According to the National Social Security Association LLC, more than 90% of Social Security recipients receive less money than they are entitled to. Failure to maximize Social Security Benefits can represent tens of thousands, or even hundreds of thousands, of dollars in lost retirement benefits; however, the rules governing Social Security income are complex and require careful consideration of available options and the individual’s personal situation.
Ways to Maximize Social Security Benefits
The following list summarizes the various ways to potentially maximize Social Security retirement benefits; however, identifying the optimal strategy should include an analysis that considers a person’s health, marital status, estimated benefits, and other financial resources.
- Defer Benefits to Age 70: Benefits for individuals who file for Social Security before their full retirement age (FRA) are subject to an actuarial adjustment which reduces monthly benefits by as much as 30% for individuals who file at 62. Individuals who delay filing after their FRA receive an 8% increase in monthly benefits for each year they delay until age 70. Avoiding the actuarial adjustments for filing before FRA and taking advantage of annual deferral credits after FRA, individuals can increase their monthly benefits by 54% or more.
- Withdrawing an Application: Individuals who file for benefits and later desire to undo their election can do so up to 12 months from the date filed. It should be noted that amounts during this period would need to be returned and the amount must be repaid within 60-days.
- Start-Stop-Start: Individuals who filed early (age 62), and later decide to defer their Social Security income benefits, can suspend benefits as early as age 66. The suspension allows benefits to increase by 8% per year (known as delayed retirement credits) until age 70, resulting in a 32% increase in benefits.
- Increase Benefits While Receiving Benefits: Benefits are based on the highest 35 years of averaged indexed monthly earnings. If an individual works while receiving benefits, and those earnings are higher than any of the previous 35 years of indexed earnings, benefits will be re-calculated to reflect the higher current earnings. Individuals who continue working while receiving benefits before FRA need to consider the potential impact of the earned income offset (more on this below).
- Spousal Benefits: Married individuals are eligible for spousal benefits once they have been married for at least one year. At full retirement age, spousal benefits are equal to 50 percent of the spouse’s full retirement age benefit, and spousal benefits received prior to FRA would be subject to an actuarial adjustment.
- Family Benefits: Child-in-care benefits are available to an adult spouse (of any age) if they exercise parental control and responsibility for a child under 16 years of age or disabled child under 22. Child-in-care benefits are also available to spouses who are not eligible for regular spousal benefits. Social Security family benefits are 50% of the worker’s monthly benefit at full retirement age and subject to a family maximum. Total benefits received on a single person’s earnings record (including spousal, child, and survivor benefits) is limited to 150% to 188% of the monthly benefit payment at full retirement age.
- Survivor Benefits: Individuals who have been married for at least nine months are eligible for survivor benefits. Once the individual and their spouse reach FRA, survivor benefits will be 100 percent of the deceased spouse’s benefit amount, including any delayed retirement credits. Survivor benefits are available as early as age 60 (or 50 if you are disabled) at a reduced amount.
- Divorced Spouse Benefits: Divorced individuals who were married for 10 years or longer, divorced for at least two years, and not remarried, are eligible for ex-spousal benefits as early as age 62. The divorced spouse benefits are similar to the benefits which they would have received if still married.
- Divorced Spouse Remarries: Divorced individuals who remarry will no longer be eligible for the ex-spouse benefits. However, those who remarry after age 60 and have an ex-spouse who is deceased are eligible to continue receiving ex-spouse survivor benefits if they meet the requirements.
- Restricted Application: At FRA, individuals born prior to 1954 can file restricted application for spousal benefits if their spouse is currently receiving benefits. Restricted application allows qualified individuals to file strictly for spousal benefits at FRA (or later) and delay filing for their benefit until later when delayed retirement credits have accrued. For married couples, only one spouse can be eligible for restricted application since eligibility for spousal benefits depends on the other spouse filing for his or her own benefit. If an individual doesn’t specifically file a Restricted Application, he or she is considered to be filing for all benefits currently available.
It is important to consider the following provisions of Social Security when deciding the optimal filing strategy to maximize lifetime benefits.
- Deemed Filing: When filing for benefits prior to FRA, a provision called “deemed filing” takes effect which means the individual is “deemed” to have filed for all available benefits – generally meaning their own benefit and any spousal benefit that they are eligible for as of the date of filing. For a currently-married individual, spousal benefits are not available until the spouse has applied for his or her own benefit.
- Retirement Earnings Test: For those who claim benefits prior to FRA and continue working, Social Security imposes an “offset” that reduces, sometimes substantially, the full monthly benefit that would otherwise be paid for income exceeding certain income thresholds. This offset is known as the “Retirement Earnings Test,” and it applies to employment income only, not earnings from investments, pensions, etc. Under Retirement Earnings Test, workers younger than FRA during the entire calendar year will be subject to a $1 reduction in benefits for every $2 they earn above $17,640 (2019). During the calendar year in which a person reaches FRA, a less onerous earnings test is imposed and benefits are reduced by $1 for each $3 of earnings above $46,920 (2019). And once a person attains FRA, there is no reduction of benefits regardless of income.
- Social Security Offset Provisions: The Windfall Elimination Provision (“WEP”) and Government Pension Offset (“GPO”) were enacted in 1983 as part of sweeping Social Security reforms to prevent what was perceived as “double dipping.” The intent of these rules was to reduce Social Security benefits for individuals who have both covered earnings and pension from non-covered earnings, in recognition of the fact that Social Security provides a larger relative benefit for “low income” workers that was not intended for workers who average income is lower solely because a portion of their lifetime earnings were from a non-covered job which is providing its own pension amount. To be affected by the WEP, an individual must have worked in covered employment long enough to qualify for Social Security benefits, as well as in the public sector where FICA payroll taxes were not deducted from their earnings. In addition, they must have earned a pension from that non-covered work.The WEP rules reduce monthly Social Security benefits by up to 50% of the amount of their public pension, but not more than $408 per month in 2014. For example, if you have a government pension of $500 per month, the maximum WEP reduction would be half of that — $250 per month. The GPO is a related provision that reduces Social Security benefits paid to spouses or survivors when the spouse or survivor earned a pension from a government job that was not covered by Social Security. The GPO reduction is equal to two-thirds, or the amount of the pension payment from non-covered government work. Unlike the WEP, which can merely reduce a worker’s Social Security benefit by up to half of the amount of the government pension, the GPO has no maximum. It can completely wipe out a spousal or survivor benefit. Although most federal workers are covered by Social Security, public-sector employees in 15 states, including public schoolteachers in some of those jurisdictions, are not. Those states including Alaska, California, Colorado, Connecticut, Illinois, Louisiana, Maine, Massachusetts, Missouri, Nevada, Ohio and Texas, plus certain local jurisdictions in Georgia, Kentucky and Rhode Island. Federal workers hired before 1984 and covered by the Civil Service Retirement System, where they did not contribute to Social Security, are also affected by the WEP rules. However, public service employees who also worked in the private sector and paid Social Security taxes on 30 years or more of “substantial earnings” are not affected by the reductions.
- Taxation of Social Security Benefits: If adjusted gross income + nontaxable interest + one-half of Social Security benefits — is below $25,000, the Social Security benefits will not be subject to income tax. Using this formula, if adjusted income is between $25,000 and $34,000 – up to 50% of benefits may be subject to income tax and up to 85% of benefits would be considered taxable income above $34,000.
Identifying the optimal Social Security filing strategy requires a careful analysis which considers the trade-off between maximizing potential life-time Social Security benefits with the opportunity cost of withdrawing funds from retirement savings during the deferral period. Ideally, the analysis should include a combination of cash-flow based planning which considers tax implications and Monte Carlo simulations which evaluates the potential impact of withdrawing funds from retirement savings during periods of market volatility in order to find the appropriate balance to achieve your retirement goals. In preparing for retirement, it is critical to seek the assistance of a Certified Financial Planner™ professional who can help you evaluate the possible impact of the various strategies by using cash-flow based financial modeling to identify the optimal strategy for your financial situation.
Disclosure: The information provided in this article is for general educational purposes and is not intended to represent tax, legal, or accounting advice. Individuals should discuss their unique circumstances with qualified professionals in these areas before making any decision.