https://www.nytimes.com/2021/09/01/your-money/social-security-when-to-collect.html?smid=url-share
RETIRINg
Susan B. Garland
Published Sept. 1, 2021Updated Sept.
3, 2021
Few retirement issues are as complex
and controversial as Social Security and the strategies people can use to
maximize their benefits.
So we were not
surprised that an article The New York Times published in June on how women can make the most
of Social Security generated many reader questions — some heated. It also
provoked a pushback from some readers who disagreed with experts’ advice that
individuals should wait as long as possible to claim benefits.
Likely to add to the
debate is a recent announcement that Social Security is expected to be insolvent a year earlier than
previously projected. Congress is likely to step in, many experts
say, and moves that beneficiaries make now to maximize their benefits will help
no matter what happens.
We are back to address several of your
questions. First, keep the Social Security basics in mind:
- You
are entitled to a full benefit at full retirement age, which is 66 for
someone born between 1943 and 1954. The full retirement age gradually
rises to 67 for those born in 1960 or later.
- You
can claim as early as 62, but the benefit will be reduced permanently by a
certain percentage for each month a beneficiary claims before full
retirement age. The benefit rises 8 percent for each year a beneficiary
delays claiming between full retirement age and 70.
- A
lower-earning spouse can collect a “spousal benefit” that is up to 50
percent of the higher earner’s full retirement benefit. A widow or widower
can collect up to 100 percent of the deceased spouse’s benefit.
Now, let’s get to your most-asked
questions.
Why not claim early
and invest the benefits in the markets?
This strategy is highly risky, said
Elaine Floyd, the director of retirement and life planning with Horsesmouth, a
New York company that trains financial advisers on Social Security strategies
and other issues.
A beneficiary who goes the investment
route, Ms. Floyd said, would need to reap “consistently high returns” and must
be disciplined enough to sock away the money every month. And if the
beneficiary is married and the higher earner dies first, the spouse would
receive a relatively low survivor benefit.
Ms. Floyd offered a hypothetical
beneficiary whose monthly Social Security benefit at full retirement age is
$3,000. Say the beneficiary claimed a reduced benefit at 62 and invested the
money, earning an inflation-adjusted return of 3 percent a year. By age 95, the
cumulative benefits and investments would be roughly $278,000 lower than if the
beneficiary had waited until 70 to claim the larger benefit.
“It’s really an apples-to-oranges
comparison,” she said. “An 8 percent retirement credit and lifetime income from
Social Security are the law, but investment returns are not that predictable.”
Why not claim early,
rather than draw down an I.R.A. and other savings?
It’s conventional
wisdom to delay tapping an individual retirement account, instead enabling it
to grow tax deferred. Roughly 40 percent of beneficiaries claim reduced Social
Security benefits at 62 or 63.
But many researchers
say reversing the order — living on retirement savings in the early years and
holding off on collecting benefits — is likely to increase monthly income over
a lifetime.
One reason, experts say, is the roughly
77 percent boost in benefits a beneficiary receives by claiming at 70 rather
than at 62.
Another is the difference in how I.R.A.
withdrawals and Social Security benefits are taxed. Individuals pay the
ordinary federal income tax rate on all I.R.A. withdrawals. But just 85
percent, 50 percent or none of their Social Security benefits are taxed.
The amount subject to tax depends on
your “provisional income,” which includes half of benefits and 100 percent of
nonbenefit income. The more I.R.A. income, the more likely you are to pay at a
higher marginal rate and be taxed at the 85 percent threshold.
With this formula in mind, a new
retiree should start I.R.A. withdrawals early, when the marginal rate is likely
lower, said Laurence Kotlikoff, an economics professor at Boston University.
By the time the beneficiary is 70 and
starts claiming enhanced Social Security benefits, her I.R.A. withdrawals will
be smaller because she drew down her assets for eight years, Dr. Kotlikoff
said.
“Many if not most
people should take I.R.A. withdrawals earlier than planned to stay out of a
high tax bracket later and have less of their Social Security benefits hit by
taxes,” said Dr. Kotlikoff, who created an online
financial planning tool for individuals and financial planners.
Consider a person who is due a $2,200
monthly Social Security benefit at full retirement age. Her $500,000 I.R.A. and
$200,000 in other savings are expected to grow at an inflation-adjusted 2
percent a year.
Say she claims her benefit at 62 and
waits until 72 to take her I.R.A. required minimum distributions. If she lives
to 100, she would generate roughly $900,000 in discretionary income after
paying for housing and other expenses, according to Dr. Kotlikoff’s
calculations. The income would come from benefits, I.R.A. earnings and
retirement savings.
She would do better by drawing down her
I.R.A. at 62 and starting benefits at 70. Because of a lower tax bite and
higher benefits, “She would pocket, at no risk, an extra $163,000,” Dr.
Kotlikoff said.
Will my Social
Security benefits be reduced if I work?
A worker who claims benefits before
full retirement age may run into the “earnings limit,” in
which Social Security temporarily withholds $1 in benefits for every $2 in
earnings above a certain amount — in 2021, the limit is $18,960.
And though a person may need benefits
to supplement low earnings, the downside of permanently reduced benefits also
exists if you claim early, whether or not you exceed the earnings limit, Ms.
Floyd said.
A working widow who collects a survivor
benefit could also face the earnings limit. A widow can claim a survivor
benefit as young as 60, though her benefit will be reduced by claiming before
full retirement age. If she is working and exceeds the earnings limit, part of
those reduced benefits will be withheld.
The earnings limit
also applies to the spousal benefit claimed by a nonworking spouse if the other
spouse is working and both are younger than full retirement age. Social
Security withholds benefits on total household earnings that exceed the limit.
Withheld benefits are not lost forever,
however. At the beneficiary’s full retirement age, Social Security will adjust
the monthly benefit upward to account for the withheld benefits. The
beneficiary will continue to receive the higher payment even after she recoups
the withheld benefits, which could take 12 years.
This is how it works: Say a person is
eligible for a benefit of $24,000 a year at full retirement age but claims at
62 and gets a reduced benefit of $16,800. If the beneficiary earns $25,000, the
government will withhold $3,020 for the year, which is half of the earnings
above the limit. At full retirement age, the beneficiary will continue to
receive the reduced benefit of $16,800 but eventually will get the withheld
money back in the form of a higher benefit.
James Blair, the lead consultant
with Premier Social Security
Consulting in Cincinnati, said he advises working clients to balance
the Social Security income they will receive by claiming early with the
permanent reduction in benefits.
“If Social Security is withholding two
or three checks, they will get paid for the majority of the year,” said Mr.
Blair, a former Social Security administrator. “If they’re only getting two or
three checks, it usually is better to wait to claim.”
Can a person who is
due a public pension also collect Social Security benefits?
Two rules could reduce benefits for
people who are also entitled to a public pension on earnings not covered by
Social Security.
One rule is the “windfall elimination
provision” (known as the W.E.P.), which applies to people who
worked at jobs covered by Social Security but also worked as noncovered
government employees and are due a pension.
When it is time to
claim benefits, many people are unprepared for these cuts, Mr. Blair said.
Possible W.E.P.-related reductions are not reflected in the worker’s Social Security statement, which shows the
history of annual earnings and estimates of future benefits only for jobs
covered by Social Security.
“You can have someone who looks at the
Social Security statement and it shows a benefit of $1,000 at full retirement
age,” Mr. Blair said. But the individual — a teacher who is due a public
pension, for example — may be surprised later if the benefit is much lower, he
said.
In addition to W.E.P. reductions, a
government pensioner who applies for a Social Security spousal or survivor
benefit can face reductions. The “government pension offset” (G.P.O.) reduces those
benefits by two-thirds of the government pension.
For example, widows and widowers are
typically entitled to a survivor benefit that is 100 percent of their late
spouse’s benefit. But if a widow is receiving a monthly government pension of
$2,000 and her late husband’s Social Security benefit was $1,500, her survivor
benefit would be reduced by $1,333 and she would collect just $166, according
to the Social Security Administration.
Mr. Blair said individuals who are
eligible for a public pension and Social Security can estimate their future
benefits by running the numbers on the W.E.P. and G.P.O. calculators.
Pensioners are exempt from the W.E.P.
offset if they paid into Social Security for 30 years or more in jobs with
“substantial earnings” ($26,550 in 2021).
Older people who fall short of the 30
years could eliminate or reduce the W.E.P. impact by working more years at the
substantial earnings level, even if they already started collecting benefits,
Mr. Blair said.
Can a divorced woman
who was married for more than 10 years claim a spousal benefit on her
ex-husband’s work record and then switch to her own retirement benefit?
Not any longer. The
government eliminated a strategy that allowed a spouse or a divorced spouse to
use a “restricted application” to file for a spousal benefit while letting her
own retirement benefit grow. Now only people born before 1954 can do this.
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Instead, when a spouse or divorced
spouse files for benefits, the government will give her all the benefits she is
eligible for — whether it is her retirement benefit or a spousal benefit, said
William Reichenstein, a principal of Social Security Solutions, a company that helps
individuals maximize their lifetime income.
A divorced spouse can file for a
spousal benefit even if the ex-spouse has not yet claimed a benefit as long as
both are at least 62 and are divorced for more than two years. A married spouse
must wait until her spouse has filed.
But if the ex-spouse dies, the picture
changes. The surviving ex-spouse can claim a survivor benefit as early as 60
and allow her retirement benefit to grow until as late as 70. Or she can claim
her reduced retirement benefit early and then switch to a higher survivor
benefit at full retirement age.
“If you were married
for 10 years, keep tabs on the ex,” Ms. Floyd said. “Once he dies, that
survivor benefit could be higher than your own.”
A
version of this article appears in print on Sept. 5,
2021,
Section BU, Page 8 of the New York edition with the
headline: Claiming Social Security: Why You Should Wait. Order Reprints | Today’s Paper | Subscribe
