Social Security is one of the most common topics among my clients approaching their retirement years. With more than 2,700 separate rules governing Social Security, it’s no surprise that many people nearing retirement are often confused and overwhelmed by the decision of when to take the leap and claim their benefits.
I recently built a financial plan for a successful executive who is considering retirement when he turns 62. Even though he has saved and invested plenty of money on his own, much of our plan focused on the right time to file for Social Security.
In addition to planning for his own future, this person wants to build a lasting plan for his wife, who is in her mid-40s, and stays at home with their young son. As I began to research how Social Security would impact his plan, I uncovered some facts about Social Security’s least known and misunderstood rules.
Here are three facts about Social Security benefits that could have an impact on your retirement decisions:
Benefits Withheld Due to Working While Receiving Benefits Early Aren’t Lost Forever.
Many people know that claiming their Social Security retirement benefits prior to reaching full retirement age — 66 for most Baby Boomers — results in a permanent reduction of their benefits.
In addition, claiming Social Security before age 66 and continuing to work can reduce them further. But most people don’t realize that any benefits withheld because they work aren’t lost forever. Rather, they are paid back over a number of years after a person reaches full retirement age.
Right now, a person choosing to take Social Security at age 62 can also keep working. But they will have $1 in Social Security benefits withheld for every $2 they earn once they make more than $17,640 in a year.
The good news here is that once they reach full retirement age, a person’s monthly benefits are recalculated to repay the amount withheld during those working years. In effect, your monthly Social Security check will get bigger.
Here’s how my client can claim early benefits and get them back later:
If he claims retirement benefits at 62, there will be a 25% reduction to his benefits — he’ll receive $1,000 each month instead of $1,333, his full retirement age 66 benefit. However, if he comes out of retirement and works for a few months on a consulting project before turning 66, we expect he will have six months of benefits withheld because his earnings will exceed the annual threshold of $17,640.
But at age 66 — his full retirement age — his Social Security benefits will be recomputed as if he claimed his benefits at age 62 and 6 months. The lost amount will be paid back over roughly 15 years, but it will be recouped.
If You are Receiving Social Security, Young Children and Your Spouse Can Also Collect.
It’s well known that children can receive money from Social Security in the event that a family breadwinner dies or becomes disabled. But what you may not know is that once a person files for Social Security, a spouse younger than 62 and the couple’s young child can receive Social Security benefits, too.
The benefits for the spouse and the young boy are based on the full retirement age benefit of the retired worker. If my client’s age 66 benefit is $1,333 monthly, his spouse and child are eligible to receive up to $667 each.
However, in yet another twist in the law, there is a maximum amount each family can receive that typically runs between 150% to 180% of the husband’s monthly benefit. If the father receives $1,333 each month, the spouse and child would receive less than $667 each. But they are still eligible for some benefits.
In our example, the young boy can receive Social Security benefits as long as he is under the age of 18, not married and is the dependent child of a parent receiving Social Security retirement benefits.
But these benefits don’t go on forever. The mother’s benefits stop when the boy turns 16. The boy’s benefits will stop when he reaches age 18 or, if still in high school, upon graduation or two months after turning age 19, whichever comes sooner.
Even After Remarriage, Widows and Widowers Can Continue to Receive Payments.
Because he is considerably older than his wife, my client wants to plan for her future. Assuming he passes away first, in addition to inheriting his investments, she can begin collecting survivor benefits from Social Security.
In addition, if she chooses to remarry after turning 60, she isn’t penalized financially. She can continue to collect this amount each month because Social Security rules allow for survivor benefits to continue if remarriage takes place after reaching age 60.
Buried within the guidelines Social Security’s operations manual, there are many nuances that can offer attractive benefits to those who qualify. If your family situation involves death, disability or the retirement of someone who paid into the Social Security system, be sure you double check to ensure you or your loved ones collect all the benefits they are entitled to. You may be entitled to tens of thousands, possibly even hundreds of thousands of dollars in additional benefits over your lifetime.
Bud Boland is a Wealth Adviser at CI Brightworth (opens in new tab) and has devoted his career to working with high net worth and high-income individuals and families. Bud works closely with clients to understand their needs and develop customized financial plans to help them reach their short- and long-term goals. Bud is a CERTIFIED FINANCIAL PLANNER™ practitioner and received his Bachelor of Science in Financial Management with an emphasis in Financial Services from Clemson University.
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