Understanding Social Security

Social Security benefits are important to most people’s retirement plans.  It’s a program that gets a lot of attention- mainly concern for its long-term viability.  It’s also a program that’s misunderstood by many, leading to mistakes in optimizing benefits.  Lack of knowledge may be the culprit, or maybe it’s because Social Security can be so darn complicated.  So let’s review some basics and then get a flavor of both the complexity but also opportunity of the various claiming strategies.

There are three important ages associated with the program - 62, Full Retirement Age (FRA) (based on year of birth), and 70.  For those nearing retirement now, FRA is between 66 and 67.  For those born in 1960 or later, it’s 67.  You are never forced to claim benefits but the earliest you can is age 62 (earlier for widows).  Some folks claim early believing they’ll get more in the long-run.  That’s probably incorrect if they live to their 80’s.  Benefits at age 62 are 25% less than at FRA.  That reduction is permanent.  For those with good health and good genes, waiting until age 70 to start might be the best strategy.  The benefits at age 70 are about 32% greater than at FRA.  Not bad if you can afford to wait a few years.   But wait- there’s more!  If the spouse collecting this enhanced benefit dies first, the surviving spouse now receives this benefit (assuming his/her own is less).  It’s a great way to maximize a surviving spouse’s benefit.

Do you have to have worked in a paying job to collect Social Security?  Not if you’re married and your spouse qualifies for it.  Early in my career I had a couple, both age 70, tell me the wife wasn’t eligible since she stayed home with the kids.  Not true.  She was eligible for a spousal benefit- up to 50% of his benefit.  Imagine their happiness when they started receiving her check.  Unfortunately they couldn’t retroactively claim the benefits already missed.  Even if she had divorced the bum years earlier she might still have a claim against his benefit- if they were married for at least 10 years, both at least 62 and she hadn’t remarried.  It doesn’t impact his benefit or even that of his current wife if remarried.  This might be one reason for the program’s financial problems- three people claiming off of one person’s contributions.  

The real complexity comes in claiming strategies.  Here’s an example. We have a husband and wife, she’s 62 and he’s 66 (FRA).  She decides to retire, but he’s planning to work until age 70.  His FRA benefit would be $2,000/month, hers would have been $1,200/month at FRA but will be 25% less at age 62 ($900).  She can go ahead and claim her benefit now.  He can file for spousal benefits off of her record because he’s age 66.  He’ll let his own benefits continue to grow until age 70.  There is an earnings penalty against your Social Security if you earn too much from work, but that goes away at FRA.  He’ll receive 50% of her FRA amount ($1,200) - $600/month- not her age 62 benefits.  He’ll collect this until age 70 when he’ll claim his own benefit (about $2,640/month).  If he predeceases her, she’ll receive his enhanced benefit instead of her reduced benefit.  Interesting isn’t it?  Which strategy is best varies by individual circumstances.  One size doesn’t fit all.

Social Security is a very valuable program, often made more so by understanding how it really works.  Before you make an irreversible decision regarding your benefits, make sure you understand your options.  The Social Security folks can help, as can a financial planner who can examine your whole situation, not just your Social Security situation.