In a previous blog titled ‘Five Questions about Social Security’ we discussed the basics of Social Security. In this follow-up article, we’ll focus on how to actually maximize your Social Security benefit.
People often wonder whether it is best to take Social Security early or to delay taking those benefits to receive a higher monthly benefit. As an example, let’s assume Bob will receive a monthly benefit of $1,500 if he waits until full retirement age to draw Social Security. If he instead decides to take his benefit early at age 62, he will receive 25% less ($1,125) per month, and if he delays taking his Social Security benefits until age 70, he will be able to draw 32% more ($1,980) per month. In this example, we assume that Bob lives until age 82, the average age for an American male, according to the US National Center for Health Statistics.
As you can see in Table A above, using the previously mentioned assumptions, Bob is actually best off taking his benefit at full retirement age.
A big factor to consider when making decisions about maximizing Social Security benefits is whether or not you continue to work while receiving these benefits. If you continue to receive income, you need to be aware of two issues that can affect your Social Security benefit: reduction of benefit and taxation of benefit.
Reduction of Benefit
Taking Social Security benefits prior to full retirement age and continuing to earn income will result in a reduction of your Social Security benefit. If you begin taking your Social Security benefit early at age 62, your benefit will be reduced by $1 for every $2 you earn above $14,640 until you reach full retirement age, at which point the reduction of benefit rules will no longer apply. A common misconception is that in the year you turn full retirement age (currently 65), you can make as much as you want without any reduction of benefits. In reality, your benefits will be reduced $1 for every $3 earned over $38,880 up until the month prior to reaching the current full retirement age of 65, at which point the reduction of benefit rules will no longer apply.
Taxation of Benefit
Not only can Social Security benefits be reduced, but they may also be taxed in certain situations. Regardless of your age, if you earn over a certain amount, your benefit may be included as income and therefore a portion of it taxed at your current tax rate. See Table B below for the income limitations and tax implications:
As of: April 2012Source: ssa.gov
Remember that reduction of benefit only applies when taking a benefit prior to full retirement age, but taxation of benefit can occur for early benefits as well as after full retirement age.
A spousal benefit can be claimed by a spouse who does not qualify for his or her own Social Security benefits. This spousal benefit entitles the non-qualified spouse up to 50% of the working spouse’s benefit. For example, if Bob’s spouse Sue did not qualify for her own benefit she could claim a spousal benefit at her full retirement age and receive half ($750 per month) of Bob’s full retirement age benefit ($1,500). If she decides to take this spousal benefit early at age 62, the benefit would amount to 32% of Bob’s full retirement benefit or $480 per month. It is important to note that an ex-spouse may also claim a spousal benefit; however, the couple must have been married for at least 10 years and the spouse claiming the spousal benefit must be single. If the claiming spouse re-marries, the spousal benefit is only available based off of the current spouse’s benefit.
File & Suspend
If the spouse who has filed for Social Security (Bob, in our example) wishes to continue working without taking benefits right away, but still wishes to file for a spousal benefit, the file and suspend strategy may be beneficial. A file and suspend strategy would allow Bob to file to continue working and suspend his benefit to continue earning delayed retirement credits (DRCs), while still allowing Sue to claim a spousal benefit.
If both spouses qualify for Social Security benefits and want to continue working past full retirement age, they can claim a spousal benefit and then switch to their own benefits down the road at a higher benefit amount due to DRCs. For example if both Bob and his wife Sue are currently at retirement age, and Bob’s benefit is $1,500 and Sue’s is $1,000, Bob could file for benefits, which would allow Sue to claim a spousal benefit of $750 (50% of Bob’s benefit), while still allowing her own benefit to continue earning DRCs. At age 70, Sue can then file for her own retirement benefit which would then amount to $1,320. Her spousal benefit would then stop and her higher benefit amount would begin.
Because Social Security benefits are complex, we suggest consulting a firm like Pension Consultants that has CERTIFIED FINANCIAL PLANNER™ professionals on staff for more specific and detailed information on maximizing your benefits.
PCI’s archived blog entries are dated, the rules and statutes referenced may have changed. The analysis or guidance within these blog entries may have become stale, dated, or no longer accurate. PCI will not update or change these entries to reflect the latest analysis or development.
Cody Mendenhall, CFP®, Executive Director
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