This report was previously posted earlier this week but has been updated to take into account repercussions of the new two-year budget deal recently passed by Congress.
Whilst our primary duty at Kruse Asset Management is the management of client portfolios and producing optimal returns, our overlying ethos is helping people to reach their financial goals and ensure the retirement that they have always dreamed of.
As part of that, we often work with clients towards building a sustainable retirement roadmap (and we have most recently acquired software from RetireUp to help us with that process), and the topic of Social Security is often discussed.
When would be the best time for someone to start claiming benefits? Does it make sense to work longer? What would my wife or husband be entitled were I to suddenly pass away?
Social Security is a huge program, and unsurprisingly considering its size and scope, it can be hard to wrap your head around some of its complexities. This report though aims to clarify certain points though and help you to better understand your options with it comes to your Social Security benefits, and what is best for you.
How Does The New Budget Deal Change Things?
Bear in mind that this budget still needs to pass the Senate (and Senator Rand Paul has already vowed to try and filibuster the deal) before it can be signed into law for Obama. While the bill is looking likely to pass, it isn’t wholly guaranteed.
What part of the budget though affects Social Security and recipients?
One section of the legislation is titled “Closure of unintended loopholes.” The document summary explains that this provision “closes several loopholes in Social Security's rules” regarding filing a restricted claim for spousal benefits and suspending benefits “in order to prevent individuals from obtaining larger benefits than Congress intended.”
There are two effective dates in the proposal. One protects anyone who is 62 or older by the end of this year to continue to claim just spousal benefits when they reach full retirement age. But that assumes their spouse has actually claimed and is receiving Social Security benefits.
However, if one spouse has filed and suspended benefits in order to trigger a spousal benefit, all bets are off.
That's because a separate part of the proposal would eliminate the current usage of file and suspend (covered later on in this report) that allows someone who has reached full retirement age to file for Social Security benefits but does not collect them in order to trigger benefits for a spouse or dependent child. Meanwhile, the retiree's own benefit would continue to grow by 8% per year up until age 70.
Will Senate Majority Leader Mitch McConnell give Rand Paul the opportunity to filibuster though?
Originally, the proposed legislation would change the rules for filing and suspending benefits starting six months after the legislation is enacted and it seemed as if it would affect everyone — even those who have already filed and suspended benefits. Under the new rules, if someone files and suspends their retirement benefits, it would also stop any spousal or dependent benefits on their record until that person actually began collecting Social Security benefits.
However, Bloomberg reported yesterday that “the deal was amended so it affects only retirees who file for benefits in the future, and the change wouldn't go into effect for six months.” The article also said, “That means older workers who want to use the strategy could still do so until early next year."
Furthermore, it appears that anyone who turns 62 in 2016 or later would lose the right to collect just spousal benefits because the new provision extends the “deeming” rules that require those who are entitled to both a retirement benefit and a spousal benefit to file for both and be paid the higher of the two amounts.
Under current law, once you reach the full retirement age of 66, you can restrict your claim to spousal benefits and collect half of your mate's full retirement age benefit while allowing your own retirement benefit to continue to grow by 8% per year up to age 70 and then switch to your own benefit. The new rules would eliminate that option.
At this point, it appears that widows and widowers will still have the option to claim a survivor benefit first and switch to a retirement benefit later, or vice versa, in whichever order would result in a larger benefit.
There are still many unanswered questions at this point as to how things may change, and we will endeavor to post updates as information becomes known.
Things You Should Know About Social Security
Don't Assume You Know About All Your Benefits
Social Security has so many different benefits (and various provisions and conditions about these benefits) that you may actually be entitled to benefits you didn't even know existed. Conversely, you may be ineligible for benefits you thought would soon be yours.
The Timing of Benefit Collection Is Important
If you are able to collect two benefits, you'll want to take one early and the other later. Why? Because you can't collect two benefits at once, just the larger of the two or something very close to that. By timing your benefit collection, you can take one benefit early while letting the other benefit's starting value grow.
There Is No Advantage to Waiting Past 70 to Take Your Retirement Benefit
If you wait to collect your retirement benefit beyond full retirement age (FRA) (currently 66 years old) it will be increased due to the Delayed Retirement Credit. This credit applies only to retirement benefits and ends at 70. There is no incentive beyond FRA to wait to collect either spousal or widower benefits.
Married? You Can Get Maximum Spousal and Retirement Benefits
If your husband, or wife, files for their retirement benefit (regardless of whether they suspend it), you can, after reaching FRA, file just for a full spousal benefit (half of your spouse's full retirement benefit) and then wait until 70 to collect your largest possible retirement benefit.
Survivor Benefits Are More Generous than Spousal Benefits
Apart from any reduction for taking widower benefits early, your widower benefit will equal at least what your spouse was collecting as a retirement benefit. Child survivor benefits are also larger than child benefits paid to young or disabled children of retired workers.
Working Longer May Mean Higher Benefits for You and Your Family
For many of you—and certainly all of you who will earn above Social Security's maximum taxable earnings level—the longer you work, the higher will be your Primary Insurance Amount (PIA), which determines your own retirement benefit and the auxiliary benefits available to your spouse, ex-spouses, and young and disabled children.
This reflects Social Security's Recomputation of Benefits provision that replaces one of your previous 35 highest-earnings years with your latest year's earnings if it's higher. Any new top-35 earnings year, even one occurring when you're 90, will raise your earnings record and thus your PIA and all related benefit entitlements.
Your Parents May Be Entitled to Survivor Benefits
If your parents are aged 62 or older and dependent on you for at least half of their financial support, they can collect parent benefits after you die. One surviving parent would receive 82.5% of your PIA. If both parents qualify and are alive, each would receive 75% of your PIA. Both cases though would be subject to the Family Maximum Benefit (FMB).
Divorced? Think Before Remarrying
If you get divorced and then remarry, you will not be able to receive a spousal benefit based on your ex's work history as long as you remain remarried.
If Your Spouse Dies Before Collecting Retirement Benefits
If your spouse dies before the age of 62, a specially calculated PIA will determine your widower benefit. If your spouse dies between 62 and FRA, the benefit will be based on their full retirement benefit. If they die later, the benefit will be based on whatever retirement benefit they were entitled to, including any Delayed Retirement Credits.
Despite Social Security being a fairly complex process for many, it remains the case that many people have firm ideas of what they may or may not be entitled to after retirement. Unfortunately though, some of these perceptions may not be correct.
As such, below we dispel some of the commonly held Social Security myths…
10 Common Social Security Misconceptions
10. You should claim benefits early before the system runs out of money
The facts: Even if Congress does nothing between now and 2034 when the Social Security trust funds are projected to run dry, there would still be sufficient funds from FICA taxes to fund about 75% of promised retirement and survivor benefits. However, it is highly unlikely that lawmakers would let the most popular and successful government program in U.S. history reach that point.
Future changes, while not necessarily popular, and which are likely to take effect decades from now, could include raising the full retirement age, boosting payroll taxes or altering the benefit formula.
9. It doesn’t matter when you start claiming benefits.
The facts: The age when you claim benefits does make a huge difference in the amount you will receive for the rest of your life.
Claim Social Security at the earliest age of 62 and you will receive a permanent 25% cut in retirement benefits compared to full benefits at 66 – a difference of just four years. Wait until 70 to claim benefits and you’ll receive a 32% boost above your full retirement age amount – doing so then, rather than at 62, would mean a 76% increase in monthly income.
Looking at the chart below, there’s a clear benefit to waiting until later to begin taking your benefits.
8. Working while collecting your Social Security benefits has no impact on the amount you’ll receive.
The facts: Unfortunately not! If you claim benefits before your full retirement age and continue to work, your benefits will be temporarily reduced by $1 for every $2 you earn above $15,720 in 2015 and 2016. There is a higher earnings cap in the year you reach full retirement age.
If you plan to keep on working, it is better to wait until the magic age of 66 to claim benefits when earnings restrictions disappear.
7. Everyone should file and suspend at 66.
The facts: Although filing and suspending is a powerful strategy that can allow a married worker to trigger benefits for a spouse or minor dependent child while the worker’s own retirement benefits continue to grow until age 70, it is not appropriate for everyone.
Each person is allowed one choice when claiming Social Security. If you file and suspend, it would preclude you from using a different strategy of restricting your claim to spousal benefits which might be a better choice in some cases.
6. Claim spousal benefits early and switch to your own maximum retirement benefit at 70.
The facts: No. If you claim Social Security benefits before full retirement age, you can’t select which benefit to receive. You must collect your own reduced retirement benefits first and would receive an additional amount only if your spousal benefit (also reduced for early claiming) were higher than your own. But if you wait until 66, you can restrict your claim to spousal benefits, receiving half of your mate’s benefit amount, and switch to your own larger benefit at 70.
5. Divorced spouses are out of luck when it comes to collecting on an ex.
The facts: Benefits available to divorced spouses were among the least understood Social Security benefits, according to a recent Nationwide survey.
As long as you were married at least 10 years, are divorced and currently single, you can collect on a former spouse’s earnings record. However, basic claiming rules apply. For some, waiting until 66 to file a restricted claim to spousal benefits while allowing their own benefits to earn delayed retirement credits may be a smarter move.
4. There is no magic claiming strategy to maximize benefits for unmarried individuals.
The facts: On the contrary, file and suspending benefits at 66 can be a powerful strategy for singles because it acts as an insurance policy. At any point up to age 70, an individual can request a lump sum payout of benefits back to the date of suspension instead of the 8% per year increase. Normally, maximum lump sum retroactive payments are limited to six months.
3. If a worker delays collecting Social Security until 70, his spouse will receive half of his maximum benefit.
The facts: No. The maximum spousal benefits is worth 50% of the worker’s full retirement age amount. But if the worker delays benefits until 70 and later dies, the remaining spouse will collect a survivor benefit worth 100% of what the deceased worker collected — including any delayed retirement credits.
2. Social Security benefits are not taxed.
The facts: Depending on income, it is unfortunately the case that up to 85% of Social Security benefits may be taxed. Individuals with modified adjusted gross income, which includes tax-free interest, above $34,000, or married couples with MAGI of $44,000 or more, pay the maximum tax on benefits.
1. A Social Security claiming decision is forever.
The facts: Try and relax – an ill-judged or mistimed claiming decision can be reversed.
If you withdraw your application for benefits within a year of first claiming and repay all the benefits you have received, you can wipe the slate clean and receive higher benefits at a later date. If you miss the 12-month window, you can suspend benefits at 66, but not repay them, and earn delayed retirement credits of 8% per year up until age 70.
Did You Know?
In 2015, over 59 million Americans will receive almost $870 billion in Social Security benefits
As of June 2015, the average monthly benefit for retired workers is $1,335
In 1940, the life expectancy of a 65-year-old was almost 14 additional years; today it is almost 21 years
By 2035, the number of older Americans will increase from 48 million today to 79 million
There are currently 2.8 workers for each Social Security beneficiary. By 2035, there will be 2.1 workers for each beneficiary
If you’d be interested in discussing your financial future with regard to your retirement and beyond, even constructing a retirement roadmap to better understand what you can afford, then get in touch with us at Kruse Asset Management by phone at (312) 775-6000 or via email at email@example.com