One popular metaphor for the sources of your Retirement Income is a “Three Legged Stool”. The legs of the stool are Social Security, Employer Pensions (remember those?) and your Personal Savings.
Now the Social Security leg, which is more like a political lightning rod than the leg of a stool, seems to be under attack. People understand the massive burden that Social Security payments place on the U.S. Tax System, but folks who have paid into the system their whole lives want to make sure they get what is rightfully theirs.
Social Security made headlines at the end of 2015 as Congress signed a bipartisan agreement that eliminated two Social Security Claiming Strategies (or “loopholes”, depending on who you ask) often used by married couples to maximize their lifetime benefits.
To better understand the recent budget legislation, it’s important to learn about some of the moving parts on which people base their decisions.
Delayed Retirement Credits
For each year that you “delay” receiving benefits, the amount you are eligible to receive grows by about 8% per year. When you look at your Social Security Statement, this is illustrated by showing your monthly benefit at three separate ages: Age 62, Full Retirement Age, and Age 70. Click here for a handy retirement age calculator.
The earliest most Americans are eligible to receive retirement benefits is age 62.
Full Retirement Age (FRA)
Full Retirement Age (FRA) is the age at which you are eligible to receive your “Full Benefit”. Americans will reach Full Retirement Age between the ages of 66 and 67, depending on the year they were born.
Age 70 is the latest you will accrue delayed credits. Therefore, the increases you’ve received for delaying each year until 70 will stop at 70. There is no reason to delay any longer than 70.
The Fundamental Trade-Off Between Claiming and Delaying
Delaying your benefits increases the size of your monthly payment, but you’ll receive fewer payments. Actuarially speaking, the system is designed for you to break even, as you’ll receive more small payments for starting as early as 62, or fewer large payments if you start as late as 70. Regardless, your life expectancy is the same.
One common misunderstanding
We talk to many pre-retirees who have been misled by their Social Security statement, which gives distinct numbers for a benefit at 62, Full Retirement Age, and 70. These numbers can lead you to believe that there is a “cliff” adjustment at Full Retirement Age and again at age 70. The reality is that the increase happens gradually, each year, from 62 through 70. For example, if your Full Retirement Age is 66, and you expect to receive $1,800 per month at FRA, your monthly benefits at different ages would be:
If your spouse did not work outside the home, or has a Social Security earnings record that is much smaller than yours, the spouse is actually entitled to a Social Security Retirement Benefit that is up to 50% of your Full Retirement Age benefit, provided the spouse’s benefit is smaller than 50% of your benefit.
So….What Happened in 2015?
Congress eliminated two claiming strategies that allowed married couples to coordinate the use of Spousal Benefits and Delayed Retirement Credits, thus, increasing their lifetime benefits.
In part 2 of this series, I’ll take a look at who is affected, and when they’ll need to act (hint – it’s soon).
Content in this article is not intended to be financial advice. Instead, we think of it as educational, and financial education is important to us. Retirement and financial planning services at the Cincinnati firm Hengehold Capital Management.