Social Security: Why Being Proactive Pays Off
There are quite a few Social Security filing strategies that retirees can choose from to match what makes the most sense in their big picture retirement plan. Today, we won’t discuss any particular strategy, nor share the most recent law change that “everyone should be aware of.” Instead, let’s just examine a very simple way a twenty minute call to the Social Security Administration may increase your benefit under certain circumstances. Interested? Read on…
It is very common for people to have faith that the Social Security Administration will always pay the largest benefit one is entitled to. That might not necessarily be the case.
PARAGON recently had the pleasure to assist a couple in finalizing their Social Security withdrawal strategy and stumbled onto a nice surprise for them. Steve, who was the breadwinner, was entitled to a much larger benefit than Susan who mostly focused on caring for the family but had enough credits for her own benefit. Steve chose to delay his benefit, while Susan opted to take hers as soon as she could, age 62. Both of their decisions worked well with the overall financial plan and were mostly based on their individual preferences.
First, let’s go over a few rules that are in play in this particular case:
The Full Retirement Age is important when making decisions to file for Social Security benefits, because that’s the age at which one is entitled to receive 100% of their retirement benefit. If one files prior to their Full Retirement Age, their benefit is reduced to account for earlier collection of benefits, and if one delays filing for benefits and starts Social Security income after Full Retirement Age – there will be an annual increase in the benefit amount. Social Security benefits increase from your Full Retirement Age till age 70 - it is not possible to delay your benefit beyond age 70.
Anyone who has 40 work credits on Social Security books is entitled to a retirement benefit. In 2019, you receive one credit for each $1,360 of earnings, up to the maximum of four credits per year. So, while Susan mostly focused on caring for the family, she managed to collect enough of these credits to qualify for retirement benefit on her own record.
Even if a person never worked a day in their life, they are entitled to a spousal benefit if they are over 62 years old and their spouse is receiving retirement or disability benefits. The spousal benefit is also reduced if the spouse files for their own benefit, or spousal benefits prior to the Full Retirement Age.
Steve’s monthly benefit at his Full Retirement Age was $2,500/mo. but, since he opted to delay it until age 70 it increased to $3,400/mo. Susan’s Full Retirement Age monthly benefit was $1,160/mo. but since she took hers as early as possible, at age 62, it was reduced to $875/mo. Susan was happily collecting her own benefit until Steve turned 70 years old, could not delay his benefit any longer, and “turned on” his own Social Security income stream. Susan became entitled to the Spousal Benefit, which is 50% of Steve’s Full Retirement Age benefit amount, adjusted for Susan’s initial early filing, amounting to $1,008/mo. Susan’s Spousal monthly benefit, adjusted for early filing penalty was $133/mo. larger than her own benefit. It made sense for Susan to collect her spousal benefit instead of her own. All Susan had to do was reach out to the Social Security Administration and apply for the Spousal Benefit, which took only twenty minutes over the phone. It is important to note that the application for spousal benefit can be backdated 6 months and they will pay out what is owed in a lump sum.
Susan wondered afterwards if she would have gotten this pay raise if we hadn’t pointed out this bigger benefit for her. Chances are, she wouldn’t have. The Social Security Administration does not proactively review records to see if recipients are entitled to more money.
Consequently, if you or your spouse have some kind of life change or filing change with Social Security benefits, it may be worth to review the rules to see if you might be entitled to more money.