Hungerford: Claiming Social Security: Complexities abound

Last month, I met with a male client who lost more than $10,000 in Social Security benefits because he didn’t apply for widower benefits for more than two years after his wife died. Unfortunately, when he realized his mistake, he could only receive six months of back benefits based on his wife’s work history — the maximum allowed. This year, still working, he turns 70 and then will begin to draw from his own account.

I think almost every reader of this column understands Social Security’s basic rules that allow receiving reduced benefits as early as 62 (60 for widows and widowers) and maximum payouts at age 70.

A discouraging audit of Social Security, released in February, reported that 82 percent of a random sample of widows and widowers would have received much higher benefits if they had drawn survivor benefits, allowing their own accounts to grow until they can be tapped for maximum value at age 70.

However, I’d argue that many of my readers are unaware that the full retirement age, now age 66, is increasing for anyone born after 1954. Each year, beginning with birthdates from 1955 until 1960, normal retirement age increases by two months.

Therefore, for anyone born in 1960 or after, the new full retirement age is 67!

Increasing the retirement age automatically lowers benefits for both those who start drawing early at age 62 or wait until age 70 (and those in between). For example, those born in 1960 and who begin payments at age 62 will only receive 70 percent of their benefit instead of the current 75 percent payout. Also at age 70, they will get only 124 percent of their age 67 full retirement amount instead of the 132 percent that is paid now.

Historically, signing up for benefits at age 62 has been extremely popular — in 2013, 48 percent of women and 42 percent of men who claimed benefits were age 62 when they chose to begin. One big drawback for anyone drawing Social Security before full retirement age is that earned income this year must not exceed $17,040 — there is a 50 percent tax penalty on wages above that amount! If you are under age 66 and your wages are unexpectedly too high, you may suspend your Social Security payments and receive credit when you resume them.

Currently, there is an amazing 76 percent difference between beginning Social Security at age 62 and age 70.

That amount is based on an 8 percent-a-year bonus for each year delayed until age 70 and doesn’t even include cost-of-living (COLA) hikes. Current Social Security maximum amounts for those age 62 are $2,153 monthly, $2,542 at age 66 (full retirement age) and $3,538 at age 70.

Writing my Journal column about Social Security four years ago — when I urged readers to consider delaying benefits — produced the most responses I’ve ever received. They were equally divided between those who believed waiting was the best choice and those who argued it should be taken as soon as it is available.

Obviously, retired low-income individuals probably need to sign up as soon as they retire. One third of current Social Security recipients age 65 or older report that their Social Security payments make up 90 percent of more of their total income. Anyone in poor health or who has a suspect gene pool, given early deaths of their parents and other ancestors, may be better served to claim early. Finally, there is an argument that those who don’t need the money can invest it to earn market returns.

Still, current projections claim the average 65-year-old man lives to 84 and the average 65-year-old female dies at 86.

However, more and more well-educated healthy seniors will live into their 90s. By waiting to claim until age 70, Social Security payouts will generate far more income given the 8 percent jump each year and that doesn’t even count yearly COLA increases.

Another factor to consider is taxes on Social Security payments. You are required to add half of your Social Security payments to your other income to determine the taxes your pay. Singles with adjusted gross income $25,000 or less and couples at $32,000 or less pay no taxes on their Social Security income. Between $25,000 and $34,000 for singles and $32,000 and $44,000 for couples, you must pay taxes on 50 percent of your social security payments. If singles make more than $34,000 and couples more than $44,000, then 85 percent of Social Security income is taxed.

If you draw on the Social Security record of your spouse or anyone you were married to 10 years or longer, you will receive 50 percent of their payout if your normal retirement age is 66.

Under the new Social security law passed in 2015, anyone born after Jan. 1, 1954 may not draw spousal benefits at age 66 in order to allow their own benefits to grow until age 70. Instead they will be paid the highest of either their own account or 50 percent of their spouse’s benefit.

Anyone born before Jan. 2, 1954 should consider signing up for a spousal payout when they reach age 66 if they are married to someone drawing Social Security who is age 66 or older. Then at age 70, after earning 8 percent annual benefit increases, they can switch to their own account.

Social Security payouts are calculated on your best 35 years of work history, adjusted for inflation.

The most popular strategy to increase Social Security and total retirement income is simply to keep working a few more years. I often encourage an earlier retirement if my client is dissatisfied at work and will still have enough money to enjoy a retirement that may last 20 to 30 years or more.

However, even though I’m convinced life is too short to work at a lousy job, occasionally I counsel that it may be necessary to tough it out for a few years more. If income permits, I advise maxing out his/her 401(k) at $24,500 this year and to put $6,5000 into a Roth IRA. One big disadvantage of early retirement is not having access to Uncle Sam’s terrific tax shelters.

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