1. When should an individual claim Social Security benefits?
The earliest date that a person can begin claiming Social Security is age 62, and the latest is when the individual reaches age 70. Full retirement age has historically been 66 for people born between 1943 and 1954 but will gradually increase with time so that for those born after 1960, full retirement age is 67. For people born between 1954 and 1960, full retirement age is somewhere between 66 and 67 based on the date of birth.
2. Is “file and suspend” a viable Social Security planning option?
The rules governing Social Security claiming have changed, so the file-and-suspend strategy is generally unavailable to most people. But for clients who were at least 66 years old by April 29, 2016, who have already filed and suspended, the strategy remains available. Under the new rules, individuals can still file and suspend, but the benefits received by others (a spouse or dependent) that are based on the individual’s earnings record are also suspended.
3. When can an individual claim retroactive Social Security benefits? I
n general, those who wait until full retirement age to claim Social Security benefits may be eligible for up to six months’ worth of retroactive benefits. For example, if an individual claimed Social Security benefits at age 67 and their full retirement age was 66, they would be entitled to up to six months’ worth of retroactive benefits. If the individual claimed Social Security benefits at age 66 and 3 months and their full retirement age was 66, they would be entitled to up to three months’ worth of retroactive benefits.
If the person chooses to claim retroactive benefits, their permanent ongoing monthly benefit will be reduced based upon the number of months’ worth of retroactive benefits that are claimed.
4. What are spousal Social Security benefits, and how can these benefits affect Social Security planning?
Spousal benefits are benefits that a person may be entitled to receive based on their spouse’s earnings record. This essentially means that married clients may be eligible for Social Security benefits regardless of whether they have ever earned income.
This spousal benefit can equal up to half of the working spouse’s benefit if the nonworking spouse waits until their full retirement age to claim Social Security benefits. If the spouse claims benefits early, the percentage is reduced based on the number of months remaining until the nonworking spouse reaches full retirement age.
5. What are Social Security survivor benefits? What planning considerations can arise when claiming survivor benefits?
After the death of a spouse, the surviving spouse can begin to claim Social Security survivor benefits as early as age 60, although the benefit will be reduced based on the number of months remaining until the survivor reaches full retirement age.
Like a traditional spousal benefit that is received when both spouses are alive, the amount of the survivor benefit is based on the deceased spouse’s traditional retirement benefit, meaning that the benefit increases in proportion to how much the spouse earned in their working years.
6. Can a surviving spouse continue to receive survivor benefits if he or she remarries?
If the surviving spouse remarries before reaching age 60, they will no longer be entitled to Social Security survivor benefits based on the prior spouse’s record unless the subsequent marriage ends. Remarriage that occurs at age 60 or later does not affect the survivor benefit rules. Further, an ex-spouse who was married to the deceased spouse for at least 10 years is entitled to survivor benefits based on their former spouse’s earnings record, even if the deceased spouse had remarried.
7. What should dual-income households consider with respect to Social Security planning?
Generally, the reduction, or working retirement tax, on Social Security benefits will apply only if the spouse whose earnings record is used to determine the amount of the benefits is also the spouse who continues to work.
But added complications can arise when one spouse decides to file a restricted application (an option that remains even after the phase-out of “file and suspend)” in order to cease receiving their own benefits and collect half of the other spouse’s available benefit. This strategy can prove useful in situations where it is beneficial to allow the “restricting” spouse’s benefit to grow until they reach age 70.
8. What should taxpayers who continue to work during retirement consider with respect to Social Security planning?
Generally, an individual can begin to collect Social Security benefits even while they continue to earn income. A portion of that benefit, however, will be subject to tax rules that differ from the otherwise applicable tax rates.
In 2022, if a person is younger than FRA, collects Social Security early and earns more than $19,560, their Social Security benefit will be reduced by $1 for every $2 that they earn over that limit. This earnings limit is applied on a calendar-year basis (January-December), rather than based on the client’s birthday. The limit is also indexed annually for inflation (the amount for 2021 was $18,960).
The limit is raised in the year the worker reaches FRA; once they reach FRA, benefits will no longer be reduced. If an individual’s benefit is reduced because they work during retirement, they will actually receive a higher monthly benefit amount once they reach FRA.
9. How are Social Security benefits affected by divorce?
If two people divorce but had been married for at least 10 years, a divorced spouse can continue to receive benefits based on their former spouse’s earnings record, even if that ex-spouse has remarried, in the following situations: The individual is unmarried; the individual is age 62 or older; the ex-spouse is entitled to Social Security or disability benefits; and the benefit the individual is entitled to receive based on their own earnings record is less than the benefit the individual would receive based on the ex-spouse’s working record.
The benefit received as a divorced spouse is generally equal to half of the ex-spouse’s full retirement amount if the individual begins to receive benefits at full retirement age. The individual’s benefit based on the ex-spouse’s record does not include delayed retirement credits that the ex-spouse may receive.
10. How can a client use a qualified longevity annuity contract in conjunction with their Social Security planning?
A qualified longevity annuity contract (QLAC) is an annuity contract that is purchased within a traditional retirement plan, under which the annuity payments are deferred until the client reaches old age (they must begin by the month following the month in which the client reaches age 85) in order to provide retirement income security late in life.
The value of the QLAC is excluded from the retirement account value when calculating the client’s required minimum distributions (RMDs) once the client reaches age 70½, though the client is limited to buying a QLAC with an annuity premium value equal to the lesser of 25% of the account value or $130,000.