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social security benefits

Retirement income from Social Security is a simple process. The government levies taxes on current employees and places the money into the OASDI Trust. Most of the funds are distributed immediately to current retirees, but any surpluses are left in the trust for future use. The size of each person’s Social Security benefit is derived from the average income of his or her 35 highest income years. It is meant to supplement retirement income, not be a retirement plan all on its own.

Full Retirement Age

A person’s FRA is the age when they can receive their benefit payments at an unreduced rate. While individuals can choose to begin receiving benefits as early as age 62, their monthly payment rate will be lessened if they do not wait until their FRA. Similarly, if a person defers benefits beyond his or her FRA (70 is the maximum age of deferment), he or she will receive larger monthly payments. At present, approximately two-thirds of retirees begin taking benefits at age 62 or shortly thereafter.

Age Factors

The most fundamental strategy is deciding whether smaller, earlier payments will be more useful than later, larger payments. For those with serious health issues, taking benefits at age 62 may be an obvious choice for getting the most out of the program and assisting with high medical costs. On the other end, retirees in good health with sufficient resources may want to delay benefits as long as possible. Approximately one out of every four people who make it to age 65 will make it to age 90. If such longevity seems possible for a person, patiently waiting for the largest possible payments can end up being a great help when other retirement assets begin to dwindle.

Eventually, the cumulative totals of benefits equal out. If retirees live beyond this “breakpoint,” a deferral on benefits can prove to be a huge advantage. However, if they do not live that long, they did not make as much use of Social Security as they could have. Typically, the breakpoint is somewhere in a person’s early eighties.

Planning for Surviving Spouse

The most commonly used part of a couple’s Social Security benefits is that a surviving spouse can exchange his or her benefit for the deceased’s benefit. This often encourages the higher earning spouse to delay benefits until he or she has reached FRA or age 70. That way, no matter which spouse dies first, the survivor will be guaranteed the highest possible payout rate. This is a fantastic tool to utilize in Spousal Planning!!

Spousal Benefits

The other major component of Social Security planning for couples is the ability for a person to elect a benefit equal to half of his or her spouse’s FRA benefit. Known as the “spousal benefit,” this can be helpful to couples when there is a significant disparity in average incomes. For example, if Spouse A was the breadwinner and Spouse B stayed home with the children, the Spouse B is eligible up to 50% of Spouse A’s benefits if they file correctly.

Couples’ Strategies

If a couple plans ahead correctly, they can take advantage of filing strategies. An opportunity is created because retirees are allowed to switch from a spousal benefits to their personal benefits later on. At full retirement age a spouse can choose to suspend benefits. Once suspended, credits build up and increase the value of monthly payments for when the benefits resume distribution. This means a person is able to activate his or her personal benefits, allow his or her spouse to activate the spousal benefit and then immediately suspend the personal benefits until age 70, whereupon they will pay at a higher rate.

There can also be an additional layer to this strategy that allows both spouses to get the maximum personal payments at age 70, while also allowing one spouse to receive spousal benefits for a few years prior. This strategy has no impact on personal benefits and can be thought of as a way to get “free” money from social security.

Survivors

A survivor’s advantage with Social Security comes from the survivor’s benefit being treated separately from his or her personal benefit. A survivor is entitled to the deceased’s full benefit at his or her FRA or take reduced benefits starting as early as age 60. A survivor is also allowed to switch from survivor benefits to personal benefits whenever he or she would like. This means that a person can begin reduced survivor benefits at age 60 and then switch to personal benefits when the payout rate is higher at FRA or age 70. Alternatively, a spouse can withdraw his or her personal benefits at age 62 and then switch to the full survivor benefit.

Divorce

If your spouse has contributed to the social security system, you may be entitled to receive half of his or her social security benefits after you divorce. Note that your eligibility and receipt of your ex-spouse’s social security benefits has no effect on the amount he or she is eligible to receive.

You are eligible if:

  • Your spouse is eligible
  • You were married for at least 10 years
  • You have been divorced for at least two years
  • You have not remarried (unless your second marriage occurs after you turn 60 years old)
  • You are at least 62 years old
  • Your own social security benefits would be less than your spouse’s

 

As you can see, planning for Social Security is a complex issue and it is highly recommended that you seek guidance from your trusted financial advisor.