Social Security Timing Strategies

History of Social Security

Social Security was enacted in 1935 to be a social safety net for retirees. It offered the elderly a means of avoiding financial destitution by keeping a roof over their head, food on the table, and clothes on their back. From an actuarial standpoint, most people were expected to live only a handful of years beyond retirement.

Social Security was not meant to be the sole source of someone’s retirement income. In the past, retirees often relied upon a combination of pensions, Social Security, and savings to cover their retirement costs.

Today, with less than 20 percent of private companies still issuing pensions, there is a large misconception about the safety net Social Security can provide retirees. Most Americans live much longer than they did in 1935, and Social Security makes up about 40 percent of retirement income for most Americans.

Social Security Solvency

Many are worried that Social Security will go bankrupt. What people may not know is that it already did. To cover a shortfall in 1982, Congress borrowed 12 billion dollars from Medicare. Additional tweaks made in 1983, like taxing Social Security as income, helped extend the program – but not indefinitely.

The social security trust fund is anticipated to go bankrupt again between 2030-35. Left as it currently stands, if you reach the age of retirement in 2030-35, and Congress has not made any significant changes to the program, you can expect to receive about 80 percent of the Social Security that was promised. This number, of course, is dependent upon changes in the economy and demographics.

Congress will likely make more tweaks along the way to ensure Social Security remains viable. If history tells us anything, Congress will not address the current solvency situation until they absolutely must. When they do, one likely adjustment will be to the benefit age.

Eligibility for Social Security

Retirees can apply for social security anytime between ages 62 and 70. Claiming as early as age 62, however, can permanently reduce not only your benefits but your spouse’s survivor benefits as well.

On the flip side, delaying until age 70 rewards the worker with the maximum benefit and locks in the highest possible benefit for a widow or widower. Of course, retirees who wait until age 70 to claim benefits may need to bridge the income gap by drawing down their retirement portfolios.

Today, about 40 percent of retirees take the payout at age 62 and only one percent take it at age 70, but there is no magic number, and everyone is different. The chart below shows what age you need to be to collect full social security benefits:

Actuarial Date

Like an insurance policy, Social Security is based upon whether you believe you will reach the “actuarial date”. While you can wait until age 70 to earn the maximum benefit, if you pass away in your 70s, you would have received less total benefit than had you claimed it sooner.

Based upon current demographics, the actuarial date associated with Social Security is generally about age 83. If you think you’ll live past this age, you may decide to wait before claiming. If you’re not sure if you’ll reach age 83 because you’re not in the best health and your parents passed before age 83, your family genetics may drive the date you decide to take Social Security.

Spousal Benefits

Claiming Strategies

Until you or your spouse reaches your full retirement age (FRA), you won’t be able to take full advantage of social security claiming strategies. For many of today’s retirees (those born between 1943 and 1955), FRA is 66. If you fall into this category and claim your benefits prior to age 66, you will automatically apply for both your worker benefit and any additional benefits you qualify for as a spouse, assuming your spouse is already receiving benefits. If you wait until your FRA to claim, however, you can elect to take one benefit or the other, switching them at a later date if advantageous.

What if I Never Worked or am Divorced?

Even if you never worked and contributed to Social Security, you may be able to receive spousal benefits if you are at least 62 years old, as long as your spouse has already claimed his or her retirement benefits.

Again, keep in mind that if you elect to take spousal benefits before your FRA, your benefits will be reduced permanently by a predetermined percentage (based on how many months earlier you elected to take spousal benefits). If you choose to collect spousal benefits at your FRA, you will be eligible to receive full spousal benefits.

Example: If a nonworking spouse files for benefits at age 62, they will receive a cumulative benefit of $117,600. If, however, they wait until FRA, they will receive a cumulative benefit of $144,000, an increase of $26,400.

Timing Strategies

Delaying Your Benefit Start Date

At present, the full retirement age is 66 but is rising to 67 for those born in 1960 or later. Each year you delay the start date past age 62, Social security benefits increase about seven percent. If you delay taking payouts until after your FRA, the benefit will increase by eight percent each year, up until age 70.

If you are at FRA and choose to delay receiving benefits, you will be eligible to receive delayed retirement credits. These credits increase your retirement benefit by a predetermined percentage of your primary insurance amount (PIA) for each month that you delay receiving retirement benefits, up to the maximum age of 70.

Example: A covered worker’s FRA is 66, her PIA is $1,000 and her life expectancy is 90. If the woman starts collecting benefits at age 62, her cumulative benefits will be $252,000. If, however, she waits to begin taking benefits until age 70, her cumulative benefits will increase to $316,800—a $64,800 difference.

Claim Spousal Benefit When One Reaches FRA

You can only earn delayed retirement credits on your worker benefit, not by delaying the spousal benefit. If your spousal benefit will always be greater than your benefit, it makes sense for you to take advantage of the spousal benefit sooner rather than later.

Claim Lower Benefits First

Cash flow needs may require you to turn to social security before both spouses reach FRA. But, if your budget permits, there’s still an opportunity to enhance your overall social security strategy. Here’s how it works: The spouse with the lower benefit claims as early as age 62; meanwhile, the other spouse waits until his or her FRA and files a restricted application for spousal benefits, which will amount to half of the lower-earning spouse’s full retirement benefit. Then, at age 70, the one receiving spousal benefits switches to his or her worker benefit, which has accumulated delayed retirement credits. Once the spouse with the higher-earning history claims his or her retirement benefit, the other spouse can switch to the spousal benefit if it’s higher.

Claim Now and Claim More Later

One strategy that may work for spouses with a substantial difference in their earnings records is for the spouse with the lower earnings history to file for benefits at age 62, while the other delays benefits as long as possible and earn delayed retirement credits. Once the second spouse files, the first is eligible for a benefit as a spouse, if it is higher than his or her current benefit. Remember that applying for benefits before your FRA will permanently reduce your social security benefits.

A Word About Survivor Benefits

If you are the widow or widower of a qualified person under social security, you may receive survivor benefits starting as early as age 60. If, however, you elect to take benefits before your FRA, your benefits will be reduced.

It’s worth noting that the magic age for claiming discussed previously in this guide does not have the same effect on spousal survivor benefits. A surviving spouse can claim either his or her benefit or the survivor benefit independently (even prior to FRA), then switch to the other benefit after FRA. In other words, by claiming prior to FRA, the spouse is not deemed to have claimed both the survivor benefit and his or her worker benefit.

Example: If the surviving spouse elects to collect benefits at age 60, she will have a cumulative benefit of $257,400. If, however, she waits to collect benefits until age 70, her cumulative benefit will be $316,800, a $59,400 increase.

Unlike spousal benefits, however, with survivor’s benefits, you may switch over to your benefits, if they are higher, at any time after age 62. In addition, you could collect your survivor’s benefit early and allow your benefit to grow until you are age 70.

Often Overlooked Opportunities

Working in Retirement

Your social security retirement benefit is based on an average of your highest 35 years of earned income, adjusted for inflation. This may include years with zero earnings, such as when a parent takes time off to raise children. Working additional years will never reduce your benefits because low-wage years never replace higher-wage years. In fact, working part-time in retirement will usually help increase your PIA—the basis for determining benefits—even if you are already drawing benefits. You may not realize the increase immediately if your benefits are temporarily reduced because you earn too much.

Although earned income over a threshold of $18,960 in 2021 (or $50,520 in the FRA year) can result in a reduction of benefits for retirees who are under their FRA, it is only a temporary reduction. The Social Security Administration will recalculate the worker’s benefit at FRA to account for any months in which the social security benefit was completely offset (i.e., any months in nonpay status). Also, because the earnings will be credited to the worker’s history, they may result in an increased benefit at FRA.

Use the Retirement Estimator on the SSA website at www.ssa.gov to see how not working could affect your monthly benefit.

Do-Over Provision

Sometimes people ask us if they can go back and redo their benefits. In an instance where you’ve inherited a lot of money or win the lottery, or perhaps retirement sounded great, but you quickly got bored and are reentering the workforce, there is a do-over provision built-in.

If you start taking your Social Security benefit and decide you made a mistake, as long as you withdraw your application within 12 months and pay back everything you took within those 12 months, the Social Security Administration will wipe the slate clean.

With that, you’ll be able to receive either the seven- or eight-percent annual increase from delaying your benefits as described previously in this guide.

It’s important to note that many social security claiming strategies seek to provide a larger cumulative benefit over a couple’s lifetime rather than generating a greater benefit today. If you and your spouse have shortened life expectancies, a delayed claim may shortchange you, possibly lowering your current standard of living or depleting retirement assets that you could pass to heirs.

We’re Here to Help

When it comes to determining the optimum social security claiming strategy, numerous variables are at play. Your financial advisor can help you evaluate the benefits of different strategies and find the option best suited to you and your unique situation. If you want to check your readiness, our retirement checklist may help.