Social Security: What You Need To Know
For many Americans, Social Security benefits are the foundation of retirement income. Learning how to get the most out of Social Security is critical to funding your after-worklife dreams. The rules for claiming benefits can be complex so Lehigh Valley Marketplace caught up with Paul Stocker, CPA, CAS, NSSA, of Social Security and Retirement Planning to help wade through the details.
Lehigh Valley Marketplace (LVM): How does Social Security play a role in Retirement Planning?
Paul Stocker (PS): For about 1/3 of people already on Social Security it represents 90% of their entire retirement income, and for more than ½, it represents at least 60% of their entire retirement income.
LVM: So, there is planning involved with receiving Social Security Benefits?
PS: There should be, but in reality there is nowhere enough of it. A lot of people think that they are going to collect as early as they are able to, which is the age of 62. For people born before 1955, Full Retirement Age (FRA) is age 66. Collecting at age 62, reduces their benefit by 25%. If a person has a Primary Insurance Amount (PIA) of $2,000 a month at FRA, they would only receive $1,500 a month if they start collecting at 62.
LVM: Do you have to collect Social Security Benefits at age 66?
PS: Actually, for every year you defer taking Social Security up until the age of 70, your PIA increases 8% for each year you defer, up to 32%. This would make the Benefit at age 70, $2,640 a month instead of $2,000 at age 66.
LVM: So, why do some people start collecting at age 66?
PS: Actually there are some major questions to ask to determine what is the best date is to retire. If you stop working at FRA, what income will you live on until you reach age 70? Life expectancy is also a major factor in the determination process. If your entire family lineage has a history of not living past the age of 72, delaying may not be the best choice.
LVM: OK, maybe it’s not as cut-and-dry as it seems.
PS: If you add the increases in benefits from the Cost of Living Adjustments (COLAs), it makes the discrepancy even worse. If you really want to complicate matters, you should see what happens when you throw married couples into the mix.
LVM: How do married couples make Social Security Planning so complicated?
PS: Not only do you have the question of what age to retire at, currently you also have what is called 2 different “Switching Strategies” that they can use. These strategies are called “File and Suspend” and “Restricted Application.” One very fine point to remember is that you must be Full Retirement Age to use either one of these strategies.
LVM: What is File and Suspend?
PS: If you have a spouse that is entitled to Spousal Benefits, you must sign up for your benefits for your spouse to be able to collect their spousal benefit. If you “File and Suspend”, you suspend your collection of benefits and can receive the 8% increase in deferred credits for 4 years, and you allow your spouse to collect their spousal benefit.
LVM: Can an individual use “File and Suspend?”
PS: Currently they can. If an individual “File and Suspends”, it will start the deferred credit process of 8% per year. If they didn’t “File and Suspend”, they would still get the deferred credits when they actually file for benefits. So why should a single person “File and Suspend”? Let’s say they find out at the age of 69 and ½, that they have a terminal disease. If they “Filed and Suspended” they can go back to Social Security and ask for all their benefits back to FRA as a lump sum since they won’t need the deferred credits in the future. But they can do this only until they reach age 70, at which time this strategy goes away.
LVM: How is the “Restricted Application” different?
PS: When you file for benefits, you are “deemed” to be filing for all the benefits that you are entitled to. If a wife’s individual benefit is less than her spousal benefit, she would receive her individual benefit plus the difference between that number and the spousal benefit. With a “Restricted Application” she is saying that she just wants to collect her spousal benefit only. She is restricting her benefit just to the spousal benefit. This allows her individual benefit to receive the 8% a year in deferred credits on her individual benefit. At age 70, she switches from a spousal benefit to her own benefit with 32% more in individual benefits.
LVM: How much of a difference can these two strategies actually make?
PS: Depending upon the 2 PIAs, age difference between spouses, and life expectancy, we have seen over a $360,000 lifetime difference between starting to collect at the earliest age of 62 and employing a combination of these two strategies.
LVM: Really? That much?
PS: It is not uncommon to see at least $200,000 if the age difference and PIA difference are not that great. When we do a retirement plan, we usually present what the plan looks like maximizing Social Security Benefits. Coupled with COLAs and deferred credits, it can make the difference of running out of income or not during their lifetime.
LVM: Do future retirees know about these two strategies?
PS: There has been an increase in the general public awareness of these strategies. Unfortunately, the Budget Act that was passed in the beginning of November 2015 has changed the future uses of these two claiming strategies.
LVM: Changed them how?
PS: Effective April 30, 2016, “File and Suspend” as a strategy is basically gone. You will still be able to “File and Suspend,” but when you suspend your benefits, you will also suspend any benefits that are associated with yours. That means that any spousal or children benefits would be suspended also. A single person who “Files and Suspends” now, will only be able to go back six months to collect back benefits instead of all the way back to age 66.
LVM: And Restricted Application?
PS: Any person who turns 62 before January 1, 2016, will be able to file for a Restricted Application if they so choose when they turn Full Retirement Age. Any one turning 62 after December 31 of 2015 will not be able to file a Restricted Application.
LVM: What do you think this change could cost future retirees in benefits?
PS: Initial illustrations come in on an average between $100,000 and $150,000 less during a couples’ life expectancy.
LVM: What options do future retirees have?
PS: It is very important that anyone that turns 66 before April 30, 2016 find out what effect the new law may have on them. Over their expected life expectancy, the amount could be substantial.
LVM: Are there any changes in the new law that affects non-couples?
PS: If there is any good news out of the new law, it is that it does not affect spousal, widow(er) or ex-spousal benefits. So ex-spouses that were married for at least ten years can still collect under their ex’s account, and widows(ers), can still start to collect as early as the age of 60.
LVM: Is there anything else that we should know?
PS: Starting to save for retirement should start in your early twenties. You can never start Retirement Planning too early.