
John from Sagamore Beach asked me if his spouse, who had her own career and who is currently retired, can start receiving a spousal Social Security benefit at age 62, and then at her full retirement age of 66 start receiving Social Security based on her own career earnings. In other words, John wants to know if his wife can receive income from age 62 to 66 while she waits to get her own full retirement benefits.
The short answer is no, she cannot. John’s wife is not permitted to file a restricted application for spousal benefits before her full retirement age. If she applies at age 62, she will collect her own benefit and it will be permanently reduced. To receive a spousal benefit while your own benefit earns delayed credits, you must wait until full retirement age (FRA) to file.
Another good question came from Mary from Foxboro who recently asked me if a husband waits until age 70 to collect benefits and dies at age 71, whether the wife can collect a survivor benefit immediately. And if so, she wanted to know what portion the wife would get of the husband’s benefit.
This one can be tricky. There are two elements to the calculation of a survivor benefit. The first is what’s called the original benefit. This amount is based on the deceased’s primary insurance amount (PIA), or actual benefit, if he or she has already started receiving it. The second factor is the age when the surviving spouse claims the survivor benefit.
For example, let’s say Mary is 60 and her husband, Mike, delayed collecting his benefit until he turned 70 and was receiving $3,000 a month at the time of his death. This is the original benefit. It is the amount Mary will receive if she claims it at her full retirement age. However, if Mary claims it now, at age 60, her survivor’s benefit will be reduced to 71.5 percent of her husband’s original benefit, giving her a permanent benefit of $2,145.
The percentage of the original benefit that Mary can collect will vary depending upon the age at which she begins collecting her survivor benefit.
A good financial advisor will counsel widows and widowers about the reduction in benefits when claiming a survivor benefit before full retirement age. Unfortunately, many misinformed advisors will encourage a surviving spouse to start collecting his or her survivor benefit as soon as he or she becomes eligible for it. But this will result in a permanently reduced benefit, which could hamper the surviving spouse’s future standard of living.
This issue is compounded if Uncle Sam continues with minimal 1 to 1.5 percent Cost of Living (COLI) increases to Social Security.
Recently, Jim from Woods Hole asked me in an initial consultation whether anything can be done if someone who is already collecting Social Security benefits realizes that he or she made a mistake in applying too early.
This is a good question. I am encountering more and more folks who claim Social Security early and then after reading about the value of delaying benefits, regret their decision. The rule is if it’s been less than 12 months, a person can withdraw his or her application to collect. If an individual does this, he or she will be free to reapply at any time in the future. The catch is that the benefits already received must be repaid. If it’s been more than 12 months, and a person is full retirement age, he or she can suspend the benefit and earn the 8 percent annual delayed credits on the current amount.
So let’s say Jim applied for Social Security at 62, more than a year ago. His PIA is $2,000 and his benefit is 75 percent of $2,000, or $1,500. When Jim turns 66, he can suspend his benefit and earn 8 percent annually in delayed credits on the $1,500 benefit. So, when he turns 70, he can claim his benefit again and increase his permanent benefit to $1,980 ($1,500 x 1.32 = $1,980).
Folks, make sure you seek out financial professionals who are retirement specialists before making any decisions regarding your Social Security benefits. As explained above, such decisions can dramatically change your income plan, which is an integral part of a successful retirement plan.
Be vigilant and stay alert, because you deserve more.