Maximizing Your Social Security Benefits Requires a Strategy

By Chris Schiffer, CPA and Ray Hawkins, CFP® of AEPG® Wealth Strategies

Key Points to Know:

  • How much are you leaving behind?
  • Social Security Techniques – ‘Show me the money’
  • Are you familiar with ‘File and Suspend’ and ‘Claim now Claim more later?

There are two Social Security claiming techniques that could add tens of thousands of dollars in lifetime benefits for married couples.

File and suspend is most advantageous for married couples where one spouse has earned significantly more than the other spouse during their careers. The lower earning spouse is usually better off claiming half of the spouse’s benefit because it is higher than their individual benefit.

The primary wage earner applies for benefits and then suspends collecting. The other spouse can start collecting spousal benefits immediately. The primary wage-earning spouse can wait to claim benefits until age 70, which increases the future individual Social Security benefit by eight percent each year between ages 66 and 70.

Claim now Claim more later is similar to the File and Suspend technique, except that in this case the higher earner is collecting their spousal benefit on the lower wage earners’ benefit.

The lower wage earner applies for benefits. The higher earning spouse can start collecting spousal benefits immediately. The higher earning spouse can wait to claim benefits until age 70, which increases the future individual Social Security benefit by eight percent each year between ages 66 and 70.

For a spouse to receive spousal benefits the other spouse has to file for benefits. These techniques are utilized when the spouse filing and suspending or claiming later is at full retirement age (FRA).

When am I eligible for Social Security?
Like the tale of the tortoise and the hare, patience pays off in the end. Early eligibility begins at age 62, and like the hare, one can seek instant gratification. However, if you apply at 62, your monthly benefit is reduced. You will receive full retirement benefits at the designated Full Retirement Age which is currently 66 and is scheduled to increase to 67 based on the year you were born:

Year of Birth Full Retirement Age
• 1943 – 1954 66
• 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 and later 67

However, if you take the steady long run approach and delay the receipt of benefits past age 66, you will earn an additional 8% credit to your benefit for each year you delay receiving your benefits until age 70. In addition, benefits are increased annually for a Cost of Living Adjustment (COLA). The COLA magnifies the impact of receiving benefits early or delaying benefits due to compounding. The results of deferring benefits and employing additional strategies can have a tremendous impact over one’s lifetime.

How much will I receive?
Your Social Security Benefit is based on your earnings history. The Social Security Administration provides a statement with an estimate of your monthly benefit. You can also access your Social Security Statement online at: http://www.socialsecurity.gov/myaccount/. Your monthly benefit is based on your highest 35 years of earnings. The closer you are to retirement, the more accurate the estimate is. Once you apply for Social Security, your monthly benefit is “locked in.”

Can my Spouse receive benefits?
In addition to his or her own benefits, as an alternative, your spouse may be eligible to claim benefits based on your earnings history and may also be eligible for a survivor benefit based on your work record. As such, when you apply for your benefits also impacts the benefits your spouse will receive.

Do I have to pay Income Taxes on My Social Security Benefits?
If you have other 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, your Social Security benefits may be taxed. A general guideline:

If you file a federal tax return as an “individual” and your combined income is

  • between $25,000 and $34,000, up to 50% of your benefits may be taxable.
  • greater than $34,000, up to 85% of your benefits may be taxable.

If you file a joint return, and you and your spouse have a combined income that is

  • between $32,000 and $44,000, up to 50% of your benefits may be taxable.
  • greater than $44,000, up to 85% of your benefits may be taxable.

So when exactly should you apply for Social Security?
To maximize your Social Security benefits, strategies based on a number of factors can be utilized, including:

  • If you have other sources of income or funds that you can tap into before Social Security
  • You and your spouse’s health and family longevity
  • Whether you plan on continuing to work full or part-time
  • Your marital status and spousal benefits

We consider all these factors and use sophisticated software to determine an optimal solution.

Should I apply for Medicare when I apply for Social Security?
Applying for Medicare should not coincide with applying for Social Security. If you plan to delay receiving benefits because you are working, you should sign up for Medicare three months before reaching age 65, regardless of when you reach full retirement age. Otherwise, your Medicare medical insurance, as well as prescription drug coverage, could be delayed, and you could be charged higher premiums.

The Social Security Administration has a wealth of information available online including calculators to help you with your decision (http://www.socialsecurity.gov) or you can consult with a financial planner to help guide you to an optimal solution based on your own circumstances.

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Chris Schiffer, CPA Ray Hawkins, CFP® www.aepg.com 908-757-5600

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