Social Security: Master the Basics
Understanding all the rules behind Social Security (SS) benefits can be a monumental task. Fortunately, mastering the basics outlined below can help you frame the initial conversation and identify potential areas to dig deeper.
Advisor Tip: Have your clients send you their Social Security statements ahead of your discussion. The statement contains all the information you need for a Social Security analysis plus their earnings history for additional client background.
The Biggest Question: When to Collect?
The age at which clients start to collect benefits will determine the size of their monthly checks and, ultimately, the amount of SS income they collect over their lifetimes. Benefits are based on individuals’ primary insurance amount (PIA), which is the monthly benefit they are eligible to receive at full retirement age (FRA).
Sooner is not necessarily better. Your clients may begin collecting SS benefits as early as age 62 — but with a consequence. By collecting early, they lock in permanent reductions to their monthly benefits. At age 62, a client would lock in a reduction of 25% (assuming a FRA of age 66). That reduction decreases for each month the client waits after age 62, up until FRA.
Patience can pay. Conversely, SS benefits will increase for every month the client waits beyond FRA, maxing out at age 70. These monthly increases are called delayed retirement credits (DRCs) and are equal to 8% yearly (assuming the client was born in 1943 or later). If clients with a FRA of 66 wait until age 70 to collect, their individual benefits max out at 132% of their PIA.
File now, collect later. If a client plans to begin taking benefits after FRA, he or she can consider using a “file and suspend” strategy. This entails filing for benefits, but opting to defer SS checks to a later date. In so doing, clients may be able to allow their spouses to collect spousal benefits at an earlier date while also taking advantage of DRCs. Clients can reverse their decision by calling the Social Security Administration (SSA) and requesting back payment of all checks they would have received had they started collecting at the time they filed. These and future checks will be based on collection at the filing date.
For most people, determining the “best” time to collect SS benefits comes down to the question of timing — now vs. later. They must assess the advantage of higher benefits later versus near-term income.
Beyond the Biggest Question
For some clients, you may need to dig deeper. More discussion may be required if the client is:
Working while collecting benefits: Clients who collect benefits before FRA and continue to work will be subject to an annual earnings test. The result may be that some or all of their benefits are withheld. In its basic form, the earnings test allows individuals to earn up to $15,480 (in 2014) before the SSA starts to withhold $1 of benefits for every $2 above $15,120. There is a different test applied in the year the individual reaches FRA and in the first year of collection. All forms of the test apply to earned income only.
Collecting a pension: Pensions from work where your client did not pay into the SS system (i.e., government pensions) can reduce his or her individual benefits due to the Windfall Elimination Provision (WEP). This reduction will not be reflected on your client’s SS statement. For an accurate estimate of your client’s SS benefits, use the SSA’s WEP Calculator.