Washington Trust Bank’s Jeff Schlenker: Maximize Social Security benefits with key steps
Your plan should be part of 'whole picture’ analysis
Jeff SchlenkerApril 23rd, 2015
What can you do to make Social Security work better for you? Don’t take it for granted. Although it sounds simple, Social Security is surprisingly complicated. Whether going through this process alone or with the help of a financial professional, be sure to follow several critical steps.
Those steps include gathering the facts and determine the optimum time to begin receiving benefits, assessing how Social Security benefits will interact with a spouse’s benefits, and integrating anticipated benefits with other retirement resources, such as insurance, 401(k)s and IRAs.
Consider a “whole picture” analysis incorporating all retirement plans, to see where there may be gaps or other issues.
Although Social Security benefits aren’t likely to make up a sizable portion of your retirement income, they are an important part of complete retirement planning. Getting a good grasp on how much you’ll be receiving and, if you plan to work part time after retirement, the impact of any earnings on your benefits can add a sense of security.
Full, or normal, retirement age is the age at which a person can begin receiving full retirement benefits. For those born from 1943 through 1954, the full retirement age is 66. For those born in 1955 through 1959, a higher retirement age is phased in so that for those born in 1960 and later years, the full retirement age is 67.
Social Security benefits are available as early as age 62, regardless of a worker’s full retirement age. However, if benefits are received early, they will be reduced permanently, based upon the number of months that checks are received before reaching full retirement age. For example, if your full retirement age is 66 and you retire at age 62, then benefits are reduced about 25 percent.
In an actuarial sense, early retirement provides about the same total Social Security benefits over a lifetime as retirement at the normal age; benefits are simply spread out in smaller amounts to compensate for the longer distribution period. In a personal sense, it all depends upon an individual’s lifespan. It would take about 16 years of full benefits to recoup the deferred early benefits, so the break-even age would be about 84.
Social Security benefits increase by a certain percentage when distribution is delayed. These increases will be added in automatically from the time full retirement age is reached and until benefits are tapped, or until you reach age 70. The percentage varies depending on birth year, but is 8 percent per year for those whose full retirement age is 66. Regardless of when you tap retirement benefits, the Social Security Administration strongly urges enrollment in Medicare at age 65.
Working while collecting
Individuals may continue to work and still receive retirement benefits. Your earnings in or after the month that you reach your full retirement age will not affect your Social Security benefits. However, benefits will be reduced if your earnings exceed certain limits for the months in the calendar year before you reach normal retirement age.
For instance, if you’re under full retirement age in 2015, $1 in benefits will be deducted for each $2 in earnings above the annual limit of $15,720. In the year that you reach full retirement age, benefits will be reduced$1 for every $3 earned above a different annual limit, $41,880 in 2015, until the month that you reach full retirement age. Once full retirement age is reached, your earnings won’t reduce the amount of your monthly benefits, no matter how much you earn. The annual limits increase each year as nationwide average wages increase.
Under legislation enacted in 1983, the Social Security Trust Funds receive income based on federal income taxation of benefits. The funds receive taxes on up to 50 percent of benefits from single taxpayers with incomes over $25,000 and from taxpayers filing jointly with incomes over $32,000. “Income” in this context includes tax-exempt municipal bond income, but not Roth IRA distributions.
Legislation enacted in 1993 extended taxation of benefits to 85 percent of benefits for single taxpayers with incomes over $34,000 and for taxpayers filing jointly with incomes over $44,000. All additional tax income resulting from the 1993 legislation is deposited in Medicare’s Hospital Insurance Trust Fund.
Spousal Social Security benefits are based upon the work record of a living spouse or ex-spouse. They are generally 50 percent of the worker’s benefit. Survivors’ benefits, based upon the work record of a deceased spouse or ex-spouse, are 100 percent of the deceased worker’s last benefit. Keep in mind a number of other differences:
The earliest age for spousal benefits is 62, and the earliest age for survivors’ benefits is 60. The spousal benefit at 62 is 35 percent of the worker’s benefit, and the survivor’s benefit taken at age 60 is 71.5 percent of the worker’s benefit.
Persons born in 1944 or 1955 will have a different full retirement age for their spousal and survivors’ benefits. Full retirement age is 66 for spousal benefits for those born between 1943 and 1954, but for survivors’ benefits the window is 1945 to 1956.
Unlike survivors’ benefits, spousal benefits don’t get the benefit of delayed retirement credits.
Survivors’ benefits become available after nine months of marriage, but 12 months are required for spousal benefits.
File and suspend
When a husband and wife each have work records, each has the choice between taking a spousal benefit or the regular benefit. The choice doesn’t have to be permanent. Some affluent couples have explored a strategy called “file and suspend” to maximize their joint Social Security benefits.
Consider the example of Harold and Ann, who would like to maximize their benefits by waiting until age 70 to begin collecting. Harold, who had the higher income, files for his benefit upon reaching normal retirement age, but then suspends the benefit to gain the additional delayed retirement credits. Ann can go ahead and claim her spousal benefit, collecting it until she reaches age 70, when she’ll switch to her own benefit, including the full credit for delay.
This method is allowed only once per couple, and the Social Security Administration provides details on the strategy at http://www.ssa.gov/planners/retire/suspend.html.
To ensure retirement planning stays on track, keep a close eye on your benefits with tools provided by the Social Security Administration. Go to www.ssa.gov, click on “My Social Security,” and then on “Create an Account.” You’ll see a record of earnings, as well as estimates of Social Security benefits for early, full and delayed retirement, the latter at age 70. The administration also offers estimates of the amount of benefits paid to your spouse and other eligible family members upon retirement, disability or death.
By staying informed, you can more easily identify gaps in funding, plan accordingly and retire with confidence.
Jeff Schlenker is a vice president and program director for WTB Investment Services, a division of Spokane-based Washington Trust Bank. He can be reached at