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Solving the Social Security Puzzle
By: Nicholas Breit, CFA, CFP®, Financial Planning Practice Leader,
Senior Consultant, The Wealth Office™
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| When to start receiving Social Security retirement benefits is an important decision, especially when you consider retirement could span 20 years or more.
Most individuals, however, are not maximizing their retirement benefits, as they are opting to collect early benefits at a reduced rate.
A recent study1 estimated that only four percent of retirees start their Social Security benefits at the most optimal time, with retirees effectively forfeiting a collective $3.4 trillion in potential retirement income.
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| A review of 2016’s new Social Security recipients2 showed nearly 60 percent of individuals collected benefits before their full retirement age (FRA), with only 10 percent waiting beyond full retirement age. And, nearly a third opted to begin receiving benefits at age 62, the earliest one can collect, despite the significant reduction in benefit.
So, how should retirees assess when to collect benefits? While Social Security is largely a longevity decision, there are a number of key factors to consider.
Eligibility & Benefits
Social Security retirement benefits are generally available to individuals with at least 40 earned credits, which is the equivalent of 10 years of employment. Based on an individual’s earnings record, the Social Security Administration (SSA) calculates a “primary insurance amount” (PIA) which reflects the retirement benefits available at full retirement age.
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| Individuals can choose to collect retirement benefits as early as age 62 or as late as age 70.
Those who elect to start benefits before full retirement age, a permanent reduction applies depending on how early benefits are collected. The FRA monthly benefit is reduced by 5/9th of one percent for each month before FRA for the first 36 months and is further reduced by an additional 5/12th of one percent beyond 36 months.
Individuals who wait to collect Social Security retirement benefits, a delayed retirement credit applies. For individuals born in 1943 or later, the delayed retirement credit works out to two-thirds of one percent for each month deferred beyond FRA (i.e. an eight percent annual benefit increase), up to age 70. So, an individual with an FRA of age 67, the FRA monthly benefit could be permanently increased by 24 percent if they waited until age 70 to collect.
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| Spousal Benefits
Both current and ex-spouses may be entitled to a spousal benefit. While certain rules and restrictions apply, an individual can collect the greater of their benefit based on their own earnings record or 50 percent of the spouse’s full retirement age benefit.
A spousal benefit may be collected as early as age 62 (or earlier if raising a dependent or disabled child), though at a reduced amount. In order to collect a spousal benefit, the spouse must have already filed to receive benefits (with an exception for divorced spouses). If the primary earner chooses to delay retirement benefits, the spousal benefit is not improved as the spousal benefit is based on the benefit as of full retirement age.
Key Considerations
Generally speaking, experts advise waiting to collect benefits (ideally until age 70); however, there are numerous factors to consider:
1) Life Expectancy – the start date for Social Security retirement benefits is largely a calculation on longevity. According to the Social Security Administration, a 65-year-old today has a life expectancy of approximately 20 years. Current health and family health history are critical factors when evaluating an appropriate start date for benefits. Individuals confident of living well beyond actuarial life expectancy may do better by delaying to receive an increased future monthly benefit.
2) Income Needs – retirees with sufficient retirement savings may have the resources to delay benefits several years to permanently increase monthly benefits. Given the significance of delayed retirement credits (up to an eight percent annualized improvement), some experts recommend tapping retirement savings (IRAs, 401(k), etc.) to bridge the gap while not collecting Social Security benefits.
3) Spousal Benefits – couples that are similar in age and with similar benefits may have greater planning opportunities, with the ability to collect one benefit while postponing the other to accrue delayed retirement credits. Survivor benefits are based on the higher earning spouse’s benefit, so delaying benefits could enhance future survivor benefits.
4) Current Employment – individuals that are still working yet choosing to collect benefits before full retirement age may be subject to benefit reductions. Prior to the year of full retirement age, $1 of benefits is deducted for every $2 earned above the annual earnings limit ($17,640 for 2019). In the year of full retirement age, benefits are reduced by $1 for every $3 above the earnings limit ($46,920 for year of FRA); upon reaching the month of full retirement age, no further reduction applies. Benefit reductions due to the earnings limit are only temporary, as the monthly benefit will be recalculated upon full retirement age to give credit for previously withheld payments.
Claiming Strategies
While the “file-and-suspend” strategy ended as of April 2016, there are still other claiming strategies that can be beneficial for couples:
1) Restricted Application – individuals that were born before January 2, 1954 and who are at least full retirement age may file a ‘restricted application’ which allows the filer to claim a spousal benefit tied to the lower earner’s benefit while deferring their higher benefit, thus receiving delayed retirement credits. This strategy can be useful for couples where both spouses have notable earnings records and who have the financial resources to forego the higher benefit for a few years.
2) ‘62/70’ Split Strategy – under this strategy, the spouse with the lower earnings records starts benefits between age 62 and full retirement age, while the other spouse (with the higher earnings record) delays benefits until age 70. This scenario provides for some Social Security income while enhancing the payout on the higher benefit. More importantly, it may also provide for greater survivor benefits in the future.
Given the vast complexities associated with Social Security, websites such as socialsecuritysolutions.com and maximizemysocialsecurity.com can be a helpful resource (albeit for a low fee) to evaluate filing options and claiming strategies. Free online calculators are also available through AARP’s Social Security Resource Center and through the Social Security Administration’s Retirement Estimator.
Will the Retirement Benefits Actually Be There in the Future?
The math behind Social Security is problematic given an increasing number of retirees being covered by fewer workers. There are currently 2.8 workers for each Social Security beneficiary, which will drop to 2.3 workers by 2035 according to the Social Security Administration (SSA). Based on current calculations, Social Security’s main trust fund will be depleted between 2034 and 2035, absent any changes to the Social Security system.
Under current law, reductions of approximately 20 percent would start in 2034, or in 2035 if Congress authorized payments from the Disability Insurance Trust Fund. While these statistics may be cause for alarm (and perhaps to blame for the rate at which individuals file for early reduced benefits), it bears noting that the SSA projects it will ultimately have enough to cover 75 percent of promised benefits through 2090 even without any changes.
With perhaps as few as 15 years until the main trust fund is depleted, some changes will ultimately need to be incorporated to put Social Security on a more sustainable path.
For more information, please contact any of the professionals at DiMeo Schneider & Associates, L.L.C.
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| 1United Income, “The Retirement Solution Hiding in Plain Sight” (June 2019)
2“It’s Tempting to Take Social Security at 62. You Should Wait.” Peter Finch. The New York Times. August 31, 2018.
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| This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources which are believed though not guaranteed to be accurate.Information has been obtained from a variety of sources believed to be reliable though not independently verified. Past performance does not indicate future performance. This paper does not represent a specific investment recommendation. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
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