When Should You Claim Social Security…
One of the most important retirement decisions you will make is when to claim Social Security benefits. Every person’s situation is different. There are many factors to consider.
Getting the Maximum Benefit
Social Security benefits max out at age 70. Taking a benefit at age 62, the earliest age that most people can claim a benefit reduces the monthly benefit by 30% to 35% depending upon the birth year. This is a permanent reduction.
For someone born in 1957, the full retirement age (FRA) is 66 years and 6 months. By waiting until age 69 to claim benefits, they would collect 20% more per month than if they’d claimed at FRA.
There is an increase for each month they wait until they reach age 70, at which point their monthly benefit would max out at 28% higher than the amount they would have received at FRA.
Waiting as long as possible to claim their benefit will always result in the highest monthly payment, but this isn’t always the optimal answer. Here are seven questions to ask to determine how other factors come into play in the claiming decision.
1. Is the Client Still Working?
If you are still working and have not reached FRA, your benefit could be reduced or eliminated if your earned income from employment or self-employment exceeds the threshold. For 2022, the earned income threshold is $19,050.
Their benefit will be reduced by $1 for every $2 of earned income above that threshold. In the year they reach their FRA, the threshold is $51,960 and the benefit reduction is $1 for every $3 of earned income.
There are no income limits once your client reaches their FRA. The FRA is age 67 for those born in 1960 or later. For those born in 1959, FRA is age 66 and 10 months, with a two-month reduction for every year earlier back to those born in 1954 or earlier (back to 1943) when it is age 66.
Note that if you had any of the benefits reduced due to the level of earned income, the amounts reduced will be added back to their benefit once they reach their FRA. But they still will have claimed at an earlier age with a reduced benefit.
2. Does Your Client Have a Health Condition?
If you have a serious health condition that could limit your life expectancy, or if your life expectancy is lower than normal for other reasons, it might make sense to claim your benefit as early as age 62.
The logic here is simple. If you feel your life expectancy is limited, claiming early will help you maximize the overall dollars received from Social Security over your lifetime. You can help with the decision by looking at the numbers regarding claiming at various ages and various life expectancies to determine a break-even point between claiming earlier and waiting.
3. What About Your Spouse?
Social Security claiming strategies for married couples can be complicated. Factors such as the age difference between the spouses and the size of each spouse’s benefits need to be considered.
In many cases, it will make sense for the spouse with the higher benefit to wait to apply until they reach their FRA or perhaps until age 70. This will maximize their benefit in their lifetime and will help increase any survivor’s benefits if they are the first to die.
4. Does Your Client Have a Pension, Annuity, or Other Income Sources?
The Social Security claiming decision is part of the bigger picture of retirement income planning. You may have several sources of retirement income, including distributions from retirement and taxable investment accounts.
You may be eligible for a pension from your employer, and you might have an annuity that will generate income. You may also have income from employment or self-employment in retirement.
In the case of a pension, it may behoove you to wait a few years after retirement to claim the benefit. In this type of situation, claiming Social Security at an earlier age could make sense as an income bridge until they begin taking the pension.
The Social Security claiming decision is part of the overall retirement income planning strategy for you. This includes a look at the impact on your tax situation as well.
5. How Long Do They Want to Keep Working?
If you intend to continue working well into your retirement years, it could make sense to claim your benefit any time between reaching the FRA and age 70.
If your income from employment for the year ranks as being in your top 35 years of career earnings, your monthly benefit could increase even if you have commenced taking your benefits.
And once you have reached FRA, there is no benefit reduction for earned income. Waiting until age 70 if your earned income adds to your benefit level could offer a “double benefit,” so to speak.
6. Is Your Client Widowed?
Clients who are widows or widowers have options as a surviving spouse. Survivor’s benefits can be claimed as early as age 60, and earlier if the surviving spouse is caring for minor children or is disabled.
The surviving spouse can claim 100% of their deceased spouse’s benefit if the surviving spouse has reached their full retirement age unless the deceased spouse claimed their own benefit before reaching their FRA.
Another option is for the surviving spouse to claim survivor’s benefits as early as age 60 and then convert to their own benefit, if higher, as early as age 62 and as late as age 70. Note that if the surviving spouse is working, Social Security earnings limits before their FRA could come into play.
For a client who is the surviving spouse of a divorced spouse, they may qualify for a survivor’s benefit based on the earnings record of their deceased ex-spouse as well. The benefits would be the same as if your client was married to the deceased ex-spouse at the time of their death if the marriage had lasted at least 10 years.
A surviving spouse can still qualify for survivor’s benefits if they remarry after age 60 (age 50 if they are disabled).
The rules for surviving spouses and Social Security are complex and in this situation, you should rely on advice to guide you to the best benefit claiming option for your situation.
7. Is Your Client Divorced?
A divorced person can claim a benefit on their ex-spouse’s earnings record as long as the marriage lasted for at least 10 years, they are at least 62 years of age and they have been divorced from their ex-spouse for at least two years.
If you were born before Jan. 2, 1954, and have reached your FRA, they can choose to receive a benefit based on your ex-spouse’s earnings record and then switch to their own benefit later on if that benefit is higher.
That option does not exist for those born on or after Jan. 2, 1954. In this case, your client would need to choose either the benefit based on their ex-spouse’s earnings record, or the benefit based on their own earnings record.
If you remarry, they are no longer eligible for a benefit based on their ex-spouse’s earnings record.
If you are interested in a Social Security analysis and help in deciding when to claim your benefits, please let us know as we are happy to help you make the best decision.