When contemplating retirement, due consideration must be given to the potential Social Security benefit that may be claimed. This benefit is determined based on the individual’s earnings record and full retirement age (FRA). FRA is defined as the age a person can receive full benefits when first applying for Social Security.
Individuals and their spouses have several choices regarding how and when to start claiming their monthly benefits. In simple terms:
- Workers who take their benefits at FRA receive full Social Security benefits,
- Those receiving benefits before FRA receive reduced benefits, and
- Workers who wait until after their FRA to receive benefits receive increased benefits.
Claiming Early
In general, the earliest age an eligible individual can begin collecting a check is 62. When claiming early, an individual permanently reduces the monthly benefit they are qualified to receive based on a percentage of their potential full benefit. Additionally, if an individual is claiming benefits before FRA, the benefit amount will be reduced if the individual has earned income (wages, salaries, commissions, etc.) in excess of $15,720.
If one or both parents are retired (between ages 62 and 66) and have a child that is 18 years old or younger, the family may qualify to receive additional benefits for their child by claiming early. Within a family, a child may receive up to one-half of the parent’s full benefit; however there is a limit to the amount of money that can be claimed by a family. This increased benefit will stop when the child reaches age 18 unless the child is a student or disabled.
Waiting to collect
Those who are eligible for benefits can defer collection and receive a larger monthly benefit for life. Those who are the higher, or sole, earners in their family and those with a longer life expectancy should strongly consider this strategy. For every year an individual defers collecting, their benefit will increase between 5 and 8 percent until reaching age 70. If an individual is married, there are several strategies that can be used in order to take advantage of the increased monthly benefit resulting from deferring collection. These three strategies involve a claim for spousal benefits and are outlined below.
File and Suspend
A spouse is entitled to an amount equal to one-half of the individual’s full benefit amount. In general, in order to receive a spousal benefit, the spouse must be at least 62 years old and the individual must have filed for Social Security benefits; however, they do not need to be receiving benefits. In order to take advantage of the increased monthly benefit for life, an individual who has reached FRA:
- Needs to file for benefits so the spouse can collect based on the individual’s earnings record.
- The individual can then immediately suspend their benefits and delay claiming until the benefits are worth more at an older age and the spouse can claim spousal benefits based on the individual’s full benefit amount. The spousal benefit may be reduced if the spouse has not reached FRA, regardless of the age of the filing individual.
Claim Now and Later
If both spouses work and qualify for social security based on their own earnings record, there is an opportunity to take advantage of the spousal benefit while deferring the spouse’s own benefit until an older age.
- If a married individual files and starts collecting benefits at FRA, once the spouse reaches FRA, the spouse can apply for spousal benefits only and delay taking their own benefit in order to receive a higher monthly benefit at age 70.
- This will allow the spouse to receive a benefit equal to one half of the individual’s monthly benefit for the period of time from when the spouse reaches FRA until age 70 at which point they can switch to collecting their own benefit which is now increased due to the deferral.
Hybrid Strategy
If the situation is right, couples may be able to take advantage of both the file and suspend strategy as well as the claim now and later strategy. If both members of the couple are close in age, have reached FRA, and can claim benefits on their own earnings record, this strategy may be useful. To utilize this strategy:
- The older spouse needs to file for their benefits and immediately suspend them, allowing their benefits to grow.
- As soon as the younger spouse reaches FRA, they can file for a spousal benefit only and allow their benefits to grow as well.
- When both spouses turn 70, they can then file for their own retirement benefits, which have been maximized.
Make a Plan
It’s important to remember that each individual/family should take the time to create a plan to reach their retirement goals. The strategies to maximize one’s social security benefit are just one tool that, if used properly, can help to reach those goals, but should not be considered the only way to do so. Individuals should also look to other retirement vehicles to maximize the effectiveness of the overall plan as well as the tax consequences that result.
