Choosing the right Social Security election can significantly impact the amount of benefits you receive over your lifetime. How much you receive from Social Security depends on three primary factors:
- Your earnings record
- When you elect
- How long you expect to live
Since you can’t go back and change your earnings record, and you have minimal control over how long you live, calculating an expected lifetime benefit largely hinges on when and how you elect benefits. In theory, if you elect early, you will get a smaller benefit for a longer period of time. If you elect later, you will get a larger benefit for a shorter period of time. Single people can do a simple “break-even” analysis to determine whether to take early or wait. But for married couples, the decision is much more complex.
For married couples, a simple breakeven analysis will usually give the wrong answer, costing you benefit
dollars. Why? Because Social Security offers three distinct benefits for married people:
- Retired Worker Benefit – Based on your own earnings record
- Spousal Benefit – Provides your spouse with a benefit once you claim your own benefit
- Survivor Benefit – Provides your spouse with a benefit after your death
Virtually all of the simple break-even calculators in use today ignore the Spousal and Survivor benefits. Complex planning software includes spousal and survivor benefits but only for one combination of election ages. In short, neither tool offers a thorough analysis.
What’s at Stake?
The difference between the best and worst possible decision of when to elect Social Security can be well over $100,000! Leaving $100,000 on the table could have a large impact on your retirement. First let’s look at the strategies that can be used.
Social Security offers three distinct types of benefits for retired workers and/or their spouses. If you file prior to full retirement age, you are deemed to have filed for all benefits for which you are eligible. At full retirement age and beyond, you have several options to elect a limited benefit for a period of time, and then convert to a larger benefit at some point in the future.
There are two techniques that can be employed to maximize your Social Security benefits. The first is the option to restrict your application to exclude certain benefits once you reach Normal Retirement Age. The second technique is the ability to file and suspend. Spousal benefits are not available until the primary earner has filed for his or her own benefits. The Senior Citizens’ Freedom to Work Act of 2000 allows a worker to earn delayed retirement credits after filing for benefits if he requests that he not receive benefits during a given period. As a result, a higher-earning spouse can file for benefits, then immediately suspend the benefit, and continue to earn delayed credits. In the process, he will have made his spouse eligible for spousal benefits under his earnings record.
Many Possible Combinations
Social Security benefits are completely gender-neutral. In other words, any technique that is available to the “primary earner” is also available to the “secondary earner”. Certain combinations of the two techniques are also allowed. For example, the higher earner could file and suspend to make a spousal benefit available to the secondary earner, who could then file a restricted application for only spousal benefits. This would allow both earners to earn delayed retirement credits on their own earnings records while one spouse still collects benefits now.
Social Security Analysis
Using software analysis, we can examine hundreds of possible combinations, including 81 possible age combinations across nine possible election strategies and find the one option that offers the highest expected lifetime benefit. Your social security election is a complex decision that should not be taken lightly.