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The Social Security Dilemma – When to Start Looking For Ways to Increase Lifetime Benefits?
Social Security offers one of the best forms of retirement income — a tax-efficient source of income that lasts a beneficiary’s lifetime with inflation protection and survivor benefits.
For most individuals, benefits represent about 30% to 35% of pre-retirement income. In an uncertain world with fewer people covered by pensions, shrinking 401(k) balances, and possibly less earned income due to forced early retirement and layoffs, the option of collecting Social Security the as soon as possible is attractive.
Often people ask when is the best time to start taking benefits. Many apply for benefits as soon as they are eligible at age 62. The average age at which people start collecting is just over 63 1/2.
Social Security benefits are based on lifetime earnings. Real wages are adjusted for inflation. Then the average monthly earnings of the highest earning quarters over the previous 35 years are used to determine a basic benefit or “primary insurance amount” called PIA.
The PIA determines how much you receive at full retirement age – 65 or older depending on an individual’s date of birth. If one chooses to draw benefits before full retirement age, the monthly benefit is reduced by approximately 6.7% per year. For someone who has reached full retirement age at 66 and retires at 62, they can only expect to receive 75% of the total benefit. On the other hand, someone who delays receiving benefits accumulates credits. So, waiting until age 70 can result in 32% higher monthly payments or 8% per year for the four-year period in this example.
A number of factors will influence this personal decision. In general, the longer you can wait before collecting, the higher the monthly benefit you can claim. Since women tend to live longer than men, women can benefit from higher payments later. So if a single woman can afford to meet her lifestyle needs from other sources, then deferral is a reasonable option. For single men or women, family longevity and personal medical history can be deciding factors.
For those who are married, benefits are based on each spouse’s income. For spouses who do not have their own income record, the benefit is based on 50% of that of the working spouse. The surviving spouse’s benefits are equal to the monthly benefit of the deceased spouse who earns the most. By delaying, her spouse will be entitled to a potentially higher benefit.
Two little-known strategies can actually increase benefits for recipients.
Claim and suspend:
This option results from the Freedom to Work for Older Persons Act 2000 and offers the beneficiary the possibility of changing their mind. This is ideal for those who are eligible to start collecting but have determined that the full benefit is not needed now.
This strategy offers three ways to increase the personal outcome of a worker who has reached full retirement age (FRA): o Register for Social Security and allow a spouse to claim spousal benefit now. o Suspend the receipt of benefits by the worker who can now continue to work and accumulate credits for deferred retirement. By delaying receipt by the worker, the amount that worker will be able to receive each month continues to increase by 8% per year until age 70. o If a beneficiary using this strategy dies, the highest accrued benefit is passed on to the surviving spouse.
Claim now, claim more later:
This option works best for married couples who each have their own work records and have reached each beneficiary’s respective full retirement age.
Under this option, a worker can apply for a benefit based on 50% of a spouse’s PIA while continuing to work and accrue deferred retirement benefits at 8% per year on their own file – ideally up to age 70. Later, the spouse can switch from a spousal benefit to claiming a benefit on their own work record, presumably if it is more important.
The decision to delay benefits really pays off when a beneficiary lives long enough to maximize the benefit – either at or above the actuarial age. For those aged 65, life expectancy is about 19 years longer on average or up to 84 years – a little more for women and a little less for men.
For women surviving to old age, a spouse who earns more and is late in receiving benefits can mean the difference between poverty or not for the surviving spouse.
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