Claiming Benefits: How to claim, when to claim and how benefits are calculated

Transcription

1 Claiming Benefits: How to claim, when to claim and how benefits are calculated

2 Almost 58 million Americans collect Social Security benefits each month.1 By far the greatest numbers of Social Security beneficiaries are retirees and their dependents, making up 70 percent of total benefits paid. 2 There are two requirements for collecting retirement benefits: a beneficiary must meet both a minimum work requirement and a minimum age requirement. Meeting the minimum age requirement for eligibility At its most basic levels, there are three retirement ages to keep in mind with Social Security. Early retirement occurs at 62. Claiming early permanently reduces benefits (as much as 30 percent). Full retirement age (and therefore full benefits) is on a sliding scale that is included below. The last age to keep in mind is age 70. Benefits can be claimed at any time between 62 and 70 years of age. There is no benefit to waiting until after age 70. We attain Social Security age on the day before our 62nd birthday. The earliest a beneficiary can collect Social Security is the first full month of having reached 62, so for instance if his or her birthday is on June 11, he or she will not be eligible for Social Security until July. The one exception is if the individual turns 62 on the first or second day of the month. The reason for this is sketched out in Social Security: The Inside Story by Andy Landis who swears that Social Security employees believe it has something to do with a court case in the 1800s in which a man claimed he had attained a certain age by the day before his birthday. Having been born on the first day of the month, he wanted payments for the month prior and claimed that by the day before his birthday he had actually lived a year from his previous birthday. The judge agreed and since then all federal agencies recognize that individuals attain an age the day before their birthdays. Year of Birth Full Retirement Age (FRA) 1937 or earlier and 2 months and 4 months and 6 months and 8 months and 10 months and 2 months and 4 months and 6 months and 8 months and 10 months 1960 and later 67 Claiming Social Security benefits prior to FRA, you ll see a penalty for every month earlier than full benefit age. *If you were born on Jan. 1, refer to the previous year 1. Social Security. Social Security Basic Facts. February 7, /basicfacts.htm 2. Social Security. Social Security Basic Facts. February 7, /basicfacts.htm 2 Page

3 Meeting the minimum work requirement for eligibility A minimum of 10 years of paying into the system (through work) is required to be eligible for receiving payments. Eligibility is determined by how many work credits have been earned. The maximum number of credits a beneficiary can earn is four credits per year. Each credit represents $1,130 (in 2012) in earnings. To be eligible for Social Security retirement benefits the beneficiary must have worked 40 credits (or 10 years) under the Social Security system for birth dates in 1929 or later. (Some people will not have worked under the Social Security system because they worked jobs for certain state or municipal governments. For instance until 1984, federal jobs were covered under the Civil Service Retirement System and not by Social Security.) 3 Knowing what benefits to expect Prior to 2011, Social Security sent out a statement notifying individuals of their projected benefits but due to budget constraints that program was halted in the spring of With a valid address, Social Security number, and having reached at least 18 years of age anyone can create an account with my Social Security at to get an accurate idea of how much their Social Security benefits will be. Social Security also has some calculators at for determining a benefit estimate but the my Social Security site is linked to the beneficiary s earnings record whereas the other calculators require a beneficiary to enter his or her earnings. Social Security may look at 10 years of earning to determine eligibility but it looks at the best earnings years for 35 years to determine the amount of an individual s benefits. This is how that works: Ginger worked for 10 years for a dot com. Because she had a decent amount of money saved up she decided to quit work and hang out at the beach for several decades. She s still eligible for Social Security because she paid into it for the minimum period of time but because Social Security is based on the highest earning years through a 35 year period, every quarter of the remaining 25 year period that Ginger did not work will count as zero. All income up to $113,700 (for 2013) is subject to Social Security tax. Therefore, Ginger will have Social Security earning of no more than $113,700 each year (and actually quite a bit less as the amount increases each year) regardless of how much additional income she had beyond that amount. What this means is that if Ginger retires in 2013 and then earns no additional income until her retirement, she will have a maximum earnings record of $113,700 and 25 years of earnings of nothing averaged out over 35 years. Ginger s earnings won t be exactly the maximum earnings because Social Security uses a wage index to compute a person s retirement benefit using a national average so that an individual s wage record reflects the general rise in the standard of living. 4 The wage index used by Social 3. Social Security. Retirement Planner: Federal Government Employment Social Security. National Average Wage Index AGING ( Page 3

4 Security still leaves recent wages as the highest wages. If an individual decides to retire at 60, just 2 years short of early retirement age, he or she will have to wait until 62 to collect but in addition, most of us earn progressively more each year so that he or she may be depriving their own earnings record of its higher earning periods. Claiming benefits Deciding when to apply for Social Security benefits is a Maximizing complicated decision that requires a look at who else might benefits apply on an individual s benefit, whether or not a worker can requires thinking apply on someone else s benefits, family history, work history about not only and even the type of work a worker does. The people who when to start taking work at Social Security can provide answers but they cannot advise on decisions about maximizing benefits. That s why benefits but also it s often a good idea to hire a financial advisor to help look at what type. the various scenarios. Getting good advice on Social Security has the potential of increasing Social Security benefits by $100,000 or more over the lifetime of the benefit. But too many financial advisors simply don t appreciate that their advice should go beyond claiming early and investing the money, a strategy that might result in the loss of a tremendous amount of money over the long run. 5 Over 70 percent of retirees are currently collecting reduced benefits because they elected to start receiving Social Security prior to their full retirement age, 5 according to James Mahaney, co-author of Innovative Strategies to Help Maximize Social Security Benefits. Mahaney considers underestimating the real value of Social Security as the number one mistake people make about Social Security. 6 When it comes to strategies for married couples, divorced individuals and widows or widowers, maximizing benefits requires thinking about not only when to start taking benefits but also which type to take first. Note: Social Security accounts for approximately 70 percent of total income for households with at least one person 65 years or older. Several things should be assessed before making the decision as to what age to claim benefits. 5. Prudential. Innovative Strategies To Help Maximize Social Security Benefits James Mahaney. prudential.com/documents/rp/innovativesocialsecuritynov2012.pdf?doc=innovativestrategies1112&bu=gc&ref=newsroomfs&cid=114. The Poverty of Widows: How do they become the poor? Lee, Youngae, Lee, Jinkook. princeton.edu/papers/ Prudential. Innovative Strategies To Help Maximize Social Security Benefits James Mahaney. prudential.com/documents/rp/innovativesocialsecuritynov2012.pdf?doc=innovativestrategies1112&bu=gc&ref=newsroomfs&cid=114. The Poverty of Widows: How do they become the poor? Lee, Youngae, Lee, Jinkook. princeton.edu/papers/ Prudential. Innovative Strategies To Help Maximize Social Security Benefits James Mahaney. prudential.com/documents/rp/innovativesocialsecuritynov2012.pdf?doc=innovativestrategies1112&bu=gc&ref=newsroomfs&cid=114. The Poverty of Widows: How do they become the poor? Lee, Youngae, Lee, Jinkook. princeton.edu/papers/ Page

5 Life Expectancy One consideration to take into account is how long an individual might live. Obviously, no one has an exact date but it s possible to get a rough idea from data collected by the Social Security Administration that found that: A 65-year old man today can expect to live, on average until age 84. By the same count, a 65-year old woman today can expect to live to age 86 on average. Even more importantly one out of every 10 beneficiaries will live past age 95. It s significant to remember that the people who collect too early and live 30 years or longer past their retirement age may have exhausted all their other benefits and find that Social Security has become their sole source of income. Those people will be more likely to find that the impact of an early retirement decision is a benefit too small for a comfortable life, while those who die too early to break-even likely won t care. A simple Life Expectancy Calculator is available online at The calculator helps to figure out how long a person might live based on their age and gender. The Charles Schwab website 8 graphs the correlation between when a person begins to claim benefits and how long they must live in order to break-even, that is reach the age when two totals of life time benefits at different ages become equal to each other, and then to begin to lose ground. So then the question should be, when is the break-even point? It s not as far away as might be thought. For instance: Peter Brady would like to retire at age 62; he goes to a financial planner to decide if it might make more sense for him to begin early rather than to wait until his FRA at age 66. His financial planner crunches the numbers and discovers that if Peter waited until age 66 rather than filing at 62, he would break-even somewhere between 77 and 78 years of age. If Peter waits until age 70 to begin collecting, his break-even point would be between 80 and 81. Note: There is no one age that makes sense for everyone. Family history, current health, being eligible to claim benefits on someone else s record and other criteria may make the decision to claim early a good decision for one person and a poor choice for another. When claiming early might make sense Most of us start out with a spotty earnings record and make progressively more money as we move up the corporate ladder. Suppose instead that a beneficiary managed to make the maximum wages of every year for at least 35 years. However unlikely that scenario is, the fact is retiring a few years earlier before collecting Social Security for that person is not likely to make that much of a percentage difference. That s an 8. Charles Schwab. When Should You Take Social Security. May 24, Rande Spiegelman. public/schwab/resource_center/expert_insight/retirement_strategies/planning/when_should_you_take_social_security.html AGING ( Page 5

6 extreme example not likely to affect the majority of us but claiming early isn t always a bad idea. That s why it s a good idea to have an understanding about how a decision either way is likely to impact the beneficiary and the beneficiary s family. Dependent children Generally, the longer an individual puts off collecting Social Security the higher the benefits. The break-even point is the point at which the total benefits collected as the result of waiting catch up in value to the total benefits collected at an earlier age for instance the value at which higher payments received by waiting until age 66 is equal to the value of beginning at age 62. The drawback is that once a person reaches the break-even point, the early claimants lose money every monthly payment after that. If an individual lives to the age of the average retiree based on Social Security s calculations the two should balance out. In other words, the higher monthly payment for a shorter period of time should amount to the same amount of money as the lower payments for a longer period. But the break-even point is a moving target that needs to take into account not only the worker s lifetime benefits but also the worker s family benefits. About 4.4 million children receive Social Security benefits each month because one or more of their parents is either deceased, retired or disabled. 9 In addition, any spouse caring for any child receiving benefits is also eligible for benefits. Say an individual has children later in life. At 62 years of age with a child or two still at home (or grandchildren in some cases), it may actually make more sense to begin collecting Social Security rather than wait for FRA or beyond because the decision no longer involves just the individual but also potentially the spouse and child or children. 10 Children can collect Social Security benefits if they are the biological, adopted or dependent child or the stepchild of: A parent who is disabled and entitled to Social Security benefits; A parent who is retired and entitled to Social Security benefits; or A parent who has died after working long enough in a job where he or she paid Social Security taxes. The requirements for the child are: The child must be unmarried (although not always if the child is disabled); The child must be under 18 or else 19 or younger and a full time student attending school no higher than grade 12; or The child may be 18 or older and disabled if the disability occurred before age Social Security Administration. Benefits for Children. Publication No PBS NewsHour. When it might actually make sense to take Social Security early. June 24, Laurence Kotlikoff. 6 Page

7 Waiting until Full Retirement Age Full Retirement Age (FRA) is the age someone can receive full benefits. While it s possible to collect benefits earlier than FRA, prior to FRA, individuals receive a smaller percentage of their insurance benefit as do any family members claiming on the worker s benefit. The table below (from the Social Security website) indicates the FRA for each birth year and the penalty for taking retirement or spousal benefits at age 62 (the earliest age at which an individual can collect) rather than at FRA. The penalty for early retirement decreases as the worker ages past 62. For a detailed listing of reductions go to and click on the birth year. Year of birth Full Retirement Age (FRA) Percent reduction if taken at age or earlier % and 2 months % and 4 months % and 6 months 22.50% and 8 months 23.33% and 10 months 24.17% % and 2 months 25.83% and 4 months 26.67% and 6 months 27.5% and 8 months 28.33% and 10 months 29.17% 1960 and later 67 30% Jonas FRA is age 66 but he lost his job and was forced to take Social Security benefits at age 62. If he had waited until age 66 his benefits would have been $1,000 a month, but by taking early retirement he has permanently reduced his benefit by 25 percent to only $750 a month AGING ( Page 7

8 When claiming benefits early isn t a permanent decision If Jonas suddenly strikes it rich with the lottery or finds a job, he has the option of withdrawing his Social Security claim, paying back the benefits he (and any family members might be claiming on his record) before the end of the first year of his claiming benefits. He would also need to pay back any voluntary tax withholdings, Medicare premiums or garnishments 11 a lump sum amount in the range of thousands of dollars. If someone other than Jonas receives benefits based on Jonas application, Jonas would need written consent before he could withdraw his claim. On the other hand, say that Jonas reached the age of 66 before claiming. He opened up his claim and took a couple payments but through an inheritance, Jonas suddenly doesn t need to collect Social Security for a few years. Because Jonas reached his FRA, he has the option of suspending his benefits up to age 70. This option is often used by beneficiaries to maximize their benefits (we ll get into that in a little while). Beneficiaries who want to withdraw their claims can do so by filling out form SSA- 521 and include the reason for withdrawing the application on the form. Social Security will notify the beneficiary about the amount needed to repay to complete the withdrawal. Some beneficiaries use what is called the Reset as a way to use that regular pay check without a permanent reduction. 12 The way that the Reset works is a beneficiary claims benefits within the first 12 months of being eligible for Social Security and pays the no-interest loan back within 12 months. The outcome is that the beneficiary now has a higher yield benefit and may have received a tax credit for the year. On the other hand for every year after FRA, a beneficiary s benefits increase by 8 percent until age 70 so that a Social Security benefit may end up worth up to 132 percent of a claimants FRA benefit. No matter which strategy is used to maximize Social Security, putting off collecting benefits after age 70 costs the beneficiary money that cannot be reclaimed. Maximizing your benefits Social Security accounts for 40 percent of the average individual s retirement benefits. Even so, most people do not understand how those benefits work and as a result they leave money on the table that would help them maintain their lifestyle during retirement. 13 Thanks in part to the near extinction of employer pension plans and 11. Social Security Administration. Retirement Planner: If You Change Your Mind Social Security: The Inside Story Edition. Andy Landis. 13. Prudential. Innovative Strategies to Help Maximize Social Security Benefits James Mahaney. 8 Page

9 the switch to leaving that burden with the individual, Social Security has become a valuable retirement asset still largely ignored. If you re a Baby Boomer, chances are you haven t planned how to claim your Social Security benefits. A survey by Securian Financial Group found that less than 20 percent of Baby Boomers had made any decisions about Social Security. 14 Those individuals choosing to plan their Social Security benefits are more likely to take a more DIY approach. But a financial advisor can help realize specific goals that may be less obvious such as maximizing the amount of money a couple has while both are still alive or creating the biggest survivor benefit for after one spouse dies. Large financial institutes have taken note of the DIY culture and there are some surprisingly good tools out there created by just the folks who are hoping you ll come looking to them for help. 15 While single people really only have the option of taking their retirement now or later, there are by some counts, 81 age combinations offering 729 options for married couples who have reached full retirement age. 16 Note: Those benefits may also extend to some same-sex couples. The Supreme Court recently declared a key provision in the Defense of Marriage Act (DOMA) to be unconstitutional, clearing the way for same-sex couples that live in states that recognize their marriages to receive federal benefits and protections that were previously denied them. 17 Those benefits include Social Security, Medicaid and Medicare. If the couple lives in a state that does not recognize same-sex marriages from another state, those same benefits may continue to be denied them. 18 This is one example in which living in the wrong state could cost a couple thousands of dollars a year in survivor or other family benefits. There s a whole industry built around finding ways to get the most out of Social Security s retirement benefits. As noted before, those strategies rely on the individual being married, widowed or divorced (to collect spousal benefits for either married or divorced spouses, the marriage must be for have lasted at least 10 years). This paper will concentrate on strategies for married couples. See Survivor Benefits: Social Security s Life Insurance for Surviving Spouses, Children and Parents. 14. Sucurian Financial. How much will I get? Securian`s study of boomers` Social Security strategies 15. Wall Street Journal. Bolstering Your Benefits. Kelly Greene. March 15, html 16. Social Security Timing. When Should I Elect Social Security. Joe Elsasser ElderLawAnswers. Implications of the Supreme Court s Gay Marriage Decision for Senior Clients U.S. News. Supreme Court Ruling Creates Confusion Over Social Security Benefits for Same-Sex Couples. Phillip Moeller. July 1, AGING ( Page 9

10 File and Suspend A typical strategy for Social Security claiming involves file and suspend. It allows a couple to make use of spousal benefits while increasing both spouses own benefits. Leroy Gibbs is at his full retirement age of 66 but he would like to wait until age 70 to begin collecting his benefit. Leroy can apply for benefits and suspend in the same move. For example, at age 66 Leroy would be eligible to collect $2000 a month. But if he waits until age 70, he could collect more than $2640 a month in benefits. By using the file and suspend strategy Leroy s wife Abby is then able to file for spousal benefits. This is beneficial to the Gibbs since Abby is also eligible as a worker and would receive $1000 a month on her own benefit, she can continue to allow her own benefit to increase each year until age 70 just as Leroy s will but by taking spousal benefits at her full retirement age, also 66, she can collect half of Leroy s benefit or $1000 a month. Then at age 70, her benefit will have grown an additional 8 percent per year for each year she delays collecting, in this case 132 percent of her full retirement benefit. Abby could also choose to collect her own benefit at age 66 and then when Leroy reaches age 70, collect spousal benefits on Leroy s benefits ( one half of his benefits). This is why it becomes necessary to have a financial planner go through all the scenarios prior to claiming benefits. To request suspension of benefits including any benefits already due if a determination about benefits has yet to be made, call the Social Security Administration at (TTY ) or visit a local Social Security office. Requests can be in writing or by phone. Social Security pays benefits a month after they a due. If a suspension request is made for benefits already being paid in June, the June payment will still be made in July. Workers enrolled in part B Medicare benefits will receive a bill for future benefits. Note: No matter whose record the benefit is based on, the amount of the benefit is determined by the age of the individual claiming. Filing a restricted (free spousal) application As alluded to above, one strategy is to have a spouse claim spousal benefits rather than collect on their own benefit. To do so though requires reaching FRA for both spouses and for the spouse whose benefits the spousal benefits will be based on to file for benefits (although he or she can suspend after filing). Prior to FRA, Social Security will assume that the worker is claiming on their own benefit. Filing for spousal benefits on a restricted application allows the spouse to continue growing their own benefit through delayed retirement credits. The spousal benefit will equal half of the other spouse s benefit at FRA. It s not possible to have both spouses file and suspend and then collect spousal benefits. The benefit is only available once per couple. For those couples using any method that includes filing and suspending, it s 10 Page

11 important to pay Medicare Part B premiums out of pocket or Social Security will pay the benefit and consider that the benefit waived rather than suspended. 19 To apply for the restricted application, check the box on the online application ( gov/iclm/rib ) that says If you are eligible for both retirement benefits and spouse s benefits, do you want to delay receipt of retirement benefits? Those individuals without online access may have to speak with a supervisor when they go in person or to a local Social Security office or call. Call to make an appointment and to avoid any loss of benefits. If you are deaf or hard of hearing, call their toll-free TTY number, If a couple takes into account, the survivor s benefit, it s often more beneficial to begin collecting the lower Social Security benefit while allowing the higher benefit to continue growing. At the death of the primary breadwinner (the assumption here is that the primary breadwinner and the husband are one and the same) the lower benefit spouse will receive an increase to a much higher benefit, allowing Social Security to act as a life insurance policy. 20 Again, this is why it becomes imperative for couples to seek counsel from a financial advisor before making a decision on claiming benefits. There are a variety of Social Security calculators available as well. They range in price from free to a modest price. There is a listing of questions to consider and a list of free and fee-based calculators with comparisons at moneyover55.about.com/od/socialsecuritybenefits/tp/best-social-security- Calculators.htm. Lump sum Social Security payout The file and suspend option leaves open yet another option. Instead of choosing to take the larger benefit later on, workers can file and suspend when they reach FRA and then allow months or even years to go by. At 70 years of age or younger, a worker can then go and request a lump sum payment from Social Security equal to the amount of benefits he or she has forgone for up to 47 months. This amount is taxable, however, and Social Security does not pay interest on the amount. To receive a lump sum payout, call the Social Security Administration at (TTY ) and ask that the benefits be started and provide a date from which to start (as far back as when benefits were suspended). 19. Prudential. Innovative Strategies to Help Maximize Social Security Benefits James Mahaney Prudential. Innovative Strategies to Help Maximize Social Security Benefits James Mahaney AGING ( Page 11

12 About AgingOptions AgingOptions is a holistic elder care company helping families plan for, pay for, and coordinate the long-term care of elderly loved ones. AgingOptions services are geared towards retirees and those thinking about retirement and concerned about: Losing independence & having to move to a nursing home. Losing your assets to uncovered medical or long term care costs. Becoming a burden on your loved ones. AgingOptions Sixth Avenue South Federal Way, WA PROTECTING ASSETS PRESERVING QUALITY OF LIFE AGING ( ) Info@AgingOptions.com 12 Page