By C. Devin Hamilton
With July 4th just in the rearview mirror, summer is in full swing. Summer means vacations, and with any vacation comes lots of planning. Where will you go? Where will you stay? How are you getting there? It could take weeks or months to effectively plan out a summer vacation, but it is all worth it in the end. Now, consider this dismaying observation: most retirees spend more time planning for a vacation than they do thinking about how to most effectively file for Social Security benefits.
Most Americans spend their entire working lives paying into Social Security, so it is not unexpected that most Americans want to begin receiving their Social Security benefits as soon as possible. While it may make sense in some cases to file at age 62 (the earliest you can file for social security on your own benefits), this is often NOT the optimal strategy.
For those approaching Social Security age, there are a few questions to consider before walking into the Social Security office at age 62 to begin your benefits.
Am I still working?
Retirement is rarely a full-time life of leisure. Most people simply want a life that offers them the freedom and flexibility that they desire, while also allowing them to preserve their sense of purpose. Considering that we are seeing people live into their mid-90s or 100s, it is conceivable that retirement could last over 30 years. Therefore, to preserve that sense of purpose in retirement, many retirees find themselves returning to work or taking up hobbies that provide income.
Returning to work or taking on an income-producing hobby is admirable, but when it comes to Social Security, it is important to keep in mind that it may have an impact on your benefits.
If you are still working prior to your Full Retirement Age (FRA), your social security benefits may be lowered depending on your income. A working individual earning more than $17,640 in the years prior to FRA will have his or her benefits lowered $1 for every $2 over that limit. While this reduction in benefits will be paid back over life expectancy, it is best to be aware and try to avoid the penalty altogether.
After you reach FRA, the penalty for income goes away, and you are free to earn as much as possible. Now there is nothing hindering your entrepreneurial spirit!
How will this affect my taxes?
As Benjamin Franklin so eloquently put it: “In this world, nothing can be said to be certain except Death and Taxes.” While the former is inevitable, there are strategies that can mitigate the certainty of taxes, especially when it comes to filing for Social Security benefits.
Social Security benefits have preferential tax treatment regardless of outside factors; in the absence of other income, Social Security benefits are not taxed. However, as your provisional income increases, a certain portion of Social Security may become taxable. For a married couple earning more than $44,000, it is possible that up to 85% of Social Security benefits will be taxable. For example, if a couple receives a total monthly benefits of $4,000, they could owe taxes on $3,400. This still leaves $600 of tax-free money, but wouldn’t it be nice for all $4,000 to be tax-free?
By working with an advisor and developing a Social Security strategy that fits your unique situation, you will be able to maximize your Social Security benefits. The higher that a couple can get their Social Security benefits, the less they will ultimately have to pay in taxes because of Social Security’s preferential tax treatment. Through Social Security maximization, a retired couple will have much more flexibility with their outside assets. For more in-depth tax analysis of Social Security and how to coordinate your filing strategy with other assets, retirees should consult their CPA, in conjunction with their financial advisor.
How will this affect my spouse?
If you don’t take away anything else from this article, remember this:
The most important consideration when filing for Social Security is NOT getting as much money back as early as possible. Rather, it is to make a decision that, in the context of your overall retirement plan, gives you and your spouse the highest probability of a successful, dignified retirement.
While filing at 62 may make sense for an individual with a short life expectancy, for a married couple the decision becomes much more important and equally more complex. The breadwinner in a household will, naturally, have the highest Social Security benefits. If the breadwinner chooses to delay, he or she ensures that, in the event of an early death, the surviving spouse will be better taken care of with a higher survivor’s benefits. The last thing anyone wants to do is leave their spouse alone without enough income to survive with dignity.
To accentuate this point, consider a breadwinner who is entitled to $1,878/month at age 62, but by waiting to file at age 70, she would receive $3,815/month. The “breakeven” point for the different filing strategies is around age 81-82; however, by delaying, the breadwinner would be essentially ensuring that the surviving spouse would be better taken care of in the event of a premature death. Social Security, in this way, helps serve as a sort of “insurance policy” to help provide for the surviving spouse.
How much of a difference does this really make? At age 80 the breadwinner would receive a total of $31,068/year if he or she starts taking benefits at 62. However, by delaying until age 70, the annual amount increases to $54,720/year!* If you pass away at this time, you may not have hit your “breakeven” point yet, but your surviving spouse will be much better off. That extra $23,652/year could be the difference between a life of comfort and a life of anxiety for your spouse.
Social Security is one of the most important decisions any retiree will make, and, with retirements lasting 30+ years, the difference in filing strategies could amount to hundreds of thousands of dollars difference. So, let’s spend at least as much time mapping out our Social Security benefits as we do on summer vacation. To ensure that you get the most out of your Social Security benefits, reach out to your Ballew Wealth advisor for a Social Security consultation.
*Assuming a 1.8% Cost of Living Adjustment annually, slightly below historical averages