News


More and more, people seem to be catching on to the fact that planning their Social Security claiming process can be vitally important to retirement.  However, intuitively, this may not make much sense, given the initial intent of Social Security.  The Social Security program was originally meant to be a government subsidized lifetime annuity for individuals to help supplement other income streams in retirement.  In order to be flexible for different retirement scenarios, the program allowed for a range of ages to begin taking this annuity, as well as payment options for spouses.  The annual Social Security payment amount varies given the age or spousal circumstance of the individual applying for Social Security.  In theory, for people who live the average life expectancy their total annuity payout over the lifetime of their Social Security benefits should not differ depending on when or how they take their payments.  If you take Social Security earlier you will have reduced payments for a longer period, and if you hold off you will have larger payments for a shorter time.  This equality of payments may no longer be the case.  Due to economic distortions such as extended periods of low interest rates, advancing average life expectancy, and legislative changes to the structure of Social Security, strategic planning of Social Security has become extremely important.

Below I have detailed some background on Social Security regulation and a few strategies to help increase a person’s lifetime Social Security payments.  This article, though, only scratches the surface of all the Social Security planning that an individual will need in retirement.  Given the decline in employer sponsored pension plans and the increase in employee directed retirement accounts, retirees are encountering more problems with volatility in the stock market and low yields on commercial income producing securities.  This makes the guaranteed income stream of Social Security all the more important.  Therefore, as well as making sure income isn’t left on the table, it is important to speak with an advisor to properly integrate full Social Security payments with other retirement accounts, income streams, and goals.

Social Security Payments, Explained

An individual’s Social Security payments are based on the average monthly earnings of the highest 35 years of that individual’s career, indexed for inflation.  A progressive formula is applied to this number and the resulting amount is what’s known as an individual’s Primary Insurance Amount (PIA).  This amount is the monthly benefit a worker receives if he or she claims Social Security at Full Retirement Age (FRA).

FRA is the age at which an individual first becomes eligible to receive full retirement benefits.  This age has changed overtime, resulting in different full retirement ages depending on the year a person was born.  This is detailed in the chart below from the US Social Security Administration:

Table 1:

Year of Birth

Full Retirement Age

1937

65

1938

65 and 2 months

1939

65 and 4 months

1940

65 and 6 months

1941

65 and 8 months

1942

65 and 10 months

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

























Benefits can be claimed before full retirement age, beginning at age 62 (irrespective of your full retirement age).  Taking benefits early, though, results in an actuarial reduction in benefits given the number of years until an individual reaches full retirement age.  More specifically, if you retire within 36 months of FRA your monthly Social Security amount is reduced 5/9 of 1% for each month you retire before FRA.  Claiming Social Security over 36 months before FRA results in the monthly amount being reduced by 5/12 of 1% for each month you retire before FRA.  An easier way to think of this, though, is for an individual with a retirement age of 65, claiming benefits at age 62 results in a monthly benefit of 80 percent of their PIA.  For individuals with a full retirement age of 66, claiming benefits at 62 results in a monthly benefit of 75 percent of PIA.

Social Security benefits can be claimed after full retirement age as well. An individual can claim benefits as late as age 70.  Conversely to taking benefits before FRA, taking benefits after FRA increases the monthly amount you will receive upon claiming Social Security benefits.  The increase to an individual’s benefit over PIA varies according to his or her year of birth.  In this regard it has clearly become more beneficial for younger generations to delay claiming benefits. Individuals born in 1930 receive 4.5% of PIA per year of delay, whereas workers born in 1943 and later receive 8% of PIA per year of delay.  Below are the detailed changes from the Social Security Administration:

Table 2:

Increase for Delayed Retirement

Year of Birth

Yearly Rate of Increase

Monthly Rate of Increase

1933-1934

5.50%

11/24 of 1%

1935-1936

6.00%

1/2 of 1%

1937-1938

6.50%

13/24 of 1%

1939-1940

7.00%

7/12 of 1%

1941-1942

7.50%

5/8 of 1%

1943 or later

8.00%

2/3 of 1%



Social Security is also reduced if you are working.  While you are working, your earnings will reduce your benefit amount only until you reach your FRA. After you reach your FRA, your benefit will be recalculated to leave out the months when your benefit was reduced or withheld due to your excess earnings. More specifically, if you are under FRA for the entire year, your benefit will be deducted $1 for every $2 you earn above the annual limit.  In 2014, the annual limit is $15,480.  In the year you reach full retirement age, your benefit is deducted $1 for every $3 you earn above a different limit, but only earnings before the month in which you reach your FRA will be deducted. Starting with the month you reach full retirement age, you can get your benefits with no limit on your earnings.

Maximizing Social Security Benefits for Individual

To maximize Social Security benefits from an individual perspective (without considering spousal benefits) the question really revolves around when to take benefits- before, at, or after FRA. This question has become simpler in recent years as people live longer and interest rates remain historically low.  As John B. Shoven, Ph.D, the director of the Stanford Institute for Economic Policy Research and Sita Nataraj Slavov, Ph.D, a resident scholar at the American Enterprise Institute, point out in the March 2014 Journal of Financial Planning, “The combination of rule changes, mortality changes, and interest rate changes has greatly increased the gains from delay (of Social Security) for cohorts born in 1938 and later (that is, individuals turning 62 in 2000 and later), with interest rates playing the largest role.”  In regards to the rule changes, they only affect couples and we will address how that affects Social Security planning later.  The benefits of mortality and interest rate changes to those entering retirement, though, is very apparent on the individual level.

Table 1 above shows that the FRA has slowly crept up year by year, but this has not kept up with the average life expectancy of an individual. Shoven and Slavov point out, “Calculations suggest that even if interest rates return to their historical average over the next decade or two, singles in the later cohorts (those entering Social Security now) will still enjoy a reasonable gain from delay (around 2% and 5% in lifetime benefits for  the average male and female respectively).”  Low interest rates, though, has had an even larger effect.  Table 2 shows that the delayed retirement benefit has consistently gone up, rising all the way to 8% annually. During this rise, though, the yields on bonds, especially those carrying little risk, have been relatively low for the past few decades, and they have been historically low over the past five years.  Therefore, as market income rates have been driven lower, the returns for delaying Social Security have been driven higher.  The result is a large payoff for delaying to take Social Security.  According to Shoven and Slavov, for single individuals the gains from delaying Social Security for later cohorts, when taking into account interest rate changes, are just over 10% and 15% in lifetime income for the average male and female respectively.  In these cases, delaying significantly is important, with the ideal age to claim for single males being 69 and for single females the age is 70.  Perhaps even more astonishing, though, are how gains from mortality and interest rate changes are enhanced for couples. 

Maximizing Social Security Benefits for Married Couples

If an individual is married, several more options and optimization methods for claiming Social Security are available.  A married individual can receive a spousal benefit that is equal to half of his/her spouse’s PIA.  If the spousal benefit is claimed before reaching FRA, the benefit is reduced and there is no delayed spousal benefit credit for claiming the spousal benefit after FRA. It is also important to note that a spousal benefit cannot be claimed unless the worker on whose record the benefit is based has claimed worker benefits himself/herself. Under this rule, if a spouse attempts to claim on a worker’s benefit that has yet to claim his/her benefits, even if he/she has reached FRA, the spouse cannot receive the spousal benefit.  Therefore, in a situation where a worker may be delaying to claim benefits to increase the monthly income amount, as described earlier, the spouse may not claim any money despite the fact both individuals may have reached FRA.

A legislative change that took effect in the year 2000, though, has created a way around this problem.  A provision known as file and suspend has allowed a worker to file for his/her own benefit at FRA and then suspend receiving the benefit.  This makes delaying a worker’s benefits more advantageous as it no longer delays a spouse from receiving the spousal benefit and the worker can still technically “delay” (increase) his/her Social Security benefit.  It is important to note, though, if an individual claims a spousal benefit before FRA, he/she is technically claiming his/her own Social Security benefit as well.  This is because if you, for example, claim a spousal benefit before your FRA, the government will award you the greater of your own Social Security benefit or your spousal benefit.  Therefore, you cannot hold off on taking your own Social Security benefit while taking your spousal benefit until you have reached your FRA.

A widow benefit also exists which is equal to 82.5% of the deceased spouse’s PIA or the deceased spouse’s actual benefit, whichever is greater.  The widow benefit does rise if the deceased spouse had delayed claiming, but the widow cannot increase his/her benefits by delaying claim.  The widow benefit is also lowered if the widow takes the benefit before FRA.

The spousal benefit coupled with the file and suspend legislation has created several opportune filing methods for couples claiming Social Security.  A few of the popular methods are described by Alicia H. Munnell, Ph.D, Professor of Management Sciences at Boston College’s Carroll School of Management, Alex Golub-Sass, senior analyst at FI Consulting, and Nadia S. Karamcheva, Ph.D, research assistant at the Urban Institute, in the August 2013 issue of the Journal for Financial Planning as “claim and suspend for one-earner couples,” “claim and suspend for dual-earner couples,” and “claim now, claim more later for dual-earner couples.”

The “claim and suspend for one-earner couples” is pretty straight forward.  This method of claiming involves a worker who reaches FRA to claim and immediately suspend his/her benefits. This allows the spouse to receive a spousal benefit based on the worker’s earnings.  The worker can then hold off (and even continue working) and thus receive delayed retirement credits.  By claiming at FRA and suspending, the worker has allowed the spouse to claim a spousal benefit, increased his/her own benefits, and increased the spouse’s survivor benefits in the case the worker dies first.

In the case of dual earning couples, the options become a bit more complex.  The “claim and suspend for dual-earner couples” option is similar to the single earner couple as the lower income earner would claim his/her benefit as early as possible- whether this be worker or spousal benefit (whichever is greater and available).  The higher income earner would then hold off on his/her worker benefits as long as possible, increasing the amount as well as the survivor benefit. Because this method is very similar to the “claim and suspend for one-earner couples” method, this is the optimal approach only when the low income earning spouse's earnings are very low relative to the high income earning spouse’s earnings.

For couples with similar income earnings histories, the “claim now, claim more later” strategy becomes the most efficient way to claim Social Security.  This method can be completed in two ways.  Because the Social Security Administration compares a worker’s two benefits, spousal and individual, and rewards the higher amount when benefits are claimed before FRA, the first method entails both individuals waiting until FRA to claim benefits.  Using this method, married individuals would claim a spousal benefit when both he/she and his/her spouse have hit FRA. Once each individual hits his/her optimal age to claim benefits, they can then switch to their own retired worker benefits at this later date.  Depending on a couple’s age difference, this method could even allow for each worker to begin claiming one type of benefit while building up delayed retirement credits, resulting in higher benefits for both individuals.  This method obviously works best for couples closer in age.

The second “claim now, claim more later” strategy is the most complicated of the claiming strategies.  Using this method, the lower income earner would claim worker benefits at age 62.  Once the higher income earner hits age 66, the individual would claim the spousal benefit based on the lower income earner’s earnings.  At age 70, the higher income earner would then claim the maximum amount of his/her own worker’s benefits and stop receiving the spousal benefit.  Although complicated, this method can actually reap the highest returns given the correct income and age differential between spouses.

The gains can be quite great for couples who maximize their Social Security benefits correctly.  According to Shoven and Slavov, a dual-earner couple who maximizes their Social Security strategy can gain over 20% in lifetime value over a base case of each spouse claiming his/her own benefit at FRA.  Even when correcting for historically low interest rates, the benefits are around 10% higher in lifetime value.  For non dual-earner couples, the gains are still high due to the increased death benefit.  With today’s interest rates, the gains are around 18% higher in lifetime value, and normalizing for interest rates, the gains are around 8% in lifetime value.

Working with an Advisor to Ensure a Fitting Strategy

The most important conclusion to take away from this information is that there are clear, monetary benefits to planning your Social Security claiming process correctly.  Not every couple should use the same strategy to maximize Social Security benefits.  Given the age and earnings history of each spouse, couples can have very different maximization methods.  However, due to health issues or unique retirement needs, the best monetary strategy might not be the best overall strategy given your particular situation.  It is therefore extremely important to not only work with an advisor who is able to sort through the numbers and identify which claiming method will be most fruitful, but also an advisor whom you trust and who knows your individual needs, in order to help construct a fitting Social Security plan for you.