An Insider’s Guide to Social Security Timing

?For many, Social Security benefits are a lifeline to retirement, but what is a good age to claim?

By Kris Maksimovich, AIF?, CRPC?, CRC?:

According to Bankrate, there are at least 567 different ways for couples to claim Social Security. ?In fact, questions about Social Security timing are brought up in nearly every meeting we have with clients.

What’s the Magic Number?

To be eligible for Social Security benefits you or your spouse must have worked for at least 10 years to become insured into the system. Like an insurance policy, benefits are based upon whether you believe you will reach the actuarial date or whether you believe you will live beyond that date. The actuarial date in 2020 was generally about age 84.6, however your family genetics and general health may drive the date you decide to take the benefit.

As a comparison, of the 1.8MM Social Security applicants in 2019, 5 percent were age 59-69, 1.9 percent were age 70-74, and 2.3 percent were age 75 and older, with the balance age 58 or younger. While you can wait until age 70 to earn the maximum Social Security benefit, if you pass away in your 70s, you would have received less total benefit than had you claimed it sooner. As you can see, there is no magic age, but a few timing strategies can help.

Popular Social Security Timing Strategies

As noted above, there are hundreds of ways to take Social Security benefits. These eight popular options are worth considering:

Consider life expectancy – By performing a break-even analysis—the age when your cumulative benefits will even out—you can gain helpful insight. To help you determine your anticipated life expectancy, the Social Security Administration (SSA) publishes?life expectancy calculators?and?benefits calculators to help you estimate your benefits based upon the age you would like to make your claim.?

Delay your benefit start date – If you delay taking Social Security payouts until after your full retirement age (FRA), the benefit will increase by 8 percent each year, up until age 70. For those born before 1955, you have already reached FRA, but for those born in 1960 or later, FRA incrementally rises to age 67. ?It’s important to note that the maximum benefit amount you can receive tops off at age 70, so there is no financial motivation to delay your claim beyond that age.

Swap a lower-paid year with a higher-paid one – Your Social Security benefit is based upon 35 of your highest-earning years. This may include years with zero earnings, such as when one parent takes time off to raise children. If you are earning a good income, each year you delay taking your Social Security benefit replaces one of your lower-paid years.

Consider spousal benefits – You could get more from taking a spousal benefit. For couples, these benefits can be as much as 50 percent of what the higher earner would receive at their FRA. ?Note that the high-earning spouse would need to be receiving their payout for the partner to get the spousal benefit. Keep in mind, however, that if you make an early claim, your spouse’s benefit will also be reduced. The flip side is, if you wait until age 70 to claim, you will maximize benefits for both of you—and potentially the survivor benefit for your spouse. When one spouse passes away, the survivor will receive the larger of the two checks.

Don’t forget divorced spouse benefits – If you are unmarried but your previous marriage lasted 10 years or longer, you could qualify for your ex-spouse’s benefit. The benefit collected could be up to 50 percent of the benefit at their FRA. If, for example, a spouse stayed home raising the children before going back to work, and then became divorced, the ex-spouse’s 35-year basis may mean a larger benefit. Should you remarry, the benefit stops.

Do-over provision – Sometimes people make their claim and then circumstances change, like they inherit money, win the lottery, or they quickly become bored and reenter the workforce. The good news is there is a do-over provision built into the system.?If you start taking your Social Security benefit and decide you made a mistake, you may withdraw your application provided you are still within 12 months since you applied. For the SSA to wipe the slate clean, you must pay back everything you took within that 12-month period. With that, you can take advantage of the 8-percent annual increase from delaying your benefits as described above.

Suspension of benefits – Once you have reached your FRA, you can suspend your benefits so that you may earn delayed retirement credits. You should understand that if you suspend your benefit, any spousal benefit based upon your work history will also be suspended.

What to Watch Out For

If you retire early, you’ll need to determine what will fill in the gap until you qualify to receive your Social Security benefit. Many considerations can influence how you draw down your 401(k) or assets.

Leaving money on the table – The largest mistake is to take Social Security in isolation, without consulting with a financial advisor. With so many ways to take Social Security, you could be leaving money on the table.

Natural biases – The second mistake is to allow biases to color decisions by discounting future income. Hyperbolic discounting bias means people tend to take things they can get now without regard for their future worth. Because of this bias, people often take Social Security earlier than they probably should.

Earning more – Working additional years will not reduce your benefits because low-wage years do not replace higher-wage years. In fact, working part-time in retirement could eventually help increase the basis used to determine benefits, though there are some caveats to consider.

If you continue earning money while collecting benefits before you reach your FRA, you will likely have penalties. ?For 2021, earned income over the threshold ($18,960 or $50,520 in the FRA year) can result in a reduction in benefits for those under their FRA, though only temporary. For every $2 you earn above a specific threshold set each year, $1 will be deducted from your benefit. In the year you reach your FRA, for every $3 you earn above the threshold, $1 will be deducted from your benefit.

Once you reach your FRA, no earning restrictions are in effect and the SSA will recalculate your benefit at FRA to account for any months in which the Social Security benefit was completely offset. That said, because these earnings are credited to the earner’s history, they may result in an increased benefit at FRA. Keep in mind that pensions, 401(k) distributions, severance and other post-employment pay, dividends, interest, and IRA distributions are not treated as earned income.

Windfall elimination period – The Windfall Elimination Provision (WEP) is common for teachers, government employees, and those who receive a pension from a job not covered by Social Security but who are also eligible for Social Security benefits from another job. The formula depends on the number of years you made substantial earnings under Social Security, in addition to your eligibility year. The maximum reduction is limited to half the amount of your noncovered pension in the first month of entitlement. The WEP also affects Social Security benefits for children and spouses (but not survivors), as it reduces the worker’s benefit that provides the basis for the dependents’ benefits. When the worker dies, the windfall elimination period reduction is removed, and the surviving spouse’s benefit is refigured using the regular benefit formula. The SSA offers a WEP calculator to help you determine the elimination period.

Tax concerns – Because some of your Social Security benefits may be taxable, depending on your income, you should factor any tax impact into your claiming strategy. Your tax rate is determined by your modified adjusted gross income (MAGI) and marginal tax rate, which can range between 10 percent to 85 percent of your taxable income—more, if your state taxes Social Security benefits.

To determine whether your benefits are taxable, calculate the MAGI for you and your spouse by adding 50 percent of your Social Security retirement benefits with all income, including tax-exempt interest. Keep in mind that even if your spouse doesn’t receive benefits, you must add your spouse’s income to yours to determine whether your Social Security benefits are taxable. Also, undistributed gain for a tax-deferred annuity is not included in the calculation, nor are distributions from a Roth IRA that has existed for five or more years if you are older than 59?. In 2021, the maximum combined income you can earn before your benefits are taxed is:

• $25,000 if you are single, head of household, or qualifying widow(er)
• $25,000 if you are married filing separately and lived apart from your spouse for the entire tax year
• $32,000 if you are married filing jointly
• $0 if you are married filing separately and lived with your spouse at any time during the tax year

For most retirees, up to 50 percent of benefits are taxable. Strategies to minimize those taxes include delaying your application for Social Security until taxable income is lower, drawing down a Roth IRA before an employer sponsored retirement plan or other IRA, or investing a portion of your investment portfolio in a nonqualified tax-deferred annuity, though it is important to note that earnings are taxed at higher ordinary income tax rates rather than capital gain rates. ?

These are just a handful of Social Security claiming strategies and there is simply no right or wrong way to decide when to apply for benefits. A trusted financial advisor can help you assess the options that are best for you.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Kris Maksimovich is a financial advisor located at Global Wealth Advisors 4400 State Hwy 121, Ste. 200, Lewisville, TX 75056. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network?, Member FINRA/SIPC, a Registered Investment Adviser. Financial planning offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (972) 930-1238 or at [email protected].