Social Security Planning

An often overlooked and underutilized aspect of financial planning is Social Security planning. Everyone’s situation is different, and the rules on taking Social Security can become very complicated depending on the circumstances. Additionally, in order to get the most out of the system to which you’ve paid, you have to be proactive. The Social Security Administration can give you estimates of what your benefits will be based on your age, earnings record, and the type of benefits you choose to take, but they are not going to notify nor inform you of the best strategy to choose in order to receive the highest possible benefits.

When it comes to Social Security planning, I believe that for most people, it is best to think of it as a form of longevity insurance. You are insuring against the risk that you will outlive your money. If you begin taking benefits at the earliest age possible (which is 62) your primary insurance amount (hereinafter PIA) will be reduced by 25%. Your PIA is the amount of Social Security benefits you are entitled to receive at full retirement age (hereinafter FRA). FRA ranges between 66 and 67, depending on when you were born. For each year you wait past your FRA to start receiving benefits, your PIA will increase by 8% each year until you turn 70. The increases in benefits for waiting past FRA are called delayed credits. After you turn 70 there is no reason to delay receiving Social Security benefits any longer because your benefits will not increase any further. There are many other facets to Social Security planning, but the main two I want to touch on are spousal and survivor benefits.

You can claim spousal benefits as early as age 62, but you will receive a reduced amount, similar to the reduction in benefits received based on your own record. If you wait until you are of FRA you will receive 50% of what your spouse’s PIA would be at FRA. It doesn’t matter what age your spouse begins taking their Social Security. As long as you wait until you are of FRA, you are still entitled to 50% of what their PIA would be at FRA, even if your spouse began receiving benefits before reaching FRA. However, your spouse must be receiving benefits on their own record in order for you to receive spousal benefits. In most cases, when you apply for spousal benefits, you are only allowed to receive the greater of your spousal benefits, or what your benefits would be based on your own earnings record. Also, in most cases, you cannot take spousal benefits and then switch to benefits based on your own record. The one exception to these two rules is what is called a restricted application. This exception is only available to those who were born before 1/2/1954, and they still have to meet a few other requirements. Additionally, as of now, anyone born by then would be 70 and should already be receiving their Social Security. Another former exception to this rule was known as “file and suspend.” But that provision was also eliminated with the passage of the Bipartisan Budget Act of 2015. It is important to note that delayed credits do not apply to spousal benefits. Therefore, if you are planning on receiving spousal benefits, there is no reason to wait past FRA.

You can begin taking survivor benefits as early as age 60, but again, the number of benefits received will be reduced since you started receiving them before reaching FRA. If you wait until FRA, you will receive 100% of what your deceased spouse’s benefits were at the time of passing. If your spouse was not yet receiving Social Security benefits, then you would still receive 100% of what they were entitled to receive at the time of death. Unlike spousal benefits, you can receive survivor benefits and then switch to receiving benefits based on your own record. You can also receive benefits based on your own record and then switch to survivor benefits later. This is where one of the key principles of Social Security planning comes into play. For the spouse who has a higher earnings record and therefore, is due to receive a higher PIA, you typically want to delay receiving benefits based on their record. This is especially true when the higher earner is the husband, who happens to be older. Statistically, on average, men do not live as long as women, and delaying the higher PIA could enable the wife to receive increased benefits in the form of survivor benefits for the rest of her life. The wife can initially receive benefits based on her own record, or she can receive spousal benefits and later switch to a higher amount of survivor benefits. There are also special Social Security rules for children, the disabled, divorcees, dependent parents, and widows/widowers. It can be a substantial benefit to understand the rules related to Social Security and be able to apply those rules to your specific situation. If you have any questions about your particular strategy, please schedule a consultation so that we can make sure you’re on the right track.