Previous generations of Americans could rely on healthy pension plans as an additional source of guaranteed retirement income to augment their Social Security benefits. But with fewer and fewer companies offering pensions these days, Social Security has taken on an even more critical role in retirement income planning.
Your decisions around when, how and in what form you (and your spouse) claim benefits will not only impact your future income, but potentially the success and sustainability of your financial plan.
When should you start taking benefits?
Depending on the year you were born, your “Full Retirement Age” (FRA) will be between age 66 and 67. This is the age at which you’re eligible to begin receiving your full Social Security benefit. You may choose, however, to begin taking early benefits any time after you turn age 62, or delay benefits up until age 70. Based on this decision, the amount of your monthly benefit would either decrease or increase correspondingly.
If you elect to take Social Security early, it will mean a permanent reduction in your benefit by up to 20-30 percent throughout your life. That means you’ll need to explore other ways to compensate for the reduced monthly income. Conversely, the Social Security Administration guarantees an annual 7-8% increase in your benefits (in addition to any cost-of-living adjustments) for every year beyond your FRA that you defer claiming benefits—up until age 70.
While delaying Social Security and receiving a higher monthly benefit may seem like the preferred strategy, it may not always be optimal. You first need to consider your current health and family history of longevity. If you’re fit and healthy with a family tree that’s full of ninety-year-olds, then delaying probably makes sense. If, on the other hand, you have significant health concerns, you might not want to delay.
Income considerations
Whether you plan to keep working in retirement should also factor into your benefits-claiming strategy. There are strict earnings limits when it comes to Social Security, so if you want to continue working, you may want to delay your benefits. If you are under FRA for the entire year, the income limit for 2021 is $18,960/year; for every $2 earned over that limit, $1 in benefits will be withheld.
Similarly, if you have other sources of substantial income (e.g., interest and dividends, property rentals, business income) in addition to your benefits, then up to 85% of your benefits may be subject to federal income taxes. It’s another reason why many people opt to delay their benefit.
Claiming strategies to evaluate
Anyone who is at least age 62 and whose spouse has filed for Social Security benefits may be entitled to spousal benefits. Spouses are entitled to up to 50% of their spouse’s benefit at FRA (if that amount is higher than the benefit they would receive based on their own work record). Even if you’re divorced, you may be entitled to collect spousal benefits if you were married for at least 10 years and never got remarried.
Widows/widowers also have a choice of receiving either your own benefit or a survivor benefit. If survivors wait until their FRA, they’re eligible to collect 100% of their higher-earning deceased spouse’s benefit. They can begin collecting as early as age 60 (at a yearly reduction of 4.75% from FRA) if income is needed, or they could potentially increase their benefit to 132% by delaying benefits to age 70. Even if a widow or widower remarries after reaching age 60 (age 50 if disabled), the remarriage will not affect eligibility for survivor benefits.
One other important consideration for couples is whether there’s a significant age difference between spouses. The greater the age difference, the greater the potential for survivor benefits to be paid out over a longer period—making the choice to collect early at a reduced benefit much less financially attractive.
Closed loopholes
Recent years have seen several commonly used claiming strategies either restricted or eliminated. The use of the “claim twice” strategy—where one spouse claims spousal benefits for several years in order to delay their own benefit—has now been limited to only those individuals born prior to January 1, 1954. For everyone else, once a spouse files to start payments there’s no choice. You either receive your own benefit or a spousal benefit; whichever is larger.
In addition, you can no longer “file and suspend” your benefits while your spouse, dependent child or any other individual (except a divorced spouse) collects benefits on your earnings history. You must be actively collecting benefits for others to receive benefits based on your earnings record.
Social Security is an essential component of your retirement income plan. However, given the shifting legal, regulatory and tax landscape, it’s important to make sure both you and your spouse (if applicable) make the best benefit claiming decisions based on your current and future needs. Talk to your Truist Wealth advisor about your retirement income plan and which strategy best aligns with your goals.
Want to better understand your Social Security claiming options or other retirement income considerations?
Talk to your Truist Wealth advisor and your outside tax advisor.