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Make Sure You Understand How Social Security Works Before You Decide To Retire

With the pandemic lasting longer than anyone could have ever expected, many people have been getting used to working from home.  Some of my clients nearing retirement are wondering if they want to go back to long commutes and spending so much time in the office.  They have started enjoying new hobbies and exercising more with the time they are saving commuting into their offices, and are enjoying the time at home with their families. I have received calls from people wondering if it is possible for them to retire, and they are thinking that they would like to start taking social security now to fund an early retirement.

It is important to have a good understanding of how social security works before you make such an important decision.  Social security benefits are calculated based on lifetime earnings.  The Social Security Administration calculates your benefit based upon your 35 highest earning years, with a minimum of 10 years of work required for eligibility for benefits.  All past wages are indexed to today's wages to accurately reflect wage growth.  The Primary Insurance Amount if the benefit that you are eligible to receive when you reach your full retirement age.  

The actual benefit that you receive may not be your PIA.  Your PIA will be increased or decreased depending upon when you choose to begin receiving your benefits.  Taking benefits before full retirement age will reduce your benefit, and waiting until after full retirement age will increase your monthly benefit up to age 70.  Starting at age 62, your eligible benefits will receive regular cost of living adjustments.

Spousal Benefits

Married people are eligible for benefits based on their spouse's work history.  The spousal benefit is 50% of the working spouse's earned benefit, but in order to be eligible for spousal benefits, the working spouse must be at least age 62 and already taking benefits. The non working spouse must also be 62 to begin taking spousal benefits. Even if you are divorced, you may be eligible to receive spousal benefit based upon your ex-spouse's earnings history.  Your marriage needs to have lasted at least 10 years, and you must be divorced for at least two years and still be single. You also need to be at least age 62, and not e.igible for higher benefits under your own work record.  Unlike spousal benefits for married couples, your ex-spouse does not have to have already filed for benefits for you to take these.

When Should You Claim Social Security Benefits?

You can claim benefits anytime between age 62 and age 70.  The amount of benefit that you will receive varies widely based on when you decide to start your benefits. If you claim at age 62, your basic benefit is reduced a fraction of a percent for each month you begin receiving benefits prior to full retirement age.  Taking benefits at age 62 can permanently reduce your benefit by up to 30%. If, however, you wait until your full retirement age, you will receive the full PIA that you have earned.  Your full retirement age changes based on the year you were born.  FRA is 66 for those born between 1943 and 1954, and increases by two months for every year after until it stops at age 67.  If you decide to delay benefits past your full retirement age, your benefits will permanently increase by 8% per year for each year that you delay with a maximum possible increase of 32%.  Once you reach age 70, you are required to file for benefits, and can no longer earn delayed credits. The best time to claim your benefits depends upon your personal situation and your health.  If you expect to live longer than average, your overall benefit will be greater if you delay claiming your benefits at the increased amount since you will receive this for a longer time. If you are in poor health, or need the money sooner, you will receive a smaller monthly benefit, but will receive it earlier to help fund your retirement living expenses.

Claiming Strategies for Married Couples

Since married couples can choose to receive their own benefit or a spousal benefit, they have more things to consider when determining the best strategy for filing for social security.  With the right strategy, the couple can maximize their benefits. In most cases, the lower earning spouse should begin collecting benefits early, while the higher earning spouse waits as long as possible. This allows the couple to receive some income while still maximizing the higher benefit for the other spouse.  In other situations, if the funds are not needed immediately, it may make sense for both to claim at age 70.  Other clients choose to take the benefits as early as possible, and may invest the benefits to try to maximize their return on these payments.

Making The Right Decision Based Upon Your Overall Retirement Plan

Social security strategies are complex, and working can also impact your benefits before your full retirement age.  Deciding when to claim social security benefits could be one of the most important retirement decisions that you make, and the choices you make are permanent.  It is a good idea to meet with a financial planner to see how much you have in savings, and what your retirement spending looks like before you decide on a claiming strategy.  It is important to take into account how social security benefits fit into your overall retirement plan.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.