5 Keys to Your Social Security Benefits Strategy

Navigating Social Security is a challenging task for those deciding when to claim their benefits. There is a thicket of rules and jargon to cut through. Even those who have been receiving retirement benefits can confront a new obstacle after a spouse dies and a survivor benefit comes into play. And with the government having changed the claiming rules in the past year, how do you know which ones apply to you? Do you take your own benefit, or one based on a spouse’s earnings record? How can you maximize your benefits? Our handy five-step guide can help you do just that.

It’s up to you to make the most of this inflation-adjusted income stream that you can’t outlive. “Social Security is a big part of a retirement income plan,” says Roberta Eckert, vice president at Nationwide Retirement Institute. But, she says, claiming benefits “is an art as well as a science.” For instance, you’ll need to figure out if it’s more important to have some income sooner than later or wait as long as possible to snare a bigger benefit.

And while the incoming Trump Administration may take on Social Security reform, it’s too early to tell how that will shake out. “All changes ever made to Social Security have been on a forward-looking basis,” says Michael Kitces, director of wealth management for Pinnacle Advisory Group, in Columbia, Md. Plan with the certainty of rules that exist, not the shifting sands of speculation.

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In this guide, we go old school, referring to the higher earner as he and the lower earner as she, only to help cut some of the confusion in explaining the strategies. The rules remain the same whether the higher earner of a couple is female or if both higher and lower earners are the same gender.

First Step: Know Your FRA

Begin by pinning down your full retirement age, which varies by birth year. We just finished a 16-year period during which the FRA rose from 65 to 66 for those born between 1943 and 1954. In 2017, those born in 1955 are turning 62—and they are in the vanguard of the climb to a full retirement age of 67. Those who turn 62 this year must wait until age 66 and 2 months to reach full retirement age. Every year for the next six years, the full retirement age for those turning 62 will climb by two months until reaching age 67.

Age 62 is key because no matter when you were born, you can claim a retirement benefit once you reach 62. But if you turn 62 in 2017 and immediately take benefits, the cut to your benefit will be deeper than that of a 62-year-old last year. “Once full retirement age starts to climb, the percentage of reduction also climbs at age 62,” says Jim Blair, a former district manager for an Ohio Social Security office and a partner at Premier Social Security Consulting, in Sharonville, Ohio. Those with a full retirement age of 66 who claimed at age 62 got 75% of their full benefit. That percentage starts to fall for those turning 62 in 2017 (to 74.17%) and eventually falls to 70% of a full benefit for those whose full retirement age is 67.

The increase in full retirement age also affects those who postpone claiming a benefit to earn delayed-retirement credits. Your benefit rises by 2/3 of 1% a month (8% a year) if you start receiving payments after your full retirement age. Those with a full retirement age of 66 can boost their benefit by as much as 32% by waiting until 70.

But, Blair notes, as FRA rises, the maximum value of the credits falls, because they still top out at age 70. The maximum hike for those turning 62 in 2017 is 30.7%. For those with a full retirement age of 67, only three years’ worth of benefits are available, so the maximum boost will be 24%.

Second Step: Consider Your Marital Status

Are you currently married, never married, divorced or widowed? Your answer affects what Social Security has for you. You qualify for a retirement benefit based on your personal earnings record once you have 40 quarters of coverage. That basically means working in covered employment (jobs or self-employment where your earnings are hit by the Social Security tax) for 10 years. Your benefit will be based on your 35 highest years of earnings. But depending on your marital status, you may also qualify for a spousal benefit or a survivor benefit. If you do, you may be able to mix and match benefits to add to your financial security.

Married couples should coordinate their claims to maximize benefits. Under the new rules of claiming, eligibility for a spousal benefit can’t kick in until the other spouse claims his benefit. Say the higher earner plans to wait until age 70 to take advantage of those juicy 8%-a-year credits for delaying his claim. The lower earner can claim a benefit of her own, but if the spousal benefit would be higher, it won’t be available until the higher earner takes his benefit. If claimed at full retirement age, the spousal benefit is worth 50% of the higher earner’s benefit.

The options for singles depend on the type of single you are. If you never married or were married for less than 10 years, you only have your own benefit to rely on—and only you can benefit from your Social Security payout because only a spouse or former spouse can qualify for a survivor benefit.

Those who are single because of divorce or widowhood have more choices. You can claim a benefit off an ex-spouse who qualifies for Social Security if you were married for at least 10 years and you are single.

Surviving spouses (and former spouses) can claim a survivor benefit as early as age 60. If they wait to claim that benefit until their full retirement age or later, the survivor benefit will be worth 100% of what the deceased spouse was receiving (or eligible to receive) at the time of death—including any earned delayed-retirement credits.

Third Step: Do You Qualify for a Disappearing Strategy?

Your birth year and your marriage status also determine if you qualify for strategies that Congress decided in 2015 to eliminate.

Those who turned 66 by April 29, 2016, had the option to “file and suspend” under the old rules—which opened the door to one spouse to claim spousal benefits while the other delayed receiving benefits to earn delayed-retirement credits. It also allowed beneficiaries who suspended to effectively bank forgone benefits and claim them as a lump sum if they changed their mind about delaying. (Such a reversal would mean forfeiting any delayed-retirement credits.)

If you took advantage of that move by the April deadline, your spouse can claim a spousal benefit at age 62 even if you’re not receiving payments. Also, if you become ill or for some other reason decide delaying was a bad idea, you can claim your lump sum.

Congress also abolished a strategy known as “restricting an application”—but not immediately. If you were born on or before January 1, 1954, you qualify to file a restricted application for spousal benefits only, once you turn full retirement age. That would allow you to collect a spousal benefit while postponing your own to earn delayed-retirement credits. Your spouse has to be taking her benefit for you to make use of this strategy. If you were born before the 1954 deadline and are not yet 66, don’t forget that this strategy is open to you. As fewer and fewer people qualify, less and less will be written about the potential benefits.

Take heed, ex-spouses: Qualifying ex-spouses can use this strategy to claim a spousal benefit from their ex’s earnings record while waiting to claim their own benefit. That’s a smart move if their own benefit with delayed-retirement credits will exceed their spousal benefit off the ex. “It’s free money for the years from 66 to 70,” Kitces says.

Beneficiaries born after January 1, 1954, can’t use the restricted application strategy. And the only remaining advantage for suspending a benefit is to earn delayed-retirement credits on one’s own benefit.

But there is one group of beneficiaries not affected by the changes. Survivors who qualify for a retirement benefit of their own can mix and match their own benefit with the survivor benefit. For example, if your own benefit at age 70 would exceed your survivor benefit, consider claiming the survivor benefit early (even if reduced) and let your own benefit grow.

Fourth Step: Mull Your Life Expectancy

The longer you or your spouse is expected to live, the stronger the case for delaying benefits as long as possible. “By waiting, you have lower longevity risk,” says William Reichenstein, a professor of finance at Baylor University, in Waco, Tex., and a principal of consulting firm Social Security Solutions. To put it bluntly: The higher benefit earned by delaying makes it less likely you’ll run out of money before you die.

Singles who can afford to delay may want to wait until 70 to claim benefits if they think they could live well past age 80. “If you have a shorter life expectancy, begin benefits as soon as possible,” says Reichenstein, who co-authored Social Security Strategies (3rd edition) (Social Security Solutions Inc., $25).

Married couples need to take into account the life expectancies of both spouses, and consider if at least one spouse is expected to live past age 80. Couples have a few choices: Both could claim early, both could delay, or one spouse could wait. “If both spouses are in terrible health, go ahead and file early and take as many checks as you can,” says Kitces. If both spouses are running marathons while taking care of 101-year-old parents, he says, both may want to delay their own benefits so both can get benefits supercharged by delayed-retirement credits.

But for nearly everyone who is in average health, Kitces says the smartest strategy is to have the higher earner delay benefits and the lower earner claim benefits early. That brings money into the household while waiting for the bigger check.

Fifth Step: Peg the Higher Earner

The closest thing there is to a universal rule for maximizing benefits is to delay the highest benefit you are entitled to so that it can grow as much as possible. For married couples, this means figuring out who is the higher earner.

The higher earner’s benefit will continue for as long as either spouse is alive, while the lower earner’s benefit will disappear after the first spouse dies. That’s because if the higher earner lives longer, he, of course, will continue to receive the boosted benefit. And, if he dies first, the lower earner will step up to a survivor benefit equal to the higher earner’s, if she claims it at her full retirement age or later. “You can think of that as a legacy for the survivor,” says Eckert.

Delaying to age 70 turbocharges that legacy with the extra boost from the delayed-retirement credits—worth up to 32% extra. That’s about $640 more a month on a full retirement age benefit of $2,000 a month—or an extra $7,680 a year for life (not including annual cost-of-living adjustments). Those credits don’t impact a spousal benefit but are included in the survivor benefit. Reichenstein suggests thinking of the higher earner’s benefit as a second-to-die inflation-adjusted annuity.

Once you know whose benefit will grow the largest by waiting, you can decide when to claim the lower earner’s benefit. Even if the lower earner claims a reduced benefit or spousal benefit early, the survivor benefit won’t be reduced. That’s a big reason why it can make sense for a lower earner to claim sooner.

For one-earner households, where one spouse doesn’t qualify for a benefit of her own at all, waiting until 70 may be too costly, because that spouse can only take a spousal benefit when the worker claims his benefit. In this scenario, Kitces says that the worker should claim when the spouse with no benefit of her own hits full retirement age. That will trigger her spousal benefit, which can’t grow beyond full retirement age.

For example, say the worker qualifies for a $2,000 full benefit, which allows his spouse to collect a $1,000 spousal benefit at full retirement age. Assuming they are the same age, if he waits until age 70 to take his benefit, the couple gives up $3,000 a month for about four years—or about $144,000. Because both benefits are pegged to his claim, the couple gets no checks while waiting. Blair says it would take the couple almost 19 years to break even if they wait to claim his benefit at 70. “It’s going to take away the incentive for some people to wait until age 70,” he says.

But if the spouses in the one-earner household have a large gap in ages, that gap can make delaying the worker’s benefits worthwhile—and with little impact on the spouse with no benefit of her own. Say the worker is four years older than the spouse without her own benefit. The worker could wait until 70 to boost his benefit with delayed-retirement credits, and because the spouse will be hitting her full retirement age around the same time, she can claim her full spousal benefit right away.

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