As we near retirement age, we worry about having sufficient money to maintain our lifestyle, or close to it, for the rest of our lives. After all, we could easily spend 25 years in retirement.
Traditionally, the “three legs” of retirement income were pension, savings and Social Security. As defined benefit pensions disappeared and savings eroded during the economic downturn, Social Security plays an ever more important role in retirement security.
Claiming Early Retirement vs. Waiting
Many retirees plan to collect Social Security as soon as they retire. However, this is often a mistake. Social Security usually replaces only about 40% of the average wage earner’s income, but the value of Social Security can be greatly enhanced if you wait until age 70 to claim your benefits.
Waiting until the maximum age of 70 to claim your Social Security benefits can almost double your Social Security. If you wait beyond your full retirement age to claim your benefits, a delayed retirement credit of 8% per year will be added to your lifetime monthly benefit. Plus, cost-of-living adjustments apply and compound.
If you have other sources of income, most financial advisers suggest that you live on this money while allowing Social Security to grow. Another option is to continue working. (Even if you defer Social Security, however, you should still consider applying for Medicare benefits three months before your 65th birthday.)
How Does Social Security Calculate Retirement Age?
Americans can claim Social Security as early as age 62. If you claim at 62, you get lower benefits for the rest of your lifetime. For those born between 1943 and 1954, the age-62 benefit is 75% of what the benefit would be at full retirement age. There are reductions for each month you claim early.
Full retirement age is 66, and is heading to 67 for those born after 1954. If you wait until full retirement age to claim your benefits, you can then continue working without jeopardizing any of your Social Security income and you can get creative with strategies that allow you to maximize your gains.
Strategies for Married Couples
A spouse who turned 62 by the end of 2015 may receive either his or her own retired worker benefit or a spousal benefit, which is half the other spouse’s base worker benefit. There are calculators that help you decide the best way to “slice and dice” your options in order to maximize income. Most of these involve at least one spouse in a couple delaying benefits until age 70.
Often, it makes sense for the lower-earning spouse to collect benefits early, at age 62, and the higher-earning spouse to delay claiming benefits for as long as possible, earning the 8% delayed-retirement credit. Although the lower-earning spouse pays a 25% penalty for a few years, he or she may later be able to qualify for a higher eventual benefit based on the higher-earning spouse’s benefit.
One Tactic is “File and Suspend”
A spouse with little or no work history may be eager to collect spousal benefits. The main income-earner can use a strategy known as “file and suspend,” which involves filing for benefits at age 66, entitling the non-earner spouse to receive spousal benefits immediately, and then suspending the benefits until age 70 and allowing them to grow. This strategy, however, is only available to those who suspend their benefits by April 29, 2016.
Waiting Increases Survivor Benefits
Delaying Social Security increases not only an individual’s own benefit, but also the benefit available to his or her surviving spouse. Upon the death of an individual, the surviving spouse will receive whichever is greater – his or her own benefit, or the deceased spouse’s benefit.
The spousal benefit is also available to a former spouse if the marriage lasted 10 years and if the former spouse has not remarried. Both current and former spouses have rights to a “full” spousal benefit as well as a “full” survivor benefit.
Call an Estate Planning Lawyer
The law surrounding the best time to claim your Social Security retirement income can be complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the subject, but for more detailed information about your specific situation, please contact an estate planning lawyer.