Deciding When to Start Receiving Social Security Benefits (Part 2)

Advantages of Taking Reduced Benefits at Age 62

Even if an individual has sufficient funds to cover living expenses without Social Security, some practitioners advise clients to begin receiving benefits as soon as possible. For 2013, the retirement benefits received at age 62 are reduced by 25% of what they would be at age 66, i.e., the full retirement age (“FRA”), but the individual receives more Social Security checks if benefits are drawn early. In addition, drawing early Social Security benefits may allow the individual to leave tax-deferred retirement accounts untouched and growing for longer periods.

For example, Curt is single and plans to begin receiving Social Security benefits on his 62nd birthday when his PIA is $2,000; he will receive monthly payments of 75% of his PIA, or $1,500. When he reaches age 66 (his FRA), he will have received 48 benefit checks of S1,500 each (not considering annual inflation adjustments), or a total of S72,000.

If Curt waits until age 66 to start receiving benefits, his monthly payment will be S2,000; it will take 12 years before the additional S500 per month (S2,000 – S1,500) equals the S72,000 he can receive between ages 62 and 66.

Curt makes his decision because he wants to receive 16 years of benefits beginning at age 62 (S1,500 x 192 months = S288,000) before he would otherwise receive the same amount if payments start at age 66 (S2,000 x 144 months = S288,000).

If an individual waits until his or her FRA to draw benefits (and the PLA remains the same), it will take 12 years to reach the break-even point, compared to the time it would take if he or she began taking benefits at age 62 (ignoring other factors such as inflation, taxes and investment returns). Therefore, if an individual does not expect to live past age 78, more benefits will be received by taking the reduced preFRA monthly payment.

If the present value of future Social Security benefits is considered, it may be more favorable to start benefits as soon as possible. However, if early Social Security benefits replace a similar amount of earned income, i.e., if the individual stops working and receives Social Security benefits instead, the short-term financial position may not be improved and the long-term outlook could suffer.

It is also important to note that, while individuals have the option of receiving Social Security benefits as early as age 62, the eligibility age for Medicare remains 65. So, although they may be able to replace a sufficient amount of their earned income with Social Security benefits beginning at age 62, individuals may not be able to adequately replace their employer-provided health 1 Sal Co.

Advantages of Taking Delayed Benefits after Reaching FRA Workers born in 1943 or later receive a credit of 8% per year for each year they delay receiving benefits after reaching their FRA, up to age 70. This delayed retirement credit can have a significant impact; not only are benefits higher, but the worker’s retirement period is shorter and the spouse’s survivor’s benefits are greater. However, higher earnings after reaching FRA won’t increase the worker’s PIA by replacing lowerwage years.

The following strategies can be used by married couples to help maximize the benefit amounts for which they are eligible.

Switching from One Type of Benefit to Another

A married individual who has reached FRA but wants to earn delayed retirement credits may claim a spousal benefit for several years, then switch from spousal benefits to benefits based upon his or her own PLA when he or she has earned the desired number of additional credits

For example, Maurice and Jo have both reached their FRAs at age 66. Maurice wants to retire and start receiving his benefit of S1,800 per month. Jo’s benefit (based on her earnings record) is S800 per month. Jo chooses to receive the higher spousal benefit, equal to half of Maurice’s benefit (S900) and delay receipt of her own benefits. She earns delayed retirement credits until age 70, at which point she is eligible for a retirement benefit of at least S1,056 based upon her own earnings record (S800 + (8% delayed retirement credit x 4 years x S800)), which is higher than her spousal benefit (S900).

Suspension of Benefits

Occasionally, a worker wants to delay benefits to take advantage of the delayed retirement credit, while his or her spouse wants to start spousal benefits immediately. Since spousal benefits cannot be received until the working spouse has begun drawing benefits, this can create a problem.

One solution is for the worker to file for benefits at FRA, allowing the spouse to file for spousal benefits, and then immediately suspend benefits to earn the delayed retirement credit. The worker can also request to “restrict his claim to spousal benefits only” to achieve the same result.

For example, Al and his wife, Rochelle, both reach their FRA. Al’s PLA is S2,000, but he intends to keep working and earn delayed retirement credits until age 70. Rochelle wants to retire, and her PLA is S500. Since Al is not going to begin receiving benefits, Rochelle is not eligible for her S1,000 ($2,000 x 50%) spousal benefit based upon Al’s earnings.

Al and Rochelle’s practitioner advises Al to file for benefits so Rochelle can claim her higher spousal benefit. Then, Al immediately suspends his benefit claim and continues working Rochelle is permitted to receive her S1,000 spousal benefit, and Al continues to accrue delayed retirement credits.

The increase in benefits resulting from the delayed retirement credit does not increase the PIA and does not affect benefits paid to family members other than the worker and, eventually, the surviving spouse. In addition, even after beginning to receive Social Security benefits, a worker can earn a delayed retirement credit for any month that suspension of benefits is requested. This option only applies to the period beginning with the month in which the worker reaches FRA and ending with the month prior to reaching age 70.

Social Security benefit amounts are calculated by reference to a worker’s PIA. The calculation is complicated, and many of the factors involved change annually. Workers car access an estimate of their retirement benefits based upon the Social Security earnings record by visiting the Social Security website (www.ssa.gov) and creating a “My Social Security” account.

Conclusion

A worker can begin receiving Social Security benefits at any time between age 62 and 70, and selecting the best time is a personal decision. A number of considerations must be weighed including life expectancy, inflation adjustments and more. Tax and legal professionals who work with clients nearing retirement age should be familiar with the factors involved so they can pro vide guidance that best fits each client’s circumstances.