Maximizing Social Security – Having the Right Strategy Can Improve Your Retirement Income

Social Security is an important income source for most retirees. Yet, people tend to overlook how their benefit is calculated and often do not carefully consider how their filing decisions will impact their income, and the income of their spouse, over the entire length of their retirement.

It pays for physicians, dentists, and other healthcare employees to consider maximizing their lifetime benefit by delaying the start of Social Security benefits and using one of the filing strategies.

The average retiree depends on Social Security for 41{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of their income, and receives a monthly benefit of $1,294 per month, or $15,528 per year, according to the Social Security Administration. For a high-income earner such as a physician, the maximum benefit if they file at age 66 in 2014 is $2,642 per month, or $31,704 per year. If the same person waits until age 70, they will receive $41,849 per year. The accumulated difference over a lifetime can be more than $100,000 in benefits.

Social Security generally refers to the federal Old-age, Survivors, and Disability Insurance (OASDI) program, and is funded by an employment tax. Employers and employees each currently pay a tax rate of 7.65{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} on wages up to $117,000. Self-employed individuals need to pay both the employer and employee portion of the tax (a total of 15.30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}).

You generally need 10 years of work to qualify for retirement benefits, although you qualify for disability and survivor benefits earlier. Your highest 35 years of earnings, after adjustments for inflation, are used to calculate your retirement benefit.

The Social Security Administration (SSA) assumes that you will retire at your ‘full retirement age.’ This age is 66 if you were born in 1954 or before. If you were born between 1955 and 1959, full retirement is between 66 and 67. If you were born after 1960, the full-retirement age is 67, although there are discussions of raising this age in the future.

You are eligible to take Social Security retirement benefits as early as age 62; however, by doing so, your benefits are reduced by about 25{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for the rest of your life. You can also delay benefits until age 70, which will increase your benefit by 8{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for each year you wait. Increases in your benefit after full retirement are called ‘delayed-retirement credits.’

Spouses are eligible to receive Social Security benefits based on either their own employment record or 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of their spouse’s, whichever is higher.

Here’s an example of a married couple, John and Ann. John is eligible for a benefit of $2,236 per month at his full retirement age. Ann is eligible for a benefit based on her own work history or a spousal benefit equal to 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of John’s benefit, whichever is greater. In this case, 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of John’s benefit is $1,118, and is greater than Ann’s own benefit of $853 per month at her full retirement age. Together, John’s benefit and Ann’s spousal benefit will be $3,354 per month.

To decide when you should have Social Security start your benefit, you need to carefully weigh how the rules of the program overlap with your own personal situation. According to the 2012 Annual Statistical Supplement, 37{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of people claim benefits at age 62, 6{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} at age 63, 7{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} at age 64, 12{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} at age 65, and 31{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} at age 66. The remaining 7{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} claim benefits after full retirement age. Very few people take advantage of delaying Social Security benefits. You may want to consider the following factors before making a decision about filing for benefits:

• Your health. If you have a serious illness or expect to have a shorter life expectancy based on your family history, you may want to consider taking benefits early. But, on average, most people who reach age 62 will live into their 80s. According to the Society for Actuaries, at age 62 men have a 53{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} probability of living to age 82, and women have a 63{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} probability of living to age 82.

• Your marital status. If you are married, you can boost your own benefit and the benefit of your surviving spouse by delaying Social Security payments. If you are 62 and married, there is an 83{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} probability that one of you will live to be 82 and a 33{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} probability that one of you will live to be 92. There are a number of filing strategies that can help you increase your lifetime benefits.

• Your personal needs and plans. If you have lost your job and cannot find a new one, you may be forced to take Social Security early. It is also possible that you may find your work satisfying and would like to continue working until age 70 and beyond. In that case, you may want to delay Social Security benefits as long as possible.

• Your break-even point. Eventually, waiting to receive higher benefits in the future means forgoing current benefits. It may be 15 or more years before you break even. Calculating the number of years until your break-even point can help put decisions to file into perspective.

If you are married, there are number of different filing strategies that can significantly boost your Social Security benefits over your combined lifetimes. Figuring out which options might be best can be challenging, and it is recommended that people seek out assistance. There are five basic factors to consider:

• You can claim a Social Security benefit based on your own work record or your spouse’s work record. The maximum spousal benefit is 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of what your husband or wife will receive. Divorced spouses who were married for at least 10 years are also eligible for spousal benefits.

• A widow or widower who starts collecting survivor benefits at the full retirement age or older will generally receive 100{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the deceased spouse’s benefit. If you begin survivor benefits between age 60 and your full retirement age, your benefit will be reduced.

• You cannot collect your benefit and your spousal (or survivor’s) benefit at the same time. You will receive the larger of the two if you are entitled to both benefits. It is also possible to switch between your own benefit and your spousal benefit under a variety of circumstances.

• You cannot apply for a spousal benefit until your husband or wife has filed for Social Security.

• You can file for benefits and then suspend the benefits at full retirement age. While your benefits are suspended, your husband or wife is still eligible for spousal benefits. While your benefits are suspended, you accumulate delayed retirement credits.

Pre-retirees may want to examine various filing strategies to maximize their retirement income based on their particular circumstances. There are three basic strategies: file and suspend; claim some now, claim more later; and combined strategies. Deciding which strategy maximizes benefits depends on the relative age of the couple, whether one person earned substantially more than the other, and how long they want to work.  Additional information on spousal benefits and filing and suspending is available at www.ssa.gov/retire2/yourspouse.htm.

Social Security Benefit statements are no longer sent out each year, but everyone can check their future benefit estimate online at www.ssa.gov. Healthcare organizations can help their employees by encouraging them to check their Social Security benefits and their filing options. v