For previous generations, retirement income mainly comprised of Social Security and pension plan benefits. Both were predictable and guaranteed. Over the years, however, the number of Americans covered by a pension plan has been steadily dropping—from 84 percent in 1979 to 23 percent in 2017.1
As a result, Social Security has become an even more essential source of predictable, guaranteed income in retirement. The decisions surrounding when, how and in what form you (and your spouse) claim benefits are important not only to your future income, but also to the long-term success and sustainability of your financial plan. While this article outlines a few of the key considerations you should be aware of, your advisor is prepared to help you better understand the choices available to you and the impact those choices will have on this retirement income source throughout your lifetime and beyond.
When should you start taking benefits?
“Full Retirement Age” (FRA) currently stands at 66, but for those born after 1959, the age has been increased to 67. You may choose, however, to begin taking early benefits any time after you turn age 62, or delay benefits up until age 70. Based on this decision, the amount of your monthly benefit would either decrease or increase correspondingly.
If you elect to take Social Security early, it will mean a permanent reduction in your benefit by up to 20-30 percent throughout your life. That means you’ll need to explore other ways to compensate for the reduced income. Conversely, the Social Security Administration guarantees an annual 7-8 percent increase in your benefits (in addition to any cost-of-living adjustments) for every year you defer collecting beyond your FRA up until age 70.
While delaying Social Security and receiving a higher monthly benefit may seem like the preferred strategy, it may not always be optimal. You first need to consider your current health and family history of longevity. If you’re fit and healthy with a family tree that’s full of ninety-year-olds, then delaying makes sense. But if you have significant health concerns, you may not want to delay.
Whether you want to or need to work in retirement is also an important consideration. There are strict earnings limits on benefits, so if you do plan to continue working, you may want to delay benefits. Currently, the income limit is $17,040/year; and for every $2 earned over the limit, $1 in benefits is withheld.
Similarly, if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits, then up to 85 percent of your benefits may be subject to federal income taxes. It’s another reason why many who are still working opt to delay their benefit.
Claiming strategies to consider
Anyone who is at least age 62 and whose spouse has filed for Social Security benefits may be entitled to spousal benefits. Spouses are entitled to up to 50 percent of their spouse’s benefit at FRA if that amount is higher than the benefit they would receive based on their own work record. Even if you are divorced, you may be entitled to collect spousal benefits if you were married for at least 10 years and didn’t get remarried.
Widows/widowers also have a choice of receiving either their own benefit or a survivor benefit. If survivors wait until their FRA, they are eligible to collect 100 percent of their higher-earning deceased spouse’s benefit. They can begin collecting as early as age 60 (at a yearly reduction of 4.75 percent from FRA) if income is needed, or increase their benefit to 132 percent by delaying to age 70. Even if a widow or widower remarries after they reach age 60 (age 50 if disabled), the remarriage will not affect their eligibility for survivor benefits.
One other important consideration for couples is whether there’s a significant age difference between spouses. The greater the age difference, the greater the potential for a survivor benefit to be paid for a longer period—making the impact of collecting early at a reduced benefit more detrimental in the long run.
Unfortunately, the Bipartisan Budget Act of 2015 tightened restrictions on one commonly used claiming strategy and eliminated another. The use of the “claim twice” strategy—where one spouse claims spousal benefits while deferring their own benefit—has now been limited to only those individuals born prior to January 1, 1954. For everyone else, once a spouse files to start payments there will be no choice. They will receive whichever is larger—their own benefit or the spousal benefit.
In addition, you can no longer “file and suspend” your benefits while your spouse, dependent child or any other individual (except a divorced spouse) collects benefits on your earnings history. You must be actively collecting benefits for others to receive benefits based on your earnings record.
Social Security plays a foundational role in your retirement income plan. However, given the shifting legal, regulatory and tax landscape, it’s important to ensure that the claiming strategy you choose is the best option for both your current and future needs. Talk to your SunTrust advisor about your retirement income plan and which strategy best aligns with your goals.