Social Security: The Importance of Getting Your Claiming Strategy Right
May 25, 2021 Author: Tess Downing, MBA, CFP®, Complete View Financial
Although a few workarounds do exist, Social Security decisions can have life-long implications. As Social Security is one pillar of your income in retirement, getting your claiming strategy right is essential.
Every decision about personal finance affects your living standard eventually. Social Security is no exception.
Early in your career, your ability to influence your Social Security retirement benefits is limited to how much you contribute each year. Your benefits are eventually calculated on your income over the 35 highest-earning years of your work life, so the earlier you look at your record with Social Security, the better. You might even let the concept of maximizing contributions affect a decision between a little more income versus a benefit.
You don’t need 35 years of contributions to qualify (you only need 40 quarters of a defined minimum amount). But Social Security will put a $0 in for any years you fall short of 35, and those zeroes can have a devastating effect on the result of its calculation.
By your sixties, it’s much harder – if not impossible – to affect the total amount reported in your Social Security work record by much. And that work record is what drives what you’ll receive for the rest of you life.
That, and your claiming strategy.
Will Social Security be there for you?
One attitude we hear from people who still have a decade or more left before reaching Social Security claiming age is that it may not even be there for them, so why bother maximizing contributions?
The sustainability of Social Security is a complicated topic, one which legislators have not wanted to confront: a “can” they’ve continued to kick down the road. Most benefits have been paid out from two sources: the payroll taxes Social Security collects from workers and income taxes collected on some Social Security benefits. For years, its income has exceeded its costs. But demographic shifts, such as our aging population, have tilted the balance in the other direction. There is still some accumulated surplus, but some changes will be needed.
Social Security could lower its outgoing costs by raising the Full Retirement Age (FRA) beyond the age 67 cap today. It could also means-test those receiving benefits and deny benefits to those who have other income and don’t “need” Social Security. Or it could increase what it collects by raising the payroll tax rate bit by bit. It could also raise the maximum wage it subjects to payroll tax. (The maximum taxable earnings limit is $142,800 in 2021. Anything you earn above that is not subject to Social Security taxes.)
The need for corrective action can’t be denied. The question is when the pressure will be significant enough to override the politicians’ ability to ignore the problem. Will Social Security “be there” for you when you’re ready to retire? Yes, in some form. (It is unfathomable that it will disappear entirely.) But will it be as robust as it is today? Only if present and future beneficiaries become more proactive and demand measured and gradual change.
What are the best sources for Social Security information?
Not the Social Security Administration - You would think going to a Social Security office would be your best source of information. But you would be wrong. It’s unlikely anyone has ill will when advising on your specific circumstances, but undertrained and overworked employees don’t make the best advisors. There are people in the Social Security Administration that know every provision backward and forward, such as its actuaries, technicians and legal experts. But they are not working in the Social Security offices, nor are they answering the phones.
Particularly when it comes to the best time to file for Social Security, you’d be well advised to do more research on your own or with someone with expertise. The dollar difference can be significant over time, and you may not be able to reverse a poor decision that you made with bad advice, no matter whose advice it was.
Your own research – The internet is your friend when it comes to researching your Social Security options. There is endless information on the subject, including every possible claiming option. Your one challenge could be deciding what is correct and which is best for you.
Running comparative calculations should not difficult. The Social Security website has plenty of good calculators to help you run the numbers. However, as you do so, you might want to use the maximum age of life, not your average life expectancy. If not, and if you don’t happen to die on time, you may find that you chose to claim too early and would have benefited from waiting.
Your financial advisor – For years, advisors identified loopholes in the Social Security laws that allowed clients to maximize their benefits. As soon as the government felt the impact of those strategies on the outflow of Social Security funds, legislative changes closed the loopholes. That was the case with the two most popular strategies that were ended with the Bipartisan Budget Act of 2015. One affected the timing of multiple benefits, renamed “Deemed Filing.” The other was a voluntary suspension of benefits called “File and Suspend.”
Today, your advisor will know what is still available under the present legislation and what is likely to change in the future. The factors that affect the best claiming strategy for you are many and can include any of the following factors, among others:
- Benefit reductions for claiming before FRA
- Retirement credits for claiming after FRA
- Maximizing a couple’s combined benefits through timing
- Impact of timing on dependent beneficiaries
- Suspending and reinstating retirement benefits
- Earnings test for ongoing income
- Taxation of benefits
- Family maximum benefits
- Disabled family maximum benefits
- Special rules for widow(er) benefits
- Rules for divorced-spouse benefits
- Social Security/private pension interactions (WEP/GPO)
Do you delay retiring to receive higher benefits? Or work longer to increase your benefit by earning more? What is the sequence and timing of spousal and retirement benefits? Do you take early retirement to activate child or disabled-child benefits, as well as child-in-care spousal benefits? When do you take widow(er) benefits if your deceased spouse took retirement benefits early? Do you take retirement benefits before private pension to put off activating the Windfall Elimination Provision?
The questions are endless.
Who are all the beneficiaries affected by your decision?
To gauge the importance of getting your Social Security benefits right, here’s a list of all benefits that could be derived from your work record:
- Your retirement benefits
- Spouse’s benefits
- Divorced spouse’s benefits
- Social Security disability benefits
- Child in-care spouse’s benefits
- Widow(er) benefits
- Divorced widow(er) benefits
- Child’s benefits
- Childhood disability benefits
- Surviving child’s benefits
- Mother’s and father’s benefits
How and when you claim your retirement benefits can affect most of those people. First, you have to claim before others can benefit. And if you suspend your own benefits, no one else can receive any based on your earnings record. (Ex-spouse benefits can be an exception.)
Note also that Social Security does not inform individuals when they become eligible for benefits, so you (and they) need to remain proactive.
In short, your claiming strategy needs to look at the overall picture. A one-time calculator may not do that very effectively.
What if you get it wrong?
Circumstances can change, or you may not have fully understood the implications of your filing decisions. You may also have waited until you reached your Full Retirement Age (FRA) to file and then were offered a high-paying job. What are your options?
Social Security offers you two do-overs:
You can withdraw your application if you’re still within the first 12 months of filing. You’ll have to repay whatever Social Security has paid on your work record (including benefits to dependents), but your benefits will go back to growing as if you never filed. When you file again, you and your dependents will all benefit from larger payments.
Once you reach FRA, you can ask to have your benefits suspended for as long as you want, up to age 70. You won’t have to pay anything back, and your benefits will grow each month they are in suspension. (As a rough calculation, if your benefits increase by 8% for each year you wait to claim between FRA and age 70, your benefits will grow by 2/3 of 1% for each month of suspension.) When you restart your benefits, they will be at a larger amount. However, other than an ex-spouse in some circumstances, all beneficiaries of your work record will also have had their benefits suspended.
Social Security benefits – which you are entitled to if you or your spouse have 40 qualifying quarters of earned income – are essential to your retirement plan. You deserve to get the maximum benefits within the existing legislation. Unfortunately, doing so will require more effort than presenting yourself to your local Social Security office.
If you feel you would like help in developing the most advantageous claiming strategy for you and your loved ones, do not hesitate to reach out to us. Call Complete View Financial for an initial consultation.