Burke: What happens if I continue to work while I collect social security?
Lopez: While you are working, and if you claim benefits before you reach your full retirement age, your benefits will be reduced. The SSA uses the following formula to determine the reduced benefits:
• If you are under full retirement age for the entire year, your benefit will be reduced by $1 for every $2 earned above the annual limit of $15,120, the 2013 limit.
• In the year you reach full retirement age, your benefit will be reduced by $1 for every $3 earned above a different limit, but earnings are only counted up to one month before you attain full retirement age.
• After you reach full retirement age, you can get your full benefit with no limit on your earnings.
Burke: My spouse’s benefit is less than mine. What should we do to maximize benefits? What about benefits for my ex-spouse?
Lopez: If you are married, you may collect up to 50 percent of the benefit owed your spouse based on her PIA. If your spouse’s own PIA is less than 50 percent of yours, the benefits will be combined. If benefits are claimed early, the spousal benefit may be reduced by up to 35 percent of the PIA. There are also benefits for ex-spouses, but the marriage is required to have lasted for at least 10 years.
It is very important to understand that this “50-percent spousal benefit” does not increase with delayed retirement credits. For example, if a worker’s full retirement age is at age 66, yet he or she continues to work up to the age of 70, the 50-percent spousal benefit does not also increase. The spousal benefit remains at 50 percent of the PIA, which is determined for the full retirement age or, in this case, at age 65. It will not increase to half of the worker’s benefit at age 70, and it will remain the same. Remember, PIA is the benefit only at full retirement age. So, if a non-working spouse has a lower PIA or none at all, it is not advantageous to wait to collect the spousal benefit when the working spouse claims his or her benefit at the age of 70. In this case, “file and suspend” (defined next) may be a better option.
Burke: My spouse wants to start receiving benefits now, but I want to keep working and delay starting my benefits so I get a higher benefit. Is there a way we can do that?
Lopez: Yes, this is the so-called “file and suspend.” This is slowly becoming a better known strategy and is a pretty effective way to collect greater benefits. If one spouse reaches full retirement age but wants to continue working thereafter, he or she can file for benefits and immediately suspend his or her own benefit while at the same time allowing the spouse to collect on the spousal benefit. This allows the worker to continue earning delayed retirement credits (DRCs) at the same time the non-working spouse, at full retirement age, begins to enjoy the 50 percent spousal benefit. It should also be noted that this spousal benefit cannot be collected until the worker has actually submitted his or her application and filed for Medicare.
Burke: Is there another strategy to help us maximize our Social Security benefits?
Lopez: Yes, another little known option worth considering is called “claim now, claim later.” If you are married and have reached full retirement age, you can claim a spouse’s benefit and then, at a later date, switch to a benefit based on your own work record. An example would be a married couple in which both people have attained the full retirement age. The husband files for his benefit and the wife then files for her spousal benefit, or 50 percent of the husband’s benefit. She, however, continues to work while earning additional delayed retirement credits up to age 70 on her own record. At age 70, she then switches from the spousal benefit she has been receiving and begins to claim her own increased benefit through the DRCs she has accumulated.
Burke: I have already started receiving benefits. Is there any- thing I can to change things?
Lopez: The golf term “mulligan,” which is essentially a “do- over,” comes to mind. A Social Security mulligan is available only within 12 months of a submitted application. The rule essentially allows you to withdraw your application and repay all your benefits to the Social Security Administration. You can then refile no later than age 70. This option may be worthy of consideration if someone reenters the workforce or now wants to consider a different claiming strategy. All benefits must be paid back.
Before claiming your benefit, know the rules. Talk with the Social Security Administration and consider receiving additional advice to review your optimal payout strategy. Remember that life expectancy matters. The optimal strategy for a couple changes depending on how long they may live. If the individuals in a married couple today are both age 65 and both expect to reach the average life expectancies, which are 83 for men and 85 for women, delaying is likely the better option.
Social Security is meant to be only one of the sources for retirement income. It was never intended to be the sole means or only income source. The option you choose will have a significant impact on your overall lifetime benefits and retirement security. Choose wisely!