Anticipating Claiming Social Security: One Strategy Could Help Maximize Your Lifetime Benefits
If you’re age 62 or older, and you’re not already claiming Social Security benefits, chances are that you’ve contemplated filing at one time or another. Many people count on Social Security to supplement their income stream in their retirement. Filing early or late can adjust this income source for the remainder of your lifetime. This makes the strategy you choose that much more important if you’re at all worried about the possibility of outliving your assets.
People have various reasons for filing in different ways. Some individuals believe that filing early is best because they believe the system, in its current unsustainable condition, couldn’t possibly support future benefit payments. Others who file early could have a lack of liquidity and may need extra cash flow. Conversely, there are others who file after FRA to take advantage of earning delayed retirement credits (DRC). This is done by deferring your benefit past Full Retirement Age (FRA), which adds 8% annually from the government for leaving it in the system. The trade-off is that if you would need to supplement that income using assets from your portfolio. There are also people who file at FRA and receive their primary insurance amount (PIA), which is the monthly benefit that is due to you at FRA.
One strategy that has proven itself to many filers is to file and suspend. This is typically done with a married couple where one PIA is higher. The spouse with the larger PIA files for benefits at their FRA and then immediately suspends payment. This allows the other spouse to claim spousal benefits (up to 50%) on the larger PIA while earning DRC’s. This provides the couple a small cash flow early on, but also allows them both to secure the 8% annual increase when benefits are deferred past FRA. It’s important to note that is the spouse with the smaller PIA must be of FRA age to receive the full 50% benefit he or she would claim on their spouse. If the spousal benefits are started before FRA they will be reduced by 25/36 of one percent for every month before FRA up to 36 months. If they start more than 36 months before FRA, they are reduced 5/12 of one percent per month.
It’s important to note the Social Security Administration has submitted legislative proposals for the 2016 fiscal year, which amend the rules allowing the file and suspend strategy. Whether these proposed changes go in to effect or not, it is important to weigh your decision heavily. You are only allowed one withdrawal per lifetime if you decide you do not want to claim benefits if they’ve already started. In addition to only having one chance to re-file, the Social Security Administration requires that you pay back all benefits received once the withdrawal is affirmed.