My husband and I turned 65 in 2012. We are both still working, but finding it difficult to make ends meet. At age 66, my husband would get about $800 per month in Social Security and I would get about $2,000 per month. Can we both keep working and begin collecting our benefits this year? If so, should we? — Rebecca, Milford, NJ
Social Security is one of those terms that almost every American has heard but very few fully understand. That’s kind of scary since approximately 35 percent of Americans over 65 depend on Social Security benefits as their only income source, according to the Employee Benefit Research Institute, despite the fact that Social Security was never intended to work that way.
If you are planning to retire soon, deciding when and how to collect Social Security is critical. The good news for you and anyone else still working is that as long as you have reached your full retirement age (FRA), your Social Security benefits will NOT be reduced by earning additional income. Although you want to maximize your benefits, that doesn’t necessarily mean just waiting longer to collect.
While you can begin receiving Social Security as early as 62, your monthly payments will most likely be greater if you wait until your full retirement age (FRA), which for you is 66. Your FRA depends on the year you were born (check out the Social Security Administration’s website for details).
Deferring your Social Security retirement benefits beyond your full retirement age can mean higher payments. Here’s how it works:
- Collect at 62 = 70-75% of your full retirement benefit.
- Collect at FRA = 100% of your full retirement benefit.
- Defer until after your FRA = an 8% credit each year you defer, up to age 70. So at age 70, you can be entitled to up to 132% of your full retirement benefit.
Married couples will typically benefit more from deferring Social Security than a single person, because the number of payments received will depend on the lives of both spouses. If both husband and wife are collecting, upon the death of one, the surviving spouse will inherit the larger of the two individual Social Security benefits.
If one spouse has earned a lot of income during his/her lifetime and the other has not, you might want to consider the “claim-and-suspend” strategy, as long as you have both reached your FRA. With this strategy, the higher earning spouse can claim and immediately suspend his (or her) retirement benefit, allowing it to continue to grow while making available a 50-percent dependent benefit for the lower earning spouse.
In your case, you could claim Social Security at age 66 and immediately suspend benefits. Then your husband, at age 66, could receive a spousal benefit of $1,000 (half of your FRA benefit), while letting his $800 and your $2,000 benefits grow. You both could continue to work, if desired or necessary, and the spousal benefit would not be affected. At age 70, you could then begin collecting your larger benefit of $2,640 and your husband could begin collecting his $1,056 benefit. Pretty cool, huh?
(Keep reading for two red flags to consider.)
If you are divorced, you are entitled to spousal benefits (as much as half of your ex’s full retirement benefit) if your marriage lasted at least 10 years, as long as you are not remarried and your own benefit is not more.
Before you and/or your spouse collect any kind of Social Security, there are two red flags you should first consider:
- Taxes. Up to 85% of Social Security benefits can be subject to income tax and about one-third of people who currently receive Social Security must pay taxes on it.
- Starting early. If you begin collecting Social Security early and are still working, some or all of your benefits may not be paid immediately and could be deferred until your FRA, depending on how much you earn.
If you are unable to reduce your living expenses and/or earn more money and you currently need more income than a spousal benefit can provide in a claim-and-suspend scenario, you can consider a couple of strategies to bridge the gap between current earnings and a greater Social Security benefit.
The first is taking withdrawals from your IRA. Since you are over age 59½, you wouldn’t be subject to the 10-percent early withdrawal penalty. However, keep in mind that withdrawals from a traditional IRA will require paying income tax on the amount withdrawn based on your tax rate that year.
Roth IRA contributions, on the other hand, are ideal for supplemental income since they can be withdrawn anytime, tax-free, and not subject to the 10 percent additional federal tax on early distributions. Earnings from your Roth IRA are generally tax-free and not subject to the 10 percent additional federal tax on early distributions if you are at least age 59½ and have owned your account for at least five years.
Another bridging strategy is to purchase an immediate annuity as part of your retirement savings portfolio, which can provide you with a reliable income stream while you wait to receive a larger Social Security benefit. If the annuity has what’s typically called a “future adjustment option” you could choose to reduce or increase your income stream once Social Security kicked in, depending on your income needs at that time. But be aware that annuities can be complex and fee-heavy products and immediate annuities, in particular, require giving up access to your investment.
While I know that it’s hard to think about the future when current needs are great, life expectancies continue to rise. So it’s important to try to create a retirement plan that provides sustainable income for your entire life.
By utilizing the claim-and-suspend strategy or deferring Social Security and building an income bridge of some kind, you can hopefully make do now and have a higher income stream during retirement. In any case, these are serious considerations and it may be worthwhile to work with a qualified financial planner and/or accountant to chart the right course for you. Good luck!
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