June 9, 2014 -- Many people are in a headlong rush to claim their Social Security benefits as soon as possible but, depending on their situation, this haste may be making waste.
Precisely when you should claim these benefits is a complex question. The answer depends on various personal factors and running the numbers to assess the upsides and downsides of waiting.
Normally, eligibility for benefits begins at age 62. Many people, unaware of the downsides of jumping too soon, claim as soon as they reach this age. Yet they might not be so quick on the trigger if they realized how much money their haste was costing them. The later you claim – until age 70, when benefits max out – the larger check you get each month.
The decision on waiting involves factors that everyone should consider as they project their various retirement income streams. These factors include:
• Your financial resources. If you have accumulated assets to draw from, it’s easier to wait to claim the greater benefit. It’s important to have these assets because Social Security benefits alone won’t cover expenses for many people.
• Your health. If you’re in poor health, claiming earlier rather than later might make sense, as this reduces the chances that you will die without having claimed.
• Your goals. If you have entrepreneurial goals during retirement and plan to divert much of your assets toward those goals, you may need your Social Security benefits to live on. You must weigh the cost of waiting (lower benefits) against your chances of entrepreneurial success, the amount of income your enterprise is likely to produce and when this income is likely to start.
If you earn income after claiming benefits – from continuing to work in a job, from working in an existing business that you own or from a new business that you start - your benefits might be reduced, depending on your age when you claim. The amounts of these reductions depend on how much you earn and whether you’ve reached what’s known as your full retirement age.
If you were born January 2, 1943, through January 1, 1955, then your full retirement age for social security benefits is 66. If you’re younger than 66, your benefits will be reduced by $1 for each $2 you earn above $15,480. If you reach your full retirement age during 2014, your benefits will be reduced by $1 for each $3 you earn above $41,400 until the month you reach that age.
Once you’ve reached full retirement age and claim, your benefits won’t be reduced no matter how much you earn from your business.
I recently began working with a married couple all set to claim early. Their situation and the alternate strategy they ultimately developed illustrate some of the complexities involved and serve as an example of a way to win the game by understanding its myriad rules.
The man had been the primary income earner and had accumulated a much greater Social Security benefit than his wife. They would have enough money to sustain their lifestyle throughout retirement, primarily because of his pension and their savings. Yet his pension would end upon his death, so his wife wouldn’t continue to receive this money. Naturally, she was concerned about having to live on a reduced income should her husband die.
To maximize the couple’s Social Security benefits, I suggested that she claim her spousal benefit (not her own benefit) at her full retirement age of 66, and that the husband also claim at 66 but suspend his monthly benefit of $2,356 until he turned 70. He would then start taking his monthly benefit, which would have grown to $3,110 (not counting any cost-of-living increases) because of the wait – an additional $754 more per month. That means he would receive more than $135,000 in additional Social Security benefits over his life expectancy.
Claiming her spousal benefit instead of her own accomplishes two things. First, it allows her own benefit to continue to build until she reaches 70. What’s more, assuming that her husband dies first, she will be able to continue to receive his benefits (plus any additional credits he gained by suspending) after he dies.
You can also use suspension to grow your benefits after you’ve already started receiving Social Security checks. If you’re at full retirement age and have claimed benefits but haven’t reached age 70, you can suspend benefits and reapply when you turn 70 to get a larger check when benefits resume.
Of course, when running the numbers and deciding when to claim, you need to know exactly how much you’d receive at each age between 62 and 70. You can do this using the Social Security Administration’s retirement benefits estimator, entering your personal information to see the amounts you’d draw each month/year by claiming at different ages. This section of the site has other helpful tools, including a life-expectancy calculator.
Visiting the site regularly is a good idea for just about everyone, regardless of how far they are from retirement, so they can make sure they’ve received credit for all of their earnings. It’s far easier to identify lapses in credits and to get them corrected in the same year—rather than going back 20 years. And after all, the government is by no means infallible.
Many people incorrectly assume that the sooner they claim, the more money they’ll ultimately receive. To keep from leaving money on the government’s table – money you’ve worked hard for all of your adult life – take a hard look before you leap to claim benefits.
This column is the opinion of the author and in no way reflects the opinion of ABC News.
Byron L. Studdard, a CERTIFIED FINANCIAL PLANNER™ practitioner, is founder and president of Studdard Financial, LLC, a fee-only financial advisory firm in Sarasota, Fla., dedicated to helping clients build wealth, protect it and pass it on to future generations. Studdard has been listed in the Guide to America's Best Financial Planners (published by the Consumers' Research Council of America, an independent research organization). He can be reached at Byron@studdardfinancial.com. If you have a question for him, send him an email and he will try to answer it in an upcoming column.