Having Security in Social Security
“The hardest choices in life aren’t between what’s right and what’s wrong, but between what’s right and what’s best.” – Jamie Ford
Unfortunately, we are all getting older and as we creep closer to the sixth decade of our lives, Social Security benefits begin to enter our financial conversations. We have had many conversations here at THOR with our clients about Social Security and have become quite familiar with the intricacies of this government entitlement program. 96% of American workers are covered under Social Security, so it is a program that affects nearly every one of us. In this newsletter, we will attempt to briefly describe how the system works and what benefits you should receive from Social Security when you retire.
Choosing when to take Social Security:
Social Security is an ever-changing, complex issue that can significantly impact your retirement income. Social Security was never meant to be the only source of income for people when they retire, but it does replace about 40% of an average wage earner’s income after retiring. But we are getting ahead of ourselves. Before you can choose when to retire with Social Security benefits, you first must become eligible to receive benefits. As you work and pay taxes, you earn Social Security “credits”. In 2012, you earn one credit for each $1,130 in earnings – up to a maximum of four credits per year. Most people need 40 credits (10 years) to qualify for benefits.
After you have become eligible, choosing when to retire will be an important decision to consider and shouldn’t be overlooked. There are three time frames to consider when deciding to start taking Social Security: early retirement, full retirement age (FRA), and delayed retirement. If you choose to take early retirement, you may start receiving benefits as early as age 62. Choosing to receive your benefits at early retirement may seem appealing, but the tradeoff is a reduction in the amount of benefits you will receive compared to your full retirement benefit. If you choose to wait until your full retirement age, you will receive full benefits for the rest of your life. Full retirement age isn’t the same for everyone though. The following chart shows your full retirement age based on your year of birth.
|Year of birth||Full retirement age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
The last potential option is to delay your retirement benefits. You can delay your benefits up to age 70. Depending on the year you were born, a certain percentage increase will be added to your benefits for every month you wait to receive Social Security benefits. A breakeven analysis can be done (THOR can do this for you) to determine how long it will take to recoup delaying retirement benefits vs. the early retirement benefits. For example, an individual that receives $1,000/month at full retirement (age 66) will only receive $750/month at early retirement (age 62). Total benefits not collected from ages 62-66 would be equal to $36,000 ($750 x 48 months). If you take the marginal difference between the full retirement benefit ($1,000) compared to the early retirement benefit ($750), you get $250/month. If we divide the $36,000 by the marginal difference ($250), you get a break-even point equal to 144 months or 12 years. Essentially, in this example, you have to live and receive benefits for 12 years, approximately age 78, in order for it to make sense to wait until 66 to receive benefits. You can do that same analysis comparing benefits at age 66 vs. taking benefits at age 70. Waiting until age 70 adds approximately an additional 8% per year (not compounded) on to your full retirement benefit. Using the example above, you would be receiving $1,320/month by electing to delay payments till age 70. The break-even point after doing this analysis was 150 months or 12.5 years to recoup the $48,000 of potential benefits not collected between ages 66-70. Finally, considering individual and family health issues when trying to make this decision will be important factors.
Spousal benefits and specific strategies:
Adding to the complexity of when to take Social Security, consideration of your spouse’s age and their potential benefits is a must. Even if your spouse has never worked under Social Security, and they are at least 62 years of age, they may be able to receive spousal benefits. Yes, you read that correctly – a spouse who did not accumulate the necessary 40 credits may still receive social security benefits based on the working spouse’s credits. This may be a windfall to some of our clients who did not realize this, so please call us and we can help determine if your spouse is eligible. Similar to normal benefits, if you start taking spousal benefits before full retirement age, you will permanently receive reduced spousal benefits. If the spouse waits till his or her full retirement age, they can be eligible to receive 50% of the full retirement amount of the main bread winner.
One “strategy” that can be very valuable when deciding when to receive benefits is the “file and suspend” strategy. File and suspend increases the Social Security claiming options for many married couples by allowing them to take advantage of spousal benefits and delayed retirement credits simultaneously. Under current law, a spouse cannot claim a spousal benefit unless the main beneficiary claims benefits first. However, once FRA is reached, a beneficiary can file for benefits, but then immediately suspend receipt of those benefits until some future date. By doing this, his or her spouse can claim a spousal benefit and the main beneficiary can let his or her own retirement benefit grow at 8%/yr. In addition, if both spouses have reached FRA, it is possible for the spouse’s own benefit to grow due to delayed requirement credits if he/she elects to receive free spousal benefits (also referred to as the restricted application option). As you can see, social security benefit options can become very complicated so THOR would be more than willing to assist you if you have questions about this strategy or other options that might be available to you.
Creating an online account and other issues:
We suggest that everyone creates their own personal account with “my Social Security” which can be found at “www.ssa.gov”. Setting up an account can benefit an individual with valuable information beginning in someone’s working years and continuing throughout the time of receiving Social Security benefits. If you are already receiving benefits, it will enable you to get your benefit verification letter, check your benefit and payment information and your earnings record, change your address and phone number, and start or change direct deposit of your benefit payment. If you haven’t already started receiving benefits, it is still useful to set up an account. It will provide you with the estimates of your retirement, disability, and survivors benefits, your earnings record, and the estimated Social Security and Medicare taxes you’ve paid. Setting up an account is very easy and can be done in four steps. If you need assistance with setting up an account please call us and we would be more than happy to guide you through the process.
We are happy to announce the newest addition to the THOR team, Andy Jostworth. Andy graduated from the University of Cincinnati in May 2013 with a BBA in Accounting (cum laude), and is currently pursuing a Master’s of Science degree in Finance at the University of Cincinnati. Andy is a native of Cincinnati and grew up in Anderson Township where he attended McNicholas High School. He enjoys sports, spending time outdoors and relaxing with family and friends.