TURNING 65 – Optimizing Social Security Benefits

Fourth and final article in a series about necessary steps to take involving federal entitlement programs as age 65 nears

Much has changed about Social Security since the first monthly retirement check was mailed out in January 1940 – paying $22.54 (about $134 today) to 65-year-old Ida May Fuller, a newly retired legal secretary from Ludlow, Vermont.

Benefits have increased dramatically. Full retirement age has been pushed back to 67 for those born after 1959. Early payouts can begin as soon as 62, with reduced benefits. More people can receive benefits, including disabled older workers. There are many more rules for enrollees to follow – more than 2,700 in all. And checks have been replaced by electronic payments.

Life expectancy has changed dramatically as well, from an average of 61 when President Franklin Roosevelt signed Social Security Insurance into law in 1935 to 78.6 today. Consequently, Social Security has moved far beyond the original intent to provide “social insurance” for those who lived beyond their years to today’s program that millions rely on to fund lengthy retirements.

The bottom line: It is particularly important to know the rules and crunch the numbers ahead of time in order to maximize benefits. The maximum Social Security monthly payment for a person retiring in 2019 at full retirement age is $2,861 ($34,332 a year). That means lifetime payments could reach $1 million for a retirement lasting 30 years or more – a sum well worth optimizing.

Key areas to know about:

Calculating Your Benefits

Benefit amounts are based on your lifetime average monthly earnings. The Social Security Administration calculates the benefit by first taking your 35 highest-earning years – up to the annual payroll tax cap – and adjusting for inflation to come up with an average monthly income. If you have fewer than 35 years in the workforce, zeros are added for the “missing” years. This figure is then applied to a formula (revised annually) to determine your initial benefit, or primary insurance amount. Any cost-of-living adjustments are subsequently applied to this number.

There is no need to do the math yourself. Projections of your retirement benefits starting at different ages, along with your earnings history, are recorded in your My Social Security account, which can be created or viewed at www.ssa.gov/myaccount.

When to Start Collecting

The decision on when to claim Social Security has far-reaching consequences on not only your lifetime payment amount but also on what benefits will be available for spouses, children and eventually survivors.

There are three key benchmark ages to focus on: 62, your full retirement age and 70.

  • Age 62 is the soonest you can sign up. That produces the smallest benefits, however, and they are locked in for life. You can increase the size of your monthly payment by an average 8 percent for every year past 62 that you wait to sign up.
  • Defer until full retirement age (66 if you were born between 1943 and 1954, gradually rising to 67 for those born in 1960 or later) and payments will be about a third larger than at 62.
  • Collect starting at 70, when the benefit maxes out, and your monthly payment will be another third larger still – or nearly two-thirds bigger than at the age 62 minimum. There is no advantage to waiting past 70.

Waiting to begin Social Security as long as possible within that eight-year range is advisable for those who are reasonably healthy, financially comfortable and have a family history that suggests average longevity, or close to it. If you expect to live into your 80s, you have a good chance to come out ahead by waiting until 70.

The age at which you will break even by waiting until 70 generally ranges from 77 to 83, depending on when you start receiving benefits. Altair can help narrow the timeframe and give advice to clients based on our calculations and life expectancy assumptions coupled with particular circumstances.

To cite one example: We crunched the numbers for a hypothetical client who is 56, has a full retirement age of 67 and has been working since age 21 (35 years) earning the maximum wage base. Assuming he/she waits until normal retirement age, the monthly benefit would be approximately $2,660. If he/she expects to live to 80 and beyond, our analysis shows it would be wise to delay benefits until age 70. On the other hand, if he/she does not expect to live to 76, it makes sense to begin collecting benefits early at 62.

A variety of online calculators can aid your decision of when to claim. The Social Security Life Expectancy Calculator will tell you how much longer people of your gender and age live, on average. The Consumer Financial Protection Bureau and the AARP both offer good retirement planning tools.

Retirement Earnings Limit

It is not advantageous to begin Social Security benefits before your full retirement age if you are still working. Not only will your benefits be permanently lower than they could have been because you filed early, you will temporarily forfeit some or all of them if your income exceeds a specified level ($17,640 in 2019). The same penalty applies to the benefits of any family members whose payments are based on your work record. For every $2 you earn above the limit, $1 of benefits is withheld from your payment.

Once you reach full retirement age, the IRS will recalculate the benefit amount and give credit for months you did not receive a benefit due to earnings. You will not get a lump sum payment restoring the amount that was withheld. But the lost sum will be gradually restored through the higher monthly benefit. Eventually you will have recouped the full amount that was taken away but it could take up to 15 years.

Benefits May Be Taxable                                                             

The Internal Revenue Service devotes a web page and even a YouTube video to answering the question, “Are Social Security Benefits Taxable?” The short answer: It depends on your total income.

Assuming you have other retirement income such as a pension, rental income, dividends, capital gains, income from tax-exempt bonds, or IRA or 401(k) distributions, there is a very good chance you’ll have to pay federal taxes on a majority of your benefits. For filers whose combined income runs over $34,000 if single or $44,000 if married and filing jointly, you are subject to taxes on as much as 85 percent of your benefits. Additionally, 13 states tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia.

Spousal Benefit Options

As a spouse or ex-spouse, you are entitled to claim either a benefit based on your own earnings record or a spousal benefit totaling 50 percent of your husband or wife’s benefit as calculated at their full retirement age. If your own retirement benefit is lower than your spousal benefit, Social Security will pay you the higher amount.

You qualify for spousal benefits if:

  • Your spouse is already collecting retirement benefits.
  • You have been married for at least a year.
  • You are at least 62 (unless you are caring for a child who is under 16 or disabled, in which case the age rule does not apply).

The Social Security Administration offers more details in an online summary of spousal benefits.

For example, say a couple’s higher income-earner retires at full retirement age in 2019 with the maximum monthly benefit of $2,861. Their spouse is entitled to collect half that amount, or $1,430 per month, when also retiring at full retirement age. Thus, total household benefits from Social Security would be $4,291 a month.

As with your own benefit, it is important to remember that payments will be permanently reduced if a spousal benefit is begun before full retirement age.

Married couples should optimize their Social Security payments by coordinating how and when they should each begin collecting benefits. Altair can help in this discussion, or you may wish to visit www.ssa.gov to obtain information or call the Social Security Administration at 800-772-1213 to inquire about your individual circumstances.

Survivor Benefits

Widows and widowers are entitled to receive a monthly payment equal to the deceased spouse’s full retirement benefit if they wait to claim until their own full retirement age. A reduced (71.5 percent) survivor benefit can be taken as early as age 60. If there are eligible children, the widow(er) can get benefits at any age. Each eligible child receives 75 percent. Ex-spouses qualify for a benefit if the marriage lasted for at least 10 years. Remarriage does not stop entitlement benefits.

As with other Social Security benefits, survivor benefits are updated most years with cost-of-living adjustments and may be subject to income taxes.

For further questions about individual benefits or related matters, speak with your financial adviser with Social Security expertise to help evaluate your options.

Summary points:

  • Know the Social Security rules and your estimated retirement income to optimize your benefits.
  • Waiting past 62 to start benefits raises payments by 8 percent a year up to 70, a worthy goal absent any overriding concerns about health, finances or family longevity.
  • The age at which you will break even by waiting until 70 generally ranges from 77 to 83, depending on when you start receiving benefits. Altair can help you determine your specific break-even ages.
  • Benefits are reduced if you exceed $17,640 (revised yearly) in 2019 earnings while receiving Social Security before full retirement age. Once you reach full retirement age the IRS will recalculate the benefit amount and give credit for months you did not receive a payment due to earnings, but it will take years to recoup the amount lost.
  • Married couples should optimize their Social Security payments by coordinating how and when they should each begin collecting benefits, including whether spousal benefits would be beneficial.
  • A widow(er), at full retirement age or older, generally gets 100 percent of the worker’s basic Social Security benefit amount. At age 60, the amount is 71.5 percent.

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The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.