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Should I start receiving Social Security benefits at 62 or wait a few years? How does my decision affect my spouse’s benefits?
Every day tens of thousands of people are making decisions about when they’ll start receiving Social Security — and these decisions affect the amount they’ll receive. However, many people don’t know what options are available to maximize their benefits.
Since Social Security represents about 39% of the income for the elderly population, understanding the benefit-claiming options is important in an overall retirement plan. Here are some guidelines to help you decide when to start receiving benefits.
Benefits of delaying
While you can start receiving benefits at 62, it typically makes the most sense to delay until 70. Delaying is a great strategy for two reasons:
• Social Security increases your benefit for each month between age 62 and 70 that you delay the start of your earned benefit. This increase in benefit is called delayed retirement credits. If you were born in 1943 or later, your annual benefit increase is 8%.
• In a married couple, when the higher wage earner dies, the widowed spouse will receive a monthly survivor’s benefit. The amount will be based on the Social Security income that the higher wage earner received during his or her lifetime, which will reflect any delayed retirement credits. Therefore, to maximize benefits for your spouse after you pass away, delaying your benefits until 70 is a good strategy.
• Additionally, your annual cost-of-living adjustment, or COLA, is based on your monthly payments; if you begin benefits at 62, your COLA will be lower as well.
Important note: If you decide to delay your retirement, be sure to apply for Medicare only at 65. Otherwise your Medicare coverage may be delayed and cost more.
To decide the best time to receive your Social Security benefits, it’s important to take health into consideration. Spouses in poor health should start their benefits early, and spouses in excellent health may want to delay their benefits. Keep in mind that Social Security benefits for a nonworking spouse can’t start until the working spouse begins his or her own benefits.
It can be tempting to take your Social Security benefits at 62, the earliest time possible. But unless you absolutely need the income sooner due to expenses and health issues, delaying is generally the better option.
Changing your mind
If you start receiving Social Security benefits, you can change your mind and then restart benefits later to take advantage of the higher payout. However, you have only a 12-month window after you start receiving benefits to make this choice, and you can do it only once in your lifetime. If you take advantage of this one-time option, you must repay all the benefits you’ve already received.
If you’re close to deciding when to claim your benefits, it’s also important to know about recent changes in Social Security law. Last November, Congress passed the Bipartisan Budget Act of 2015, which phased out two popular Social Security claiming strategies for married couples. The Social Security Administration eliminated “file-and-suspend” and “restricted application,” two strategies that were viewed as loopholes and that allowed married couples to claim thousands more dollars in lifetime Social Security benefits than they ordinarily would have.
The file-and-suspend strategy allowed the higher-earning spouse to file for benefits upon reaching full retirement age, then suspend those benefits. This allowed the benefits to grow at 8% annually, while also allowing the recipient’s spouse to begin receiving spousal benefits, which are half the amount of the higher-earning spouse’s benefits.
Restricted application, a related strategy that mainly focused on married couples who were both income earners, allowed recipients who are full retirement age to receive their spousal benefits and then switch to their personal benefit at age 70 as a way to maximize benefits.
The restricted application option will no longer be available to anyone born after Jan. 1, 1954. If a married couple is already taking advantage of file-and-suspend and restricted application, they will be grandfathered in and unaffected.
The bottom line
If you are in excellent health and have adequate income to sustain your lifestyle until full retirement age or to age 70, it’s probably best to delay your Social Security benefits. There are many factors to take into consideration, however, and it’s a good idea to meet with a financial professional who can walk you through your claiming strategies to maximize your benefits.
Blake Fambrough, CFP, is a financial advisor with Dubots Capital Management in Temecula, California.