This has been a year of many retirements. Many federal employees decided that the pandemic, change of pace and work environment, volatility in the market, etc., were the last straw and have made the decision to separate for service. A lot goes into that decision, one of which is figuring out what to do about Social Security.
According to Kiplinger, there are over 500 different sets of calculations for how and when to apply for Social Security. For most married couples, around 80 of those are just for you. What’s a retiree to do when figuring out the best strategy?
Historically, many people have been misinformed when seeking help regarding Social Security. The level of complexity may be high depending on your circumstance, and it’s not unusual for SSA agents to not be fully informed on all of your choices and options. They also cannot know you and your lifestyle, making them not well-prepared to help you make the best choices.
Strangely, the last 6 months appear to have been different. On several occasions I’ve heard that SSA has been incredibly helpful and offered additional things for consideration. Regardless, we encourage our clients to run these decisions by us before submitting paperwork. I can’t possibly discuss all the variables within the Social Security proem in this column, but here are a few of the more common considerations to be aware of before applying for your Social Security benefit. Make sure to read until the end, where you can find out how to receive a free worksheet on calculating the taxes on your Social Security.
Special Retirement Supplement
If you retire as under FERS prior to 62 with 30 years at MRA or 20 years at 60, you’re eligible to receive the Special Retirement Supplement until your age 62. As a fed, this commonly known benefit is to help bridge the time between your separation from service and the date in which you can start taking your Social Security benefit.
Waiting for the right moment…to file for Social Security
There is a lesser-known fact, however. Just because you can take Social Security doesn’t always mean you should.
Social Security has three main target dates that you should be aware of. The first is your age 62, when you first become eligible. The second is your Full Retirement Age (FRA), somewhere around 66-67 years old depending on your year of birth. The third is your age 70. You can take your Social Security benefit at any time between those dates (not counting disability).
While you are allowed to take Social Security at age 62 if you’ve qualified, this is earliest date allowed (non-disability related). Because of this, your benefit will be reduced by nearly 1/3 depending on your age. This reduction is permanent, meaning any future cost of living increases will be permanently reduced as well. Also note that if you’re still earning an income and you file for Social Security prior to your Full Retirement Age (FRA) you may be subject to reductions of benefit. Do your math carefully if this applies to you – you don’t want this to be a surprise.
Your Full Retirement Age (FRA) is somewhere between 66-67 depending on your birth year. This is the moment in which you receive your full Social Security benefit (note I didn’t say maximum). With this, you’ll receive all that you’re entitled, based on their calculation. It’s important for you to review your Social Security statements to ensure that the SSA has your employment history correct.
You should know that a portion may be taxed (more details about this at the end of this column), as well as having reductions for Medicare if you participate in Medicare. Turning on Social Security while on Medicare triggers them to automatically take the Medicare premiums from your Social Security check before it gets sent to you. Make sure you set a reminder for yourself to paying your Medicare premiums manually if you have done so thus far to prevent double paying.
A third option is to wait until after your Full Retirement Age (FRA) to file. Why would someone wait? Because you received an increase of 8% each year for waiting, until age 70. There is no benefit in waiting beyond 70; the additional credits cease at 70, so take it then if you’ve not yet.
Just remember that whenever you take Social Security, that becomes the basis for which your COLAs (cost of living adjustments) will be calculated. If you waited until age 70 for the maximum benefit, each COLA will be on a higher amount and will net you a great sum year upon year. This can equate to hundreds of thousands of dollars in extra earned income over the course of your entire retirement, compared to someone filing earlier. In our experience, we have found the breakeven point to be around age 83, when it would have made sense in waiting to file until age 70. If you have long livers in your family, this might be for you.
These three are not your only options, just the main points for reference as you design your retirement strategy.
Health Considerations
Something else to consider is that perhaps you know something about your health that makes you believe that you will not live to be very old. If this is the case, perhaps it does make sense to take Social Security early and before your FRA.
Social Security stops when you’re dead, so if this circumstance applies to you, make sure you do the planning to find out if it’s worth taking it early. If you are terminally ill with a reduced life expectancy, then you should consider taking it as soon as you can.
Family Considerations
A surviving spouse may receive their deceased partners social security if they apply for it. They can keep theirs if it’s higher, but they also have the option of receiving their spouse’s. Their own will go away in doing this, so it’s important to plan properly for having less income (this is where life insurance can help fill the gaps in a pre-mature death). It’s for this reason that it’s generally recommended that the higher-earning spouse delay their social security until age 70. The surviving spouse will receive the “stepped-up” benefit of their deceased spouse, helping to bridge some of the income gap created. Regardless, the survivor will now be receiving only one social security instead of two, and will likely need to make portfolio adjustments to meet their needs in this new stage of life.
Thiago, now I realize I made a mistake
Meet the Undo Button: if you feel that you’ve made a mistake in filing for your SSA benefits, you typically have 12 months to withdraw your application and repay. This can help restore your intended selections to ones that make the most sense for you and your family. Don’t beat yourself up over this. There is very little education on the myriad complexities, and many of the rules don’t make logical sense. (Ahem, I’m looking at you, Medicare).
Finally, although the money you’ve put into Social Security comes from your taxes, once you claim benefits, at least some of your benefits could be subject to income taxes too. Make sure you work that reality into your retirement plan and account for the difference in cashflow, how you’ll meet those needs, how this might change your portfolio, and a variety of factors.
To help you with this, I’d like to give you our free Social Security Taxation Worksheet PDF. This will help walk you through determining the potential taxation on your Social Security benefits. If you’re interested in this free worksheet, just email “Worksheet” either in the subject line or body of the email to welcome@rmgadvisors.com and someone from our team would be happy to send it to you. Happy planning!
