Despite all the talk about the program’s fiscal health, it’s a pretty sure bet Social Security isn’t going away anytime soon–and it’s 100 percent certain that the program will be one of your most important sources of security in retirement.
But the amount you’ll receive over the course of your retirement isn’t assured or automatic; maximizing your Social Security benefits will require some good planning and decision-making. And the most important decision you’ll make is when to enroll.
About half of all Americans file at age 62–the first year of eligibility for benefits. But for most, it’s a costly mistake that will mean foregoing thousands of dollars in higher benefits. Although you’re permitted to start receiving checks at 62, most Americans will receive larger monthly/annual payouts by waiting, if at all possible, until they reach age 66-or even 70.
Many seniors worry about the math of lifetime benefits — that is, they fear they won’t live long enough to make delayed filing worthwhile. In my view, those concerns miss the main point.
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Social Security is built around actuarial principles-essentially, the mathematics of risk. And a central actuarial idea behind Social Security is the Normal Retirement Age (NRA), a rule used by the Social Security Administration to ensure the system pays out fairly among all beneficiaries, and to keep from running out of money as American longevity increases.
But the main value of Social Security is replacement of current income, not accumulation of assets. That’s where later filing can help.
If you file for benefits early-that is, before the typical NRA of 66-the government reduces your monthly benefit accordingly to avoid paying higher lifetime benefits to you than it does to someone who waits until the NRA. Under the rules, your annual benefits will be reduced for most of the years you start early, based on an actuarial projection of average longevity. Let’s say your NRA is 66 but you retired and started taking Social Security at 62. That means you retired four years early. The net effect: your benefits will be reduced permanently by a total of 25 percent.
On the other hand, you’re incented to wait past your NRA. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect: if you wait until age 70, your annual benefit will be 32 percent higher than it would be if you started at age 66-and in addition to the 32 percent, you also get all the cost-of-living adjustments (COLA) from the intervening years. You’ll come out ahead so long as you-or your spouse-live past what’s called the “break-even” age. That’s the age where the total benefits paid to the patient ones start exceeding total payouts to those who take early benefits. That age is around 80-and in the case of more than 80 percent of American couples, the husband or wife will live past that age.
This can add up to hundreds of thousands of dollars, assuming you or your spouse lives many years beyond the breakeven age. An individual who takes benefits at age 62 instead of 70 would receive $140,000 less in total lifetime benefits if that person or his spouse lived to age 90. And if the man or woman lives to age 95, the loss is even higher-about $275,000. (The calculations assume an average Social Security benefit of $1,000 per month).
Estimating your benefits
Until 2011, the Social Security Administration sent all covered workers an annual statement that projected monthly benefits at different filing ages. The statements were suspended in a budget cutting move, with the exception of workers over age 60 who haven’t yet filed for benefits and all workers in the year when they turn 25.
The paper statements haven’t yet been restored, and were replaced in May 2012 by a new online statement available to all covered workers. You can sign up to access your online benefit statement at the Social Security Administration website.
The Social Security Administration also offers a useful online Retirement Estimator that allows you to project your future benefits assuming different retirement ages. The tool is free and easy to use–you just plug in a few personal facts and your Social Security number; the site digs through your actual lifetime earning history and calculates your monthly benefit assuming different retirement ages. It’s a useful decision-making tool and takes less than five minutes to use.
Working while receiving Social Security
Once you hit your NRA, you can earn an unlimited amount of income and receive Social Security benefits. However, if you file early, there’s a penalty on dollars earned over a certain amount. The 2013 ceiling is $15,120 (Social Security defines “income” in this context as wages from employment, or net earnings from self-employment). If your earnings exceed the limit, $1 will be deducted from your benefit payments for every $2 you earn over that amount. But even then, your lifetime benefits wouldn’t be reduced because the withheld benefits would be added to your benefits after you reach the NRA. Learn more here at the Social Security Administration website.
Understanding spousal benefits
If you’re married, it’s crucial to understand the interaction of both spouses’ benefits. Certain provisions of the Social Security law can create powerful amplifying effects when the higher-earning spouse waits to file for benefits until the NRA or beyond. The bottom line is that it’s generally beneficial for the higher-earning spouse to delay taking Social Security benefits until the NRA or beyond.
Spousal benefit: Spouses are entitled to receive the greater of his/her own benefit or half of their spouse’s benefit. One strategy that isn’t used very often-but is perfectly legal-is known as a “file-and-suspend.” Here’s how it works:
1. The higher-earning spouse files for benefits at his/her NRA but immediately files a notice to suspend benefits.
2. When the higher-earner files, the lower-earning spouse files for a spousal benefit, which will equal up to half of the higher-earning spouse’s benefit, depending on the lower-earners’ age).
3. The higher-earning spouse continues to accrue higher payments for whatever point he or she elects to begin receiving benefits.
This strategy is perfectly legal, and it only makes sense if the spousal benefit would be higher than the individual’s own benefit. But the result can be much higher combined benefits for the couple.
Survivor benefit: When your spouse dies, the surviving spouse is entitled to receive the greater of his/her own benefit or 100 percent of the spouse’s benefit, including any cost-of-living increases earned along the way. Again, if the higher-earning spouse delays filing until the NRA or beyond, the surviving spouse’s benefits will be increased substantially.
Survivor benefits are an especially important consideration for women. Men tend to be the higher wage-earners, but also tend to die younger. In many cases, this means that a delayed filing by a man can be a critical way to boost lifetime retirement security for older women-a time of life when overall income can decline sharply. Social Security is the sole source of income for 42 percent of single women over the age of 62, and older single women fall into poverty at a higher rate than most demographic groups in the country. The poverty rate for elderly single women is 23 percent, compared with just 5 percent for married retired people.
Click here for frequently-asked questions about spousal and survivor benefits.
Click here for guidance on where to get personalized help with Social Security filing decisions.
Claiming guides
The Center for Retirement Research at Boston College publishes a useful — if high-level– free guide to claiming strategies.
AARP Social Security Q&A tool. AARP has created a searchable database of the most common questions about Social Security. The tool can answer up to 11,000 questions.
Andy Landis, a former Social Security Administration employee who educates financial professionals and consumers about the program’s benefit structure, has published a book called Social Security, The Inside Story.
David Blanchett, head of retirement research at Morningstar, discusses the best time to file for Social Security in this interview with Christine Benz, Morningstar’s director of personal finance.
Jim Blankenship is a financial planner on a mission to educate the world about Social Security. His book, “A Social Security Owner’s Manual: Your Guide to Social Security Retirement, Dependent’s, and Survivor’s Benefits,” offers terrific detailed discussion of filing strategies.
Applying for Benefits
Apply in person – the Social Security Administration’s office locator to find the nearest facility.
Apply online - The SSA also is streamlining its online benefits procedure this fall.
Receiving benefits
Benefits payment calendar – at SSA.gov.
Direct Express – The federal government is rolling out a major campaign to expand delivery of federal benefits via debit cards. It’s an effort to help recipients of Social Security and Supplemental Security Income who don’t have bank accounts and hence don’t benefit from the convenience of electronic fund transfer. Nationally, about 4 million benefit recipients still receive paper checks, resulting in plenty of lost checks and delays.
Social Security Disability Insurance
People who are disabled in ways that prevent them from working may be eligible for SSDI benefits under Social Security–but qualifying is difficult and there is usually a long backlog of cases waiting for approval. Here are resources you’ll want to check:
Social Security Administration – home page describing the SSDI program, benefits and application process.
Books discussing SSDI – listing at Google.
News & Politics
Social Security – general news updates on Social Security.
Social Security and women – Blog updates at WISER Women – Women’s Institute for a Secure Retirement. The Social Security Administration also maintains a useful page of information for women.
