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Social Security | Why you want to get your claiming strategy right

by Sharon O'Day | Contributor
Oct 4, 2021

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Do an internet search for "how to maximize my Social Security benefits," and you'll be given three simple pieces of advice:

  • Earn equal or more than the annual earnings cap on which you pay Social Security taxes.
  • Work for at least 35 years since your benefits are calculated on your best 35 years of income.
  • Hold off claiming benefits until you reach age 70.

That is how some people receive a check each month for $3,895 in 2021, the largest checks Social Security cuts this year.

But it's not that easy.

First, you would need an income above each year's annual earnings cap, which in 2021 is $142,800. That figure is adjusted for inflation, so it will have been lower in the past. But it would still represent a very healthy income throughout your career. Unfortunately, that's not the case for most Americans.

Next, maybe you worked 35 years without breaks. But life tends to throw us curveballs, and you may have had some years without income. If you keep an eye on your online Social Security account, you might find you accumulated less than 35 years of income in time to correct the shortfall.

And finally, it's nice if you can afford to hold off claiming Social Security until age 70 to benefit from delayed credits, but financial circumstances do not always make that possible.

The proof of the difficulty is the size of the average Social Security check issued to a retired worker in June 2021: $1,555.

Why does "getting Social Security right" matter?

Social Security decisions are often taken lightly, despite the fact they can have lifelong implications. And the late-game workarounds are few. Yet Social Security makes up a fundamental piece of your available funds in retirement, playing a more significant role than most imagine.

Every financial decision you make will eventually affect your living standard. Every purchase, every investment, every job decision. While that's not how we look at finances, your current financial situation is simply the result of every decision you made in the past. And Social Security is no different.

As you start your career, you have little influence over your retirement benefits other than how much you contribute to Social Security each year. And your contribution depends on your salary. Because benefits are calculated on your 35 highest-earning years (adjusted for inflation), the sooner you focus on this and maximize your salary, the better.

Maximizing contributions might even influence salary negotiations as you decide between an offered benefit and a bit more income. Or you might work overtime or start a side gig. Sadly, the tendency is to believe Social Security is simply something employers take out of your paycheck, over which you have no control. But that's not true; it's worth understanding how the system works.

You qualify for Social Security benefits as you accumulate work credits by paying Social Security tax on your income. Each work credit in 2021 represents $1,470 in income from "covered" employment, meaning income reported to Social Security. You can accumulate four credits per year, which represents $5,880 for the year. And you need 40 credits to qualify.

However, your final retirement benefit will be calculated not on your credits but rather on 35 years of contributions. If you have more than 35 years, the highest-income years will be selected. If you have less, a $0 will be put in for each missing year, significantly impacting the final benefit calculation.

Many people only wake up to considering the size of their future Social Security check when they start thinking of retirement, in their late 50s or early 60s. By then, it is much more difficult, if not impossible, to make a marked difference in your Social Security work record. And it's that work record that determines the size of your check for the rest of your life.

Will Social Security even be there when you retire?

People with a decade or more before they reach Social Security claiming age (62 is the youngest) question whether the system will still be solvent when they are ready to retire. In that case, why should they worry about maximizing contributions?

The sustainability of Social Security is complicated. Unfortunately, it's a topic even our legislators in Washington aren't willing to confront and are happy to "kick the can" down the road year after year. Social Security is often referred to in political circles as the "third rail" because anyone touching the subject gets zapped.

Over the years, most benefits have come from two sources: the Social Security taxes collected from workers and the income taxes paid on Social Security benefits over a certain threshold. Its income exceeded its outflow for years until the large demographic of America's retiring baby boomers changed the direction. The disruption to income caused by the Covid-19 pandemic will not help, although that is hopefully transitory. But the surplus is rapidly dwindling, and changes will have to be made.

Social Security has several options to lower its outgoing costs. It could raise the Full Retirement Age (FRA) beyond today's cap at 67. It could use means testing to deny benefits to those with ample other income and who don't need Social Security. It could gradually raise the payroll tax rate above today's 6.2% each for employer and employee. Or it could raise the earnings cap above today's maximum of $142,800, after which no Social Security taxes are collected.

Corrective action is undoubtedly called for. The question is how to apply sufficient pressure on politicians to be willing to touch the topic.

So, will Social Security "be there" whenever you are ready to claim your benefits? It will, in some form. It is inconceivable that the most popular social program would disappear entirely, especially when most retired households count on it for a significant part of their retirement funds. But, how robust will the program be? That depends on whether existing and future beneficiaries get proactive and demand change.

Where can you find reliable Social Security information?

Don't expect it from the Social Security Administration. A Social Security office would seem to be a natural resource for such information, but it is not. While employees seem to have ample goodwill, many are undertrained and overworked. They can provide basic information, but they are not qualified – nor expected – to provide financial advice. And the experts behind Social Security, including actuaries and lawyers, are not the ones on the other end of the phone line when you call.

A common question asked of Social Security employees is when to file to get the most significant benefit. If that is your question, you should consider doing more research and finding someone with specific expertise. You could lose significant dollar amounts if you get the wrong advice and find the decisions are not reversible.

Do your own research. Endless information on your Social Security options can be found on the internet, including about the various claiming possibilities. One caveat would be to check your sources, as they cannot all be relied upon to be correct.

You will find resources that let you run comparative calculations for your different options. For example, the Social Security website has different tools for you to run your numbers.

As you do so, one suggestion is to use the maximum age you could live and not the average life expectancy for people your age. You don't want to find that you chose to claim your benefits too early and don't have the resources to cover you when you outlive the average for your date of birth.

Ask your financial professional. Financial professionals used to find loopholes in the Social Security legislation that gave their clients unique benefits. But they did so often enough for the government to feel the impact of the perfectly legal loopholes on the outflow of funds, and those loopholes were closed. Two of the most popular loopholes? One dealt with the timing of multiple benefits, renamed "Deemed Filing," and another, a voluntary suspension of benefits called "File and Suspend."

Your advisor still knows how to get the greatest benefit out of today's laws, as well as how to be prepared for what might change in the future. Claiming strategies take so many factors into account, including this partial list:

  • How does your FRA affect your benefits?
  • How does your FRA affect delayed retirement credits?
  • How do you use timing to maximize a couple's benefits?
  • How can you suspend and reinstate your benefits?
  • How does timing impact dependent beneficiaries?
  • What is the earnings test for ongoing income?
  • How are benefits taxed?
  • What is the maximum for family benefits?
  • What are the maximum benefits for disabled families?
  • Are there special rules for widow(er)s?
  • What are the rules for ex-spouse benefits?
  • How does WEP/GPO affect Social Security benefits?

The questions an advisor can answer are endless. For example, should you delay retirement so you can receive higher Social Security benefits? Or should you work longer, so your work record is more substantial? What is the optimum timing and sequence of retirement and spousal benefits? Should you retire early to activate child or disabled-child benefits, plus spousal benefits for child-in-care? How does your deceased spouse taking retirement benefits early influence when you take your widow(er) benefit? Does it make sense to take Social Security retirement benefits and hold off receiving a private pension, so you delay when the Windfall Elimination Provision (WEP) is activated?

As you can see, maximizing Social Security benefits can be complicated.

An example of a helpful strategy involves a couple coordinating its claims. The lower earner might file for benefits at FRA, which means the couple has some money coming in. The higher earner can delay claiming benefits to age 70 when they are the largest due to the delayed retirement credits. If the higher earner is the older of the two and more likely to pass away sooner, the strategy is especially smart. It allows the surviving spouse to receive the largest possible survivor benefit, equal to the deceased spouse's full benefit.

What beneficiaries benefit from your work record?

Social Security benefits go way beyond just retirement checks. For example, survivor benefits, spousal benefits and disability benefits all have specific qualification requirements. Social Security's Benefit Eligibility Screening Tool can give you a head start on understanding the eligibility of those programs.

This list shows how many people are potentially affected by the decisions you make regarding your work record.

Your decision of when and how you file for retirement benefits can affect many of those people. You have to file for benefits first before any others can benefit. And if you decide to suspend your benefits, everyone else is blocked from receiving from your earnings record. (There is one exception: your ex-spouse.)

You – and particularly all those who benefit from your work record – will have to stay proactive, as Social Security will not inform them if and when they are eligible for benefits.

You'll want to keep an eye on the overall picture and use whatever tools you have to check your options regularly. That will help you make your best claiming strategy decisions.

Can you make changes if you get it wrong?

Life has a way of not moving in a straight line, and things change. You also may not have understood all the implications when you decided to file. Or you may have been offered a high-paying job just as you filed at your Full Retirement Age (FRA). Or filed early, at age 62, because you needed the money, then inherited unexpectedly. What can you do?

The Social Security Administration does offer some flexibility in the form of two do-overs.

Suppose you filed less than 12 months ago. In that case, you can apply to Social Security for a "withdrawal of benefits" and repay whatever it paid you (to you and any of your qualifying dependents). This action erases your original action and allows your benefits to grow as if you never filed. As a result, you and your dependents will receive larger payments when you file once again. But beyond 12 months, that window is closed.

Also, once you reach your FRA, you can instruct Social Security to suspend your benefits for as long as you choose, up to the maximum age of 70 when benefits stop growing anyway. You will not have to pay anything back.

Your account will accrue delayed retirement credits at a fixed percentage each month while in suspension. (Your benefits will increase by roughly 2/3 of 1% for each month they are suspended if your benefits grow by 8% per year in the period between FRA and age 70.) However, as mentioned earlier, all beneficiaries receiving benefits from your record will also have those suspended during your suspension – except for an ex-spouse.

Wrapping up

If you or your spouse have earned income in 40 or more qualifying quarters, you are entitled to Social Security benefits. For many, these benefits become an essential part of their retirement plan.

Therefore, there is no reason not to get the maximum benefits permitted by law. However, you will have to do more than just show up at the local Social Security office.

The right strategies on your part can leave you with more money to enjoy your senior years to the fullest. They can affect you – and possibly those you leave behind – for many years.

To make that happen, think about accessing your Social Security online information early, monitoring the status of your account and engaging whatever support you feel you need.

Alliance America can help

Alliance America is an insurance and financial services company dedicated to the art of personal financial planning. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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