During a recent webinar, the instructor, Mary Beth Franklin,1 made the point that 66 is the "Magic Age." Upon further reflection, she may be right. By 66 most of us should be retired, or close to it. Decisions have been made and it's time to enjoy the fruit of a lifetime of labors. However, Mary Beth was referring to Social Security claiming strategies. She reminds us that to enjoy this magical period, we must plan first.
Social Security is an amazing annuity program, with guaranteed inflation-adjusted income. To maximize your Social Security income, wait until full retirement age (FRA), which ranges from 66 to 67, depending upon your month and year of birth. At this point, if you delay claiming until age 70, your benefit will increase 8% until you reach age 70. Can you think of any other investment that will guarantee 8%? That is why many planners will tell you, if possible, spend other sources of income until you reach age 70.
If you choose to start collecting at age 62, keep in mind that your benefit will be reduced by 25% or more for the rest of your life. If
you are still working, you will also lose benefits, $1 for every $2
earned over the limit. For 2013, the earnings limit is $15,120. After
FRA, there is no earnings limit.
If you are part of a couple, you have more options, especially if you are of a similar age. Say you are the higher-earning partner; you should attempt to delay collecting a benefit until age 70. Your lower-earning spouse may want to collect at age 62 in this case, to ensure cash flow. Alternately, if the lower-earning spouse waits until FRA, she can choose to file a restricted claim for spousal benefit, which is 50% of your benefit. You would "file and suspend." File for benefits at FRA, then immediately suspend, so your benefit will grow to age 70. But by opening the case, your spouse can then file for spousal benefits. The bonus here is the spouse's benefit will also continue to grow until age 70. If the math works, she can switch to her own benefit at age 70 and you can begin collecting on your record. This will not necessarily preclude the spouse who started claiming at 62. If the spousal benefit is larger than her benefit at FRA, she can switch to a spousal benefit then.
A few other tips: Upon the death of a spouse, the surviving spouse would step up to the highest benefit based on the two records. Also, a divorced spouse who is not currently remarried can collect on her ex-spouse's record (assuming they were married at least ten years), and if she had more than one spouse, she can choose the best benefit. This will not affect either your ex-spouse's benefit, or claims for his subsequent spouses. As long as you are both at least 62 and have been divorced for 2 years, you can claim, and in this case, you don't have to wait for him to claim. You can also take advantage of the maximization strategy, if you wait until FRA, you can file for spousal benefits and let your benefit continue to grow to age 70. Here like the married couple you can choose whichever benefit is greater, but unlike the married couple it is not necessary to have your ex-spouse file and suspend.
(Note: Although I have been using a female pronoun for simplicity, strategies are applicable equally to either male or female spouses and to LGBT relationships in those states that recognize them.)
Now suppose you started collecting at age 62, eight months later you had a small windfall and are wishing you hadn't started collecting. Well Social Security allows you a do-over. Within twelve months of the initial claim, you can repay the benefits received and allow your benefits to grow. This can be a real planning opportunity if you need cash flow in the short term but are expecting a distribution in the near future.
Remember, for the most flexibility in strategies, wait until FRA. Consider health and family history. Don't delay benefits if you have health issues that will shorten your life expectancy. Consider your ages and your current earnings record. If you have a pension or an annuity, make sure you coordinate benefits so you can maximize distributions from each source. It is not too early to start planning, so you too can enjoy the magic.
The Social Security Administration offers detailed free calculators at: http://www.ssa.gov/retire2/AnypiaApplet.html.
This article only scratches the surface. Other benefits and filing strategies are available. As always, consult a financial planner or tax professional.
1 Mary Beth Franklin is a contributing editor at Investment News. She
specializes in retirement distributions, Social Security and tax planning.