It seems like a simple concept: you work, you pay in, then you collect a benefit when you retire. But it doesn’t take much Googling to get lost in a dizzying array of acronyms, strategies, calculators, and services – all promising to “maximize your benefit.” There can be a good deal of nuance involved in the process of deciding how and when to file for your benefits. Let’s take a look at what Social Security Maximization is all about.
FRA and Timing
Everybody has a Social Security retirement age: they call it “Full Retirement Age” – FRA for short. Your FRA depends on when you were born. Over the years, this age has increased by increments, depending on the year of your birth. According to this neat calculator, my FRA is 67. It is important to note that your FRA and your actual retirement age aren’t one in the same; many individuals continue to work well into their 70s – long after they collect their first benefits.
The Social Security Administration (SSA) uses a special formula to determine your FRA monthly benefit amount. This amount serves as the basis for determining the size of your monthly social security check, depending on when you begin collecting. As you work and pay taxes, you will receive periodic updates describing your FRA benefits.
You can begin receiving benefits as early as age 62, and you can file any time thereafter. When you turn 70, you are required to collect benefits. Collecting early results in a decreased monthly payment (as compared to the FRA amount) and collecting late increases your monthly payment. The timing of benefits is the primary method that people use to manipulate (and attempt to “maximize”) their lifetime benefits.
The Life Expectancy Bet
How does it work? The SSA has a pretty good idea of how long you’ll live – they have a lot of statistics. By their estimation, the total benefit paid to you is pretty much the same regardless of when you begin collecting, as long as their life expectancy assumption for you pans out. If you have a good feeling that you’ll outlive the average American, you could theoretically collect more dollars over your life by delaying your benefit until 70 and continuing to collect well beyond your actuarial life expectancy. Conversely, if you anticipated a shorter life expectancy, an early collection of benefits could result in maximal lifetime dollars.
Married couples have even more decisions to make. While the popular “File and Suspend” strategy for married couples was phased out earlier this year, there are still other variables for spouses to consider. For example, each spouse has their own “when to file” decision to make. Further, a lower earning spouse must determine whether their own benefit would exceed their spousal benefit, and decide whether to collect their own benefit or their spousal benefit.
Based on your total income, some of your social security check can be taxable as income. Further, if you begin collecting benefits before your FRA, the SSA will actually dock your benefit when your income exceeds a certain threshold. To avoid extra taxes or benefit reductions, many individuals seek to integrate their filing decision with their employment plans.
The Bottom Line
Many individuals and couples will employ various combinations of timing, employment, and filing status to maximize their expected lifetime dollars from the SSA. Some people need these strategies in order to generate a sufficient stream of guaranteed income in retirement. Others simply hope to squeeze every possible benefit out of the system. Others ignore the hype and begin collecting at 62 – either out of necessity or concerns about the SSA’s future liquidity.
When it comes down to it, this conversation sits right at the confluence of some of life’s most sensitive topics. What seems like a technical and financial conversation can quickly encompass a wide variety of subjects. When working with clients on Social Security planning, I’ll often discuss attitudes about some (or all) of the following:
- Career and professional self-worth
- Lifetime Savings and financial self-worth
- Investment & Risk Tolerance
- Mortality & Widowhood
- Marriage & Divorce
- Taxation & The Federal Government
Any strategy to maximize your social security benefits is based on a web of assumptions. I like to remind clients that it doesn’t take long for such a web to unravel. Further, it is important to examine the filing decision in the context of financial and non-financial factors. As with any major financial decision, a variety of risk/reward relationships must be examined in the context of assets, liabilities, goals, and attitudes.
Questions? Talk to your fee-only financial planner or contact us.