The Social Security Maze

“The importance of money flows from it being a link between the present and the future.”  John Maynard Keynes

President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935.  This law created a system of Federal old-age and survivor’s benefits, for workers and their families, paid fors through a nationwide payroll tax with both employers and employees contributing.  What started as a way to protect our nation’s elderly from poverty transitioned over time to become the largest source of income for the majority of retired Americans.  Recent Social Security Administration statistics show that 48 million Americans receive Social Security retirement benefits totaling over $60 billion per month!

How Are Social Security Retirement Benefits Determined?

Your Social Security retirement benefit is based on credits you earn on your annual income.  You can earn a maximum of four credits per year and need a total of 40 credits (approximately 10 years of employment) to be eligible to receive benefits.  If you didn’t earn enough credits through your own employment record, you may still be eligible for a benefit based on your marital status.

Monthly benefits are based on your Primary Insurance Amount (PIA), which is the amount you will receive if you retire at your Full Retirement Age (FRA).  The Full Retirement Age is 65 for people born before 1938, gradually increasing to 67 for those born in 1960 and later.

Years ago, one’s retirement strategy was fairly simple: you reached 65, claimed Social Security benefits and along with your company pension, you had a solid retirement income plan.  But times have changed.  Most company pensions have disappeared with workers now responsible for their own retirement savings. In addition, you now have more options as when to file for Social Security benefits: as early as age 62, your Full Retirement Age now 66 or 67 (depending on the year you were born), or delay until age 70.  Most people don’t really understand the implications of these filing options.

Strategies to Maximize Your Benefits

Filing for Social Security benefits is considered by many insiders as “the most neglected financial decision a retiree faces” meaning many retirees may be missing out on strategies that can optimize their lifetime benefits. Deciding when to claim benefits will have a permanent impact on the benefit you, and potentially your spouse, receive.  Claiming before your Full Retirement Age can significantly reduce your benefit while delaying increases it.

Let’s take a look at just how much an individual’s monthly benefit can vary based on when you elect to begin receiving benefits. The example in the table below for a person born in 1954 outlines monthly benefit amounts based on claiming benefits at three different ages:

2015 03 image chart



As you can see, the range of potential benefits for an individual, from the earliest at age 62 to the latest at age 70, is over $1,500 per month or $18,000 per year.  Imagine the difference over a 20-30 year time horizon! The caveat of course, is that the longer you live the more benefits you will receive and the shorter your lifespan the less you will receive.

While a single individual’s decision is primarily focused on when to begin receiving benefits, married couples have many more options to consider, as the objective becomes how best to maximize their combined benefits.

Married couples should coordinate their claims since the best strategy can differ depending on the spouses’ ages and income gap.  Couples can file and suspend at Full Retirement Age to trigger 2015 03 image 2a Social Security cardbenefits for one spouse while the other’s benefit grows until he or she reaches age 70.  Another option is to file a restricted claim for spousal benefits and collect half of the spouse’s benefit while the other’s grows until 70.

If you are divorced, you may be entitled to Social Security benefits based on your ex-spouse’s record if the marriage lasted at least 10 years, if both of you are at least 62 and if the person collecting the spousal benefits has not remarried.

While the more advanced claiming strategies are not new, they certainly aren’t well known.  Longer life expectancies and the increase in dual income households have made many of these strategies more relevant than in the past.  Your individual circumstances will play an important role in determining the most appropriate strategy. Employment and earnings history, marital status, overall health and life expectancy, your tax situation and financial well-being all need to be taken into consideration.  Strategies should not be looked at in isolation; rather, they should make sense in the context of your overall financial plan and align with your goals and objectives.

Choosing the optimal social security claiming strategy can be a complicated decision and the number of rules and exceptions is daunting.   While ultimately one’s own life expectancy will determine the success of a particular strategy, it is important to be aware of the various options that are available.  The professionals at Madison Wealth Management are here to help you navigate through the Social Security maze!

Important Note: These materials are provided for informational purposes only.  Please do not assume that any information contained in this Insight serves as the receipt of, or as a substitute for, personalized investment advice from Madison.