By MICHAEL P. DENNY, CPA, CFP
Recently, I read an article that stated most couples spend more time planning their next vacation than they spend planning how to take their Social Security benefits. As that fact began to sink in it became alarming to me, considering the cumulative Social Security benefit for a typical married couple could be over $1 million. Spending a little bit of time analyzing your options on the front end can pay significant dividends in the form of increased payments over the rest of your life. This article will explain some of the basics of Social Security benefits and give you a few strategies that can be used to boost your retirement income.
Like most government programs, there are many acronyms used to explain the details of the Social Security program…only a few of the most important ones are covered in this article. The first thing Social Security claimants should know is their Full Retirement Age (FRA). This is the age at which someone claiming Social Security is entitled to his or her full benefit. For most people approaching retirement currently, their Full Retirement Age equals age 66. The amount of a worker’s benefit is based on their Primary Insurance Amount (PIA), which is calculated beginning at age 62, and is based on Social Security earnings and number of working quarters. It is also used to calculate spousal benefits.
A person’s Primary Insurance Amount is adjusted based on when a worker claims benefits in relation to their Full Retirement Age. A worker can claim benefits as early as age 62 or as late as age 70, and their benefit amount is decreased or increased accordingly. For those electing to claim benefits before their Full Retirement Age, their benefits are reduced. The reduction in benefits can be as high as 25% for workers and 30% for spouses of workers. This reduction in monthly benefits can last for the remainder of the worker’s life, although annual inflation adjustments, or Cost of Living Adjustments (COLAs), will still be made.
Delayed Retirement Credits (DRCs) are a great planning tool for married couples to use to their advantage. For each month someone delays taking their Social Security benefit past their Full Retirement Age, they receive a credit that increases their benefit by 8% on an annual basis. The 8% credit is applied for every year until age 70. So, if your Full Retirement Age equals age 66, your benefit could increase by a total of 32% by age 70. This credit is added to a possible Cost of Living Adjustment (COLA) each year and is locked in for the rest of your life. An important and often overlooked fact is that Delayed Retirement Credits increase the benefit paid to a surviving spouse, which factors into planning for many married couples.
Other great planning opportunities regarding Social Security exist for married couples, although the strategies can be complicated. I will only touch on some of the basic strategies. First, it is important to know about the File and Suspend strategy. In this strategy, typically the higher earning spouse files for benefits at Full Retirement Age then immediately suspends taking their benefit. The primary purpose of this strategy is the individual filing for benefits allows their spouse to collect their Spousal Benefit based off the higher earner’s record, while allowing their own benefit to build up through Delayed Retirement Credits.
Another popular strategy for married couples is called filing a Restricted Application. This strategy typically involves the higher earning spouse filing an application for only their spousal benefit at Full Retirement Age, allowing his or her own benefit to increase due to Delayed Retirement Credits. So, this strategy is similar to File and Suspend, but allows the higher earning spouse to collect their Spousal Benefit while allowing their own benefit to increase. This strategy can work well when both spouses have built up sizable benefits.
In conclusion, it is important to remember that Social Security benefits represent an income stream that you cannot outlive. As medical care advances and people are living longer, making sure you are maximizing monthly income for you and your spouse is even more beneficial. Therefore, it can be a very important component of a couple’s retirement plan, and it makes sense to consult with an advisor who has expertise with Social Security benefits and can educate you regarding your options.
Michael P. Denny, CPA, CFP, is a Partner with GranthamPoole CPA firm with offices in Metro Jackson and Oxford, Miss. His primary focus is personal financial planning and tax planning and preparation. He can be reached at 601.499.2400 or firstname.lastname@example.org.