Turning Social Security into a Winning Strategy
The below is neither comprehensive nor exhaustive. Rather, it’s meant to paint in broad strokes some of the benefits in carefully planning and evaluating your Social Security strategy.
A Quick Glance at the History of Social Security
Social Security was never meant to be your entire source of income once you stop working. Instead, it was meant to provide a basic level of income – and that’s pretty much it.
Since its inception in 1935, Social Security is that annoying line item that gets deducted from our paychecks. Today that’s to the tune of 6.2% and twice that amount if you’re an employer.
How is my benefit calculated?
Your benefit is essentially comprised of:
- Your 35 best years of work history.
- You need 40 credits to be fully insured.
- You earn a maximum of 4 credits/year
Once you turn 60 you start to get statements in the mail that estimate your benefit.
Quick tip: Mistakes do happen. Review your statement in detail, particularly your earnings history, to ensure it looks right.
What are the Problems with Social Security
These have been widely documented, but in short:
- People are living longer and therefore more people are on claim.
- It’s currently under funded – money being paid out is funded by existing workers.
- Many folks are claiming a lower benefit due to lack of understanding.
There are other issues, but the above are some of the more poignant ones.
How can I maximize my benefit?
In all honesty, a little bit of math, and a little bit of luck. The idea in maximizing your benefit is to get the most lifetime cash flow from your benefit. The math part is easy: your statement will estimate your benefit at age 62, Full Retirement Age (FRA), and age 70.
Based on your needs in retirement, you can plug in and figure out what your annual income will be (approximately, as you do get raises throughout).
The “luck” part is harder. Since we don’t have a crystal ball to tell us how long we’ll be around, the best we can do is provide an educated guess. Looking at our family health history and personal health record can shed valuable insight.
A quick rule of thumb: the earlier you claim your benefit, the less money you’ll receive. The later you claim your benefit, the more you’ll get. That being said, delaying isn’t always in your best interest. That’s where planning can shed light on what’s best for you.
Understanding Social Security Spousal Benefits
Assuming one spouse paid into the system a lot more than the second spouse, spousal benefits are essentially 50% of the primary breadwinner’s benefit at full retirement age. Below is a quick example:
In the same example above, if the primary breadwinner claimed their benefit early, the spouse can still receive 50% of the original PIA (primary insurance amount) so long as they claim at FRA (full retirement age). If not, they’ll also get a reduced benefit.
If one spouse paid into the system and is entitled to some benefit (but less than 50% of the other spouse’s PIA), they can’t double dip. Their spousal benefit will still equate to 50% of the primary breadwinners PIA:
If both spouses have similar benefits (in other words, one spouse’s benefit is not less than 50% of the other spouse’s benefit) they’ll typically just claim their own benefit.
Unlike spousal benefits, survivor benefits are directly tied to a filing decision. For example, if Jack and Jill went up the hill and filed for social security at age 62 (at a reduced benefit), and Jack predeceases Jill, Jill’s benefit may be reduced.
By the same token if Jack waited until 70 and received a higher amount, Jill could also receive that higher amount as a survivor benefit. The below illustrates the point:
Social Security also provides for divorcee benefits, assuming a confluence of perfect events:
- The marriage lasted for 10 consecutive years.
- You are at least 62.
- You are not currently remarried.
If all the above are true, you can claim off your ex-spouse’s benefit without he or she knowing or having their own benefit affected.
Taxes and Reduced Benefits
Since it was meant to provide for folks who are fully retired, part of your benefit could be taxed or reduced. For simplicity’s sake, we’ll use single/joint filers as an example:
Mixing it all together: How understanding the rules can increase your payouts.
In this sample case study, we’ll take a look at spousal benefits across ages 62, FRA, and 70 and determine which provides the most benefit across the respective timeframes. Keep in mind this is an overly simplified example for illustration purposes only.
|Spouse 1||Spouse 2|
|PIA = $2,200||PIA = $600|
|Born in 1955, lives through age 75||Born in 1955, lives through age 84|
|Goal: Maximize the lifetime value of benefits received. |
Claiming at age 62
Lifetime value of benefits = $607,620
- Spouse 1 individual reduced benefit of $1,650/month for 14 years = $277,200
- Spouse 2 individual reduced benefit of $450/month for 14 years = $75,600
- Spouse 2 reduced spousal benefit of $350/month for 14 years = $58,800
- Spouse 2 survivor benefit of $1,650/month for ~10 years = $196,020
Claiming at FRA/66
Lifetime value of benefits = $633,600
- Spouse 1 individual FRA benefit of $2,200/month for 10 years = $264,000
- Spouse 2 individual FRA benefit of $600/month for 10 years = $72,000
- Spouse 2 spousal benefit of $500/month for 10 years = $60,000
- Spouse 2 survivor benefit of $2,200/month for 9 years = $237,600
Claiming at age 70
Lifetime value of benefits = $601,920
- Spouse 1 individual enhanced benefit of $2,904/month for 6 years = $209,088
- Spouse 2 individual enhanced benefit of $792/month for 6 years = $57,024
- Spouse 2 spousal benefit of $308/month for 6 years = $22,176
- Spouse 2 survivor benefit of $2,904/month for 9 years = $313,632
As you can see, when you factor in longevity, the breakeven point for this couple was filing at FRA (age 66). The nuances can get even more pronounced when couples have similar benefit amounts.
One of the best places to start is to obtain your statement at www.ssa.gov and double check your earnings history and estimated benefit amounts.
From there, work the benefit amounts into your retirement projections. Take into account other sources of income and arrive at a filing decision that works in your best interest.
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