Married couples may have more reasons to consider timing Social Security retirement benefits than individual beneficiaries. Most retired couples wrestle with the right time to claim retirement benefits from social Security. While there might not be a perfect time to claim for many people, selecting an optimal claiming strategy can affect how much money you collect in Social Security retirement benefits over a lifetime.
Although some Americans must claim early benefits for financial or health reasons, SSA pays retirees to delay claiming benefits. Eligible Full Retirement Age (FRA) is determined according to birth year:
Beneficiaries born between 1943 and 1954 reach FRA at age 66. It’s possible for individuals born in 1954 to claim Social Security early retirement as soon as age 62 in 2016.
Beneficiaries born in 1955 reach FRA at age 66 years, two months. It’s possible for individuals born in 1955 to claim Social Security early retirement as soon as age 62 in 2017.
Beneficiaries born in 1956 reach FRA at age 66 years, four months and may claim Social Security early retirement as soon as age 62 in 2018.
Beneficiaries born in 1957 reach FRA at age 66 years, six months and may claim Social Security early retirement as soon as age 62 in 2019.
Beneficiaries born in 1958 reach FRA at 66 years, eight months and may claim Social Security early retirement as soon as age 62 in 2020.
Beneficiaries born in 1959 reach FRA at 66 years, 10 months and may claim Social Security early retirement as soon as age 62 in 2021.
Beneficiaries born in 1960 or later years reach FRA at 67 years and may claim Social Security early retirement as soon as 2022.
Claiming Strategy 1: Claim Early Retirement Benefits at Age 62 or Before FRA
Sometimes it’s important to claim Social Security benefits as soon as possible. If claiming Social Security retirement benefits are needed to keep food on the table, the decision is usually an easy one to make.
The decision to request early retirement from benefits from Social Security is costly, however:
Early retirement costs the beneficiary 6.66 percent per year up to three years. Claiming benefits beyond the three-years’ early period costs in beneficiaries five percent:
This means a beneficiary who requests early retirement age 62 with an FRA of 66 starts four years earlier than Social Security Full Retirement Age, or -6.66 percent times three years plus five percent times one year, equal to a permanent Social Security retirement benefit reduction of 25 percent.
Claiming Strategy 2: Delay Claiming Social Security Retirement Benefits to Age 70
If you’re part of a healthy married couple, it could make good financial sense to delay claiming Social Security retirement benefits to age 70. In doing so you’ll earn significantly higher Social Security benefits over your lifetime.
The statistical odds of living to age 80 and beyond are higher today than ever before. If you’re likely to live to a healthy old age, it’s typically best to wait to claim Social Security retirement benefits because you’ll receive a larger guaranteed monthly benefit. Review the Life Expectancy calculators at SSA.gov for more information.
If your health is poor but your spouse is healthy, you may want to claim early Social Security retirement benefits. Your spouse, on the other hand, may decide to wait to increase his or her retirement benefits.
Ultimately, the decision to claim early Social Security retirement benefits or delay claiming them depends on a variety of factors including other income sources, taxes, health, marital status, and age. Consult a financial adviser if your personal financial situation is complex and/or the decision about timing Social Security retirement benefits is unclear.
Claiming Strategy 3: Remember to Consider the Impact of Taxes on Social Security Retirement Benefits
If you earn a significant income from combined income sources, such as salary (wages), income from investments (even tax-free income), rental property income, or any other source you must report to IRS, you’re likely to owe tax on Social Security retirement benefits. Your tax rate will depend on the overall income bracket because Social Security is treated as ordinary income.
Consider strategies that help you to boost income while lowering taxes. For instance, consider taking maximum income from any source that’s excluded from provisional income. SSA uses provisional income to determine taxation of Social Security benefits. Under current IRS regulations, income received from the following may be partly or fully excluded from SSA’s provisional income calculation, including:
Inheritances and gifts
Distributions from Roth IRAs
Non-taxable annuities and pension plans
Taxes are just one component of your total financial picture, so it’s very important to consider all factors. It makes sense to consult a qualified adviser if you’re concerned about how to reduce taxes on retirement income.
If you’re married, it’s important to consider how your Social Security retirement claiming strategy will affect his or her Social Security retirement benefits and total income scenario. It’s really important to consider if your spouse (or you) is a lot older and/or earned a lot more money over a working lifetime.
If your spouse or you aren’t eligible for Social Security retirement benefits on your personal Social Security earnings, SSA calculates benefits based on the eligible worker’s work history and earnings credits. Obviously, the age at which the eligible worker decides to claim Social Security retirement benefits will affect which his or her spouse becomes eligible to collect.
It’s important to consider a younger spouse’s ability to collect survivor’s benefits as part of the claiming strategy. If the surviving spouse reaches FRA at the time the Social Security beneficiary dies, it’s possible to claim 100 percent of the primary beneficiary’s Social Security retirement benefit. The surviving spouse can therefore take advantage of his or her delayed retirement credits and/or cost-of-living (COLA) adjustments accumulated in that case.
The bottom line is clear: waiting to claim Social Security retirement benefits can benefit the beneficiary and his or her spouse and survivors. Delaying Social Security retirement means that a surviving spouse can claim benefits as a widow/widower. In most cases, the surviving spouse can elect to collect Social Security benefits under his or her personal benefit account or as a survivor, depending on the higher retirement benefit amount.
Claiming Strategy 5: Pay Attention to Social Security Rules
Social Security rules changed in November 2015 when President Obama signed a bipartisan budget that directly affected strategies used by many Social Security retirees to increase total lifetime benefits, such as “file-and-suspend” options.
New Social Security laws went into effect in May 2016. This Social Security rule change means that some retirees forfeited the right to use “advanced” Social Security claiming strategies after that date.
Based on new Social Security regulations, some of the basic changes that went into effect in 2016 include:
Social Security beneficiaries who haven’t reached age 62 as of 1-1-2016 may no longer choose between their own benefit account or that of a spouse. SSA will evaluate both options and the retired individual will receive the larger of the two (without the opportunity to accumulate new benefits).
As of May 1, 2016, retirees may not file and suspend their own Social Security retirement benefits while triggering Social Security spousal or dependent benefits. The beneficiary must receive his or her personal benefit in order to allow the spouse or family member the opportunity to collect on his or her primary Social Security record. It’s still possible to suspect in order to accrue work credits, but in this case the spouse can’t receive Social Security benefits if the primary worker’s benefits are suspended.
Retirees may no longer request suspended retirement benefits as a lump sum payment from Social Security before reaching age 70.
If retirees took advantage of old Social Security rules before the new law went into effect, these individuals aren’t affected by the changed laws.
Recent Social Security law changes and/or future changes in Social Security laws can affect your financial future. It’s important to reconsider some of your retirement income assumptions if you previously planned to use formerly available Social Security claiming strategies like file-and-suspend. However, it’s also important to recognize that many opportunities exist to increase Social Security retirement benefits today.
Married couples may still benefit from advanced claiming strategies. For instance, the decision to delay a spouse’s benefit as the other accumulates extra work credits ultimately benefits both. It’s possible to improve your Social Security retirement income by:
Maximizing Social Security survivor benefits for a spouse or yourself
Claiming delayed Social Security retirement benefits, up to age 70, to earn more retirement credits
Consider the impact of taxes owed on Social Security benefits by diversifying income sources before retirement
No single claiming strategy is ideal for every Social Security beneficiary. It’s crucial to consider the full financial picture before fine-tuning your Social Security claiming strategy. Details count: a significant age difference between spouses, life expectancy, taxes, and other variables are likely to influence the claiming strategy that’s best for you.