SOCIAL SECURITY RULES HAVE CHANGED; WHEN DO I DRAW BENEFITS NOW?
In November of 2015, Congress surprised many of us with effective collaboration between the Democrats and Republicans to pass the Bipartisan Budget Act of 2015. As an American and a taxpayer I was happy to see our legislative branch function correctly for once, but the sweeping Social Security reforms made within this law change seemed both sudden, and had dramatic future impacts on many more Americans than I believe they want to admit. Two popular filing strategies were eliminated for individuals currently younger than age 62: the “File and Suspend” strategy, and the “Restricted Application”.
The purpose of this article isn’t to delve into those changes, as doing so ends up taking so long that readers might not get to the real point, which is – for individuals currently younger than AGE 62 – those who have lost these former filing strategies – HOW TO MAXIMIZE SOCIAL SECURITY BENEFITS NOW, IN LIGHT OF THE REVISED RULES?
As an introduction to how to do that, let’s first talk about why maximizing your Social Security benefits matters at all. Did you know that:
- For 1 in 5 retirees, Social Security is their only source of income
- For 1 in 3 retirees, Social Security is 90 percent of their retirement income
- For 2 in 3 retirees, Social Security is more than 50 percent of their retirement income
- These ratios are not expected to change over time*
If so many Americans rely so heavily on Social Security, finding a way to maximize the amount they get could certainly be an important technique!
For those younger than age 62, with most of the more advanced techniques now gone, the answer really comes down to determining the appropriate AGE for drawing benefits. Your filing age ultimately determines how much money you get on a monthly basis. File at a younger age and you’ll get a smaller benefit sooner. File at a later age, and you’ll get a larger benefit but have to wait longer to get it.
Depending on your outlook about your life, you might feel that understanding that dynamic makes for an easy solution. If, for example, you think you’re going to live a really long life, say into your 100’s since all your other relatives have, you might think it’s very logical to wait and get that bigger benefit for a lot of years. If, on the other hand, everyone in your family dies young, you might be inclined to draw right away. For many people, though, the longevity picture is murky enough that they’re just now sure how to answer that question. Dad died young unexpectedly but Mom’s still living and your own health’s been pretty good. Which way will your fortunes fall?
Many times, if there’s no clear answer, we have to see if other factors can help us decide. In order to do that, it’s helpful to understand some of Social Security retirement’s basic rules:
- The earliest possible filing age for retirement benefits is currently age 62.
- Individuals reach their Full Retirement Age (FRA) between the ages of 66 and 67, depending on their year of birth.
- The latest age you can wait to file for Social Security retirement benefits is age 70.
- In between ages 62 and FRA, benefits grow by 5-6% per year, with the specific increase depending on when you were born.
- Then, starting at FRA up through age 70, benefits grow by 8% per year.
These growth rates represent a guaranteed increase! There are very, very few legitimate investments that can provide such a guarantee.
Let’s look at an example:
Jane Doe’s Social Security statement tells her that her future retirement benefits would be the following, depending on her starting age:
- Age 62 (earliest age): $1,662/month
- Age 67 (her Full Retirement Age): $2,527/month
- Age 70 (maximum age): $3,238/month
Which filing age should Jane choose in order to MAXIMIZE her lifetime benefits?
Jane could draw benefits at age 70 at almost double what she’d get at age 62, but if she dies two years later, she’s lost out on almost $120,000 of income she could have had by filing early at 62. But the other side of the coin is that, if Jane starts benefits at age 62 and lives to be 100, she’ll have received over $420,000 LESS by filing at 62 than she would have gotten if she waited until age 70.
If Jane doesn’t feel confident in deciding which way to go based on her longevity alone, then other factors she might consider include:
How important is Social Security in her retirement picture? Is it her only fixed income resource, or does she have another pension she can rely on as well? Since traditional pension plans are becoming less common for most American workers, there’s a good chance that Social Security plays a pretty important role in Jane’s retirement picture, as we saw in the earlier statistics.
How long is Jane planning to work? If she’d already planned on working beyond age 62, she shouldn’t draw benefits early, because she’ll lose some of those benefits anyway for all earned income she receives above about $14,000/year currently.
How much of a nest egg does Jane have saved? Having a bigger nest egg makes it easier to wait for Social Security, because there are other dollars to draw on. On the other hand, if Jane’s nest egg is minimal, she should make every effort to work as long as possible to enable herself to wait on Social Security, since she’s got very little else to live off of once she’s retired.
The situation gets compounded for married couples, because now there are two Social Security filing decisions to make, each with their own factors for age, benefit amount, and longevity. However, that combination presents planning opportunities for maximization.
Other factors married couples should consider include:
- Age difference between spouses
- Difference in amount of benefits
- Situations where one spouse didn’t work long enough to earn benefits or doesn’t qualify due to non-covered pensions
- Children/other beneficiaries also entitled to benefits on your record (ie. Severely disabled child)
Depending on the combination of factors, it might make sense for the spouses to do very different things.
For example, if Jane gets married and her husband, John, is 6 years older than her, with a smaller Social Security benefit than hers and poor health, it may make sense for them to draw John’s benefit earlier, and wait on Jane’s to let it grow bigger. This makes particular sense if she will live longer and there’s a smaller nest egg.
If another couple, Tom and Terry Smith, are both the same age and have similar benefits with a relatively large nest egg saved, then they may want to base their decision more on how important guaranteed income is to them, compared with having a remaining nest egg that they could leave behind to children, if they don’t spend it all.
Once you start thinking of all of the different factors involved, you realize there are MANY permutations of the situation and the calculations can come quite complex. If Social Security plays a significant role in your future retirement picture, your best ‘bet’ might be to sit down with a CERTIFIED FINANCIAL PLANNER™ who specializes in retirement income planning to get some personalized advice and calculations about YOUR best options.
* Source:Video: “What is Social Security’s Role in Retirement Security?” Littell, Tacchino, Sass, The American College Press, 2014, as quoted in HS354 Source of Retirement Income outline.
Michelle Ash, CFP®, CASL®, is a Managing Partner for Paragon Wealth Strategies, LLC. Please see her bio here: http://www.wealthguards.com/michelle-l-ash-cfp-casl
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