Navigating the Ins and Outs of Your Benefits
Death and taxes. The only two things guaranteed in life, right? But what if we could add “Social Security benefits” to the list? We know what you’re thinking: “Yeah, right.” Perhaps, understandably, your faith in the government system is a tad shaken, but don’t throw in the towel just yet. Chances are you and/or your spouse may be nearing retirement age, or, even more likely, you have parents who need some help figuring out how to maximize their own Social Security benefits. Here are some of the key facts and common myths explained, so you can be better prepared moving forward.
Fact: The longer you wait to “cash in,” the larger your benefits.
First, know that 66 to 67 (depending on birth date) is defined as the “full retirement age” (FRA) as of 2017 according to the Social Security Administration website. At that age, you may be eligible to receive your “maximum monthly Social Security benefit,” which is determined by several factors (see below for more on this point).
“For every year you delay, up to age 70, the benefit increases by 8%,” says John Hall, CFP, a financial planner at Lynchburg Wealth Management. “If you have amassed a decent retirement nest egg outside of Social Security, then it may make sense to delay.”
While there’s no avoiding the fact that delayed benefits equal more money, you can strategically approach your benefits to maximize the amount you receive and make the most of your retirement years. Numerous factors should be considered in deciding when it’s best to cash in, but at the top of the list would be the following:
• Your age and general health
• Your spouse and his or her general health
• Additional sources of retirement income
• Estimated cost of living throughout retirement
Keep in mind that average life expectancy in the United States is 78.74 years; men average 76 years, and women average 81. Meeting with a financial planner and your family accountant should help you determine the best approach moving forward.
“We recommend those in mid-life have a good understanding of a realistic retirement date and consider using IRAs and other sources of income in the early years of retirement to maximize their Social Security benefits.” —Christopher Devlin, CIO of Selective Wealth Management
Fiction: Social Security benefits have to be taken at a particular age.
Though many things in life have set windows of opportunity (i.e. signing up for health coverage), social security offers flexible options. In fact, your retirement date and your social security filing date do not need to be the same, says Hall. People should know that “Social Security can be taken as early as 62 or as late as 70 or any age in between” according to Hall. “It’s not a once-a-year selection [and] not just your birthday month.”
Hall further points out that taking income before reaching FRA will result in a permanently lowered benefit; however, “if you’re single with no children, and, for health reasons, have a shorter than normal life expectancy, then it would usually make sense to file early to make the most of your Social Security benefit.”
The importance of planning is key in terms of deciding when to cash in. Hall recommends asking yourself these questions:
• What are your dreams for retirement?
• What are your goals?
• What are your circumstances?
“In many instances, it makes sense not to file for Social Security for several years after someone has retired from their job.”—Hall
Fiction: If I don’t draw on my benefits, they’re wasted.
“If you’re married,” Hall says, “It’s important to keep in mind that there is a spousal component of social security, so it makes sense to think about the family finances…”
In fact, you may be pleased to know that social security has death benefits, meaning “when a higher earning spouse dies, the surviving spouse receives a ‘widow/widower’ benefit equal to 100% of the deceased spouse’s social security benefit,” says Devlin. Being armed with this knowledge should be helpful in estate planning and determining what income will be available following a death in the family.
Additionally, consider the reverse of delayed benefits. If you reach FRA and have a lower life expectancy or poor health, it’s worth considering using your Social Security benefits sooner rather than later, and thus minimally drawing on your other retirement sources of income because those can be passed on to your children.
Devlin says, “By drawing less on other [retirement] sources, and maximizing your Social Security benefit, you can pass out more to [your] heirs.”
“The most important considerations are health, financial need, and your spouse. . . [T]hink about the family finances, not just one individual’s, when making the social security decision.”—Hall
Fact: You can draw on your Social Security benefits early.
“If you have no other financial option than to file for Social Security right away,” Hall says, “Then that helps make the decision for you.”
Once you’ve reached the age of 62, you are eligible for early benefits but will do so at a reduced payout; the amount reduced depends on work history among other things but could go as high as a 30% reduction over the course of your entire retirement. And while it may seem tempting to cash in as soon as possible, you may want to consider the drawbacks of doing so. “The longer you defer retirement,” Devlin says, “the higher your payments.”
You should apply three months prior to whenever you want payments to begin via the Social Security Administration website at www.ssa.gov.
Fiction: Social Security benefits are the same for everyone.
The reality here is that several factors determine your monthly Social Security benefits, or the “maximum monthly benefit” amount. For every additional year you work, and thus pay into the Social Security system, your possible benefits increase. If you plan to work past your retirement age, not only will you be paying into the system via taxes, but you are also given an annual percentage increase up to the age of 70 (see sidebar below). The benefits you receive are calculated by evaluating what your pre-tax retirement income was and how many years you worked. So, various earnings levels have various benefit levels.
Also, keep in mind that “Social Security is a government program and is subject to the rules set forth by the governing bodies,” Devlin says. “This [distinction] is very important, because the rules today may not be the rules in the future.”
With that in mind, approach your Social Security benefits as an important factor in retirement life, but do so with the knowledge that benefit amounts change based on legislation, your individual experience, and your family situation.
“Go securely online and set up [your] online social security account.”—Hall
By Jennifer Redmond