Things to Consider Before Filing for Social Security

Jane Young, CFP, EA

Jane Young, CFP, EA

Social Security seems straight forward but it can be quite complex, there are many opportunities and pitfalls to watch out for.  Before filing for Social Security, research your options to maximize your benefit, minimize taxes and avoid errors in your benefit calculation.  It’s important to meet with a Social Security Representative prior to filing but don’t solely rely on this information.   Due to the complexity of various options, they may overlook something that could impact your situation

You can file for Social Security benefits as early as 62 but you will receive a reduced benefit.  Most healthy individuals should hold off on taking Social Security as long as possible.  If possible, delay taking Social Security until age 70.  Your benefit will increase 8% a year from your full retirement age to age 70.  The full retirement age for individuals born before 1954 is 66 gradually increasing to age 67 for anyone born in 1960 or later.

Upon reaching full retirement you may be eligible to take 50% of your spouse’s benefit or 100% of your own benefit if you are currently married, were born before 1954 and your spouse has started taking benefits.  While taking spousal benefits, your benefit can continue growing until you reach age 70 at which time you can switch to 100% of your own benefit if it’s higher.  There is no advantage to delaying benefits beyond age 70.

If you have been divorced for two years or more, were married for at least 10 years and are currently unmarried, you are eligible to receive 50% of your ex-spouses benefit or 100% of your own benefit.  If you were born before 1954, at full retirement you have the option to start taking 50% of your ex-spouses benefit and switch to your own retirement benefit at a later date. If you are a widow and you were married for at least 10 years you are eligible to take the highest of 100% of your deceased spouses benefit or your own.

If you take benefits before your full retirement age you are limited on how much you can earn before your benefit is reduced. In 2016, your benefits would be reduced by $1 for every $2 earned over $15,720.  Benefits lost due to work will result in a higher benefit later.  There is no income limit if you wait to take benefits at full retirement. If you take Social Security while working a larger portion of your benefit will be taxable, so you may want to consider delaying Social Security until you stop working or reach age 70.

If you held jobs where you paid into Social Security and you receive a pension from working in a job where you did not pay Social Security, your Social Security benefit may be reduced.  Be sure to notify the Social Security Administration of your pension.

More information on your Social Security benefits is available at www.ssa.gov.

Taking Social Security Early Not the Best Option

Jane Young, CFP, EA

Jane Young, CFP, EA

The best time to take Social Security is a personal decision based on your financial situation, health, lifestyle, family longevity and when you stop working.  Social Security will provide you with the same total amount, if you live to the average life expectancy, regardless of when you take it.   The full retirement age for most people is between 66 and 67.  You can begin taking reduced benefits as early as 62 or you can wait and take an increased benefit as late as age 70.  If you begin at 62 your benefit is reduced by about 30%, if you take Social Security after your full retirement date your benefit will increase 8% per year until age 70.

You will probably benefit from taking Social Security at full retirement or later.  Unless you have a serious medical condition, there is a good chance you will live longer than the Social Security average life expectancy.  Social Security life expectancy tables are based on 2010 data and lag what can be reasonably expected.  They indicate a 65 year old male will live to around 84.3 and a 65 year old female will live to around 86.6.  Taking Social Security later is like buying longevity insurance.  It can provide you with more money later in life which can help put your mind at ease, if you are worried about out living your money.

If you are still working it can be especially detrimental to take Social Security before your full retirement age.  In 2015 you will lose $1 for every $2 earned over $15,720.   Once you reach full retirement age there is no limit to how much you can earn.   However, taxation of your Social Security benefit is based on your overall earnings.  If you take Social Security after you stop working a smaller portion of your benefit is likely to be taxable.  Additionally, if you continue to work and delay Social Security you may be able to increase your total Social Security benefit. The Social Security Administration annually recalculates benefits for recipients who are still working.

The decision on when to take Social Security is significantly impacted by your marital status and your spouses expected benefit.  If you have been married for at least ten years you have the option to take the greater of 50% of your spouse’s benefit or your full benefit. If you wait until your full retirement age you can start taking 50% of your spouse’s benefit, let your benefit grow, and switch back to your full benefit at age 70.   If you take the spousal benefit prior to your full retirement age you cannot switch back to your own benefit at a later date.  If you have been married for at least 10 years, and your spouse dies, you are eligible for the greater of your benefit or 100% of your spouse’s benefit.

More information about your Social Security benefit is available at www.ssa.gov.

Pitfalls in Taking Early Social Security

Jane M. Young CFP, EA

 

You can begin taking Social Security at age 62 but there are some disadvantages to starting before your normal retirement age.   The decision on when to start taking Social Security is dependent on your unique set of circumstances.  Generally, if you plan to keep working, if you can cover your current expenses and if you are reasonably healthy you will be better off taking Social Security on or after your normal retirement age.  Your normal retirement age can be found on your annual statement or by going to www.socialsecurity.gov and searching for normal retirement age.

Taking Social Security early will result in a reduced benefit.  Your benefits will be reduced based on the number of months you receive Social Security before your normal retirement age.    For example if your normal retirement age is 66, the approximate reduction in benefits at age 62 is 25%, at 63 is 20%, at 64 is 13.3% and at 65 is 6.7%.  If you were born after 1960 and you start taking benefits at age 62 your maximum reduction in benefits will be around 30%.

On the other hand, if you decide to take Social Security after your normal retirement age, you may receive a larger benefit.  Do not wait to take your Social Security beyond age 70 because there is no additional increase in the benefit after 70.  Taking Social Security after your normal retirement age is generally most beneficial for those who expect to live beyond their average life expectancy.  If you plan to keep working, taking Social Security early may be especially tricky.  If you take benefits before your normal retirement age and earn over a certain level, the Social Security Administration withholds part of your benefit.   In 2012 Social Security will withhold $1 in benefits for every $2 of earnings above $14,640 and $1 in benefits for every $3 of earnings above $38,880.  However, all is not lost, after you reach full retirement age your benefit is recalculated to give you credit for the benefits that were withheld as a result of earning above the exempt amount. 

Another potential downfall to taking Social Security early, especially if you are working or have other forms of income, is paying federal income tax on your benefit.  If you wait to take Social Security at your normal retirement age, your income may be lower and a smaller portion of your benefit may be taxable.  If you file a joint return and you have combined income (adjusted gross income, plus ½ of Social Security and tax exempt interest) of between $32,000 and $44,000 you may have to pay income tax on up to 50% of your benefit.  If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefit. 

The decision on when to take Social Security can be very complicated and these are just a few of the many factors that should be taken into consideration.