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Social Security Planning

When you work and pay social security taxes, you are paying for three types of benefits:  retirement, disability and survivor’s benefits.  Social security has been in the news for years as the government wrestles with how to keep the benefit system afloat.  For couples who are currently age 65, at least one person has a 50% chance of living to age 92 according to the Society of Actuaries.  A healthy 65-year-old has a 50% chance of living until age 88, which means 23 years of traditional retirement.  Even with the increased longevity, 74% of Americans collecting social security benefits are collecting them early, before full retirement age.  Those choices can have a large impact on lifetime income as well as survivor benefits.  For those who are close to retirement, the strategies in how you choose to take your benefits are certainly more important than ever. 

Your social security retirement benefit is based on the number of years you’ve worked and the amount you’ve earned.  The benefit is calculated using a formula that takes into account your 35 highest earning years.  Should you decide to take benefits before your full retirement age (between 65 and 67 depending on the year you were born), your benefits will be reduced.  Collecting at age 62 will give you only 75% of your benefit at full retirement age.  Collecting early will also impact your ability to work as a means of having additional income, as the government will begin to reduce your benefit if you earn more than $15,120/year (2013 limit) and you are under your full retirement age. 

The story changes dramatically, however, if you postpone collecting your benefits.  For every year you wait after your full retirement age, you receive an 8% increase in benefits.  This can have a dramatic impact in overall lifetime income as well as an increased survivor benefit for a spouse.  Delayed retirement benefits only apply to the primary worker’s benefit, not the spouse’s benefit if claimed.  The full spousal benefit is 50% of the primary worker’s benefit if collected at the full retirement age.  The spousal benefit also gets reduced if collected early. 

In many cases, many married couples are finding that the smartest decision is for the highest earning spouse to delay receiving benefits until full retirement age or later.  One option is for the highest earning spouse to “file and suspend” benefits, which enables the lower earning spouse to collect a benefit while the higher earning spouse’s benefit continues to increase since it is delayed.  This also ensures that the lower earning spouse will receive a higher survivor benefit. 

If your head is swimming, you are not alone.  Social security is definitely an area in which you want guidance from a financial professional.  Should you begin receiving benefits early and have benefits over a longer period of time, or wait until your full retirement age or later?  The answer is an individual decision that must be based on your unique situation and your retirement picture. 

This article does not constitute legal, investment or tax advice.  Each individual should seek independent advice from a financial professional based on his or her individual circumstances.  

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