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Why It Matters:
Congress eliminated some popular Social Security strategies, but clients may still need help making smart decisions about when to claim.
Clients may not understand that when they file for benefits can have lasting consequences.
You can help clients make the Social Security decisions that are right for them by explaining how their benefits work.
While Congress eliminated or drastically reduced once-popular Social Security claiming strategies, there’s still room for a financial professional to help clients make smart decisions about their benefits.
The defunct “file and suspend” strategy was targeted by Congress in 2015 and phased out by 2016. And the “restricted application” now remains only for those who haven’t yet filed for benefits and were born before 1954, a group that will get smaller every year.
The Social Security Administration says there’s no way to “maximize” benefits because the agency tried to scale benefits so that, in the end, lifetime earnings statistically will come out close to equal no matter at what age a claim was filed. A client who claims a lower benefit at an earlier age would statistically collect less for longer. And by claiming a higher benefit at a later age, the person would and collect more but for statistically less time.
But, the Administration says, workers can make educated decisions and collect benefits in the way that is most appropriate for their own circumstances. To do that, clients may need some help understanding some key considerations:
- Filing age.
- The impact of working while claiming benefits.
- Spousal and survivor benefits.
Clients start claiming Social Security at age 62. But they might not understand there’s a catch. Their fully earned monthly benefit based on their highest 35 years of earned income – called the Primary Insurance Amount – won’t be available until they reach full retirement age (FRA). That age has been slowly going up based on year of birth. As an example, the FRA is 67 for someone born in 1960 or after.
Claim earlier than FRA, and the benefit is reduced, and it can be by a lot. Someone with an FRA of 66 who claims at 62 would see his or her monthly benefit cut by 25% … for life. Those with an FRA of 67 who claim at 62 experience a 30% reduction of monthly benefits.
On the other hand, if circumstances allow, a client may want to wait and not file at FRA. For every year claiming is delayed, up to age 70, the full monthly benefit goes up even more, as much as 8% for each year.
Before they file for benefits, a financial professional can help clients consider a variety of factors such as how long they plan to work, their health, their family’s history of longevity, and income needs.
Working while claiming
Clients who plan to claim early, say at 62, and then continue working should be aware there are implications. For those under their FRA for the entire year that are claiming benefits, there’s an earnings limit ($17,040 in 2018). After that, the government deducts $1 for every $2 in wages. And, another wrinkle, the limit is higher for the year they reach FRA ($45,360 in 2018). After FRA, there’s no limit.
The ins and outs of spousal benefits
Some individuals who had low-paying jobs throughout their career or didn’t earn enough credits to claim their own Social Security retirement benefit (like a stay-at-home parent) still have the ability to claim a benefit based on a spouse’s work history. Clients can apply for those benefits as they would their own by contacting Social Security either online, by phone, or in person.
Even divorced clients may be eligible to file on an ex-spouse’s earnings. There are restrictions, including the length of the marriage and current marital status.
A potentially important factor for clients to consider is the lower-earning spouse’s financial situation. When the higher-earner dies, a lower earning survivor can “step-up” to the higher-earner’s monthly benefit. But overall, with just one check, household monthly income would most likely decline. By waiting longer to claim benefits, the higher-earning spouse can create a higher monthly benefit for the surviving spouse to claim later. Something to think about.
The remaining strategy: Restricted application
As mentioned earlier, Congress tightened old loopholes that allowed some married couples to increase their lifetime household income using claiming strategies. One strategy remains for couples born before 1954 if both are entitled to Social Security benefits based on their own work record. At FRA one spouse can apply for spousal benefits on the other’s benefits, leaving his or her own benefits to increase until they turn 70, then claim their own, enhanced benefit.
Social Security offers tools to help you show clients what retirement benefits they can expect through both an estimator and a more personalized tool based on their own actual reported earnings. Social Security also has helpful information to explain how taxes may affect benefits (clients may not understand their Social Security benefits are potentially taxable).
Transamerica’s educational program, a Field Guide to Social Security, includes a retirement income workbook and offers financial professionals tools to help explain Social Security retirement benefit strategies.
Things to Consider:
Financial professionals still have a role to play when it comes to helping clients claim Social Security retirement benefits.
Once clients make the decision to file a claim, they only have 12 months to change their mind. You may want to start the conversation early to help them avoid taking a step they didn’t thoroughly think through.
Social Security probably affects most – if not all – of your clients. Some 171 million Americans are earning benefits and more than 60 million are claiming them.