One of the many decisions you will be faced with as you approach retirement age is when is the right time to claim Social Security benefits. There are many factors to sort through to make the right decision for you. Will it still be there when I’m ready to claim benefits? Are there different types of Social Security benefits? Are Social Security benefits taxed, and if so, how? Will I receive more if I delay claiming, and if so, how much more? How are benefits affected when me or my spouse pass away?
All of these are great questions and depending on individual circumstances, they have different answers.
Let’s start with some basics – Approximately 178 million workers were covered by Social Security in 2019. Many experts believe that while Social Security will change, it will never end. Historically Social Security was thought of as an insurance program. However, it has come to be inaccurately perceived as a salary continuation. Currently, Social Security is the major source of retirement income for most retirees.
There are different types of benefits:
- Workers Benefits – A worker who is eligible for a retirement benefit is entitled to the primary insurance amount (PIA) at full retirement age. However, benefits may be taken as early as age 62, at a reduced amount. Full retirement age depends on the year you were born, and the amount of the benefit is based on a formula which factors in how much the worker has paid into the system during their working years. Cost of living adjustment apply from age 62 on. Additional deferral credits (increase in benefits) when deferring past full retirement age. The deferral credits amount to about an 8% increase in benefits for each year you delay claiming. There are no additional deferral credits past age 70. The timing of when to claim benefits is an important decision that can have a significant impact on total benefits received. There are a couple of options that may apply to correct a bad decision of claiming too early.
- Spousal Benefits – This benefit is available to spouses and qualified ex-spouses of a worker who claims retirement benefits. At full retirement age, the spousal benefit is worth 50 percent of the workers PIA. Under current law, one must claim worker benefits before his or her spouse can claim spousal benefits.
- Survivor Benefits – Survivor benefits are payments primarily to a surviving spouse (although other dependent family members may be eligible as well). The spouse is entitled to 100 percent of the benefit that the deceased worker was collecting or was entitled to collect at the time of death if they had not yet claimed benefits. The full benefit is only available at full retirement age. However, benefits are payable as early as age 60 at a reduced amount.
Planning note – It is possible to be eligible for different types of benefits at the same time. However, Social Security will pay only one type of benefit at a time. Therefore, it is important to know about the different types of benefits, when you may be eligible, and how they are calculated to create an optimal claiming strategy. Depending on circumstances, claiming one benefit type early at a reduced rate and then switching to a different type later may provide the most benefits.
Many people don’t realize it, but Social Security benefits can be taxable. Social Security benefits are taxed if a client’s provisional income exceeds certain thresholds. Provisional income is equal to adjusted gross income (AGI), plus one half of Social Security income, plus other nontaxable interest. Under current law up to 85% of benefits can be taxed when provisional income exceeds $34,000 for a single filer and $44,000 for married filing joint filers.
Choosing the optimal claiming strategy requires a comprehensive planning approach and needs to be made in the context of your financial situation. There is no one-size-fits-all solution when it comes to discerning the claiming age. Everyone’s situation is different and timing of claiming Social Security should be based on many different factors that are unique to each person.
Some of these factors include continued employment, health, marital status, wealth/net worth/sources of income outside of Social Security, personal risk tolerance, financial reliance on Social Security, age disparity between spouses, earnings disparity between spouses, work in noncovered employment, divorce, federal income taxation of benefits, and others.
If you would like to have a more in-depth discussion on any of the above information, please consult with your wealth advisor.
– by Josh Podczervinski, CFP®, CPA | Wealth Advisor