THE SOCIAL SECURITY DEBATE: What Age is the Right Age?
By Donna Holm, CPA, MST, Associate of Harless & Associates
While rumors circulate that the Social Security System is going bankrupt, consider the source of funding; every U.S. wage earner. While it is true that there are fewer workers for every benefit recipient, (2.8:1 in 2011 vs. 5:1 in 1960), and the average American will collect much longer than once envisioned, bankruptcy would be impossible as long as workers continue to contribute. Keep in mind that the maximum wage base has steadily increased; it’s $117,000 in 2014.
Since 2011, some 11,000 Americans turn 65 every day. Social Security means you worked for it, you’re entitled to it, and you deserve it. Full retirement age (FRA) depends on the year you were born because it has changed several times since Social Security began. What age is the right age to begin taking benefits? It depends. As you approach retirement age, this becomes one of the most important decisions to make, and advice should be sought
As a result of taking benefits too early and/or not coordinating benefits with a spouse, 73 percent of Americans receive a reduced benefit. With life expectancies increasing, it is important to realize just how far your retirement funds need to stretch. Those individuals taking benefits between ages 62 and 65 offer various reasons, including family histories that don’t favor longevity, or simply a decision to take what is owed to them.
There is some mystery as to how the monthly benefit is calculated, which can lead to hasty decisions. You will need to have contributed into the system through payroll taxes for 10 years, though they do not have to be consecutive. The monthly benefit will be based on the best 35 years of wages. For some, this may mean a “0” in some years of the calculation. A formula is used to determine your monthly benefit at full retirement age (FRA).
It is important to realize that you will receive a reduced benefit between age 62 and your own FRA, about 24 percent less. In addition, due to cost of living increases, your monthly benefit will continue to increase about 8 percent for every year you defer up to age 70. Once you reach age 70, start collecting whether you need the money or not as there won’t be any further increases.
What does all this mean? There is a strong argument for delaying benefits at least until FRA or age 70. In other words, assuming a monthly benefit of $1,800 at age 66, with a lifespan to age 90, you will earn approximately $57,000 less by starting benefits at age 62. And, as many are working past age 65 now, it is in your best interest to delay benefits because you will lose a portion of your monthly benefit depending on your annual wages: $1 in benefits will be withheld for every $2 in earnings above the limit, which for 2014 is $15,480/yr. Further, your benefits will be taxable up to 85 percent if your overall earnings and other taxable income exceed certain thresholds. As you can see, while every situation is different due to many variables, waiting seems like a good overall strategy even though the decision is complex.
- Married couples: As a spouse, you are entitled to up to 50 percent of your spouse’s benefits (and this has no effect on the monthly payment received by the spouse). As a result, there are various strategies available to couples, depending on age and wage differentials. Examples:
- Claim and switch: a husband files for spousal benefits when he reaches age 66, then switches to his own benefit at age 70, which has the benefit of those 8 percent per year increases.
- File and suspend: A husband can file at age 66 and ask that his benefit be suspended to allow the wife to file for spousal benefits on her husband’s account.
- Divorced individuals: You have the ability to collect on your ex-spouse’s record if certain requirements are met. This can get complicated with multiple marriages and divorces these days, so speak to your tax advisor for help. Remember, you cannot collect multiple benefits!
- You must have been married to your ex-spouse for at least 10 years;
- You must be divorced from your ex-spouse for more than 2 years;
- You and your ex-spouse must both be at least 62 years of age;
- And you generally cannot be re-married or eligible for equal or higher benefits on your own.
If you have already started receiving benefits, and you now regret this decision, you can withdraw your application for benefits. This can only be done within 12 months of your initial claim for benefits. Further, you will need to repay all benefits received. And finally, only one reversal is allowed in a lifetime! This is something to consider especially if you applied for benefits and then returned to work.
Covering every scenario is beyond the scope of this article. There are many tools and calculators available at www.ssa.gov. In addition, consult your tax advisor for help in determining how this investment vehicle should be considered along with your overall retirement planning to make the most of these potentially significant benefits.
Donna Holm, CPA, MST is an Associate with Harless & Associates.