A Quick Guide to Securing Social Security

Social Security is a large part of the retirement plan for almost every American worker, providing replacement income for qualified retirees and their families. If you have questions about this benefit, you’re not alone. From general information to when to take benefits and how your marital status affects those benefits, there are many items you should review so you have a clear financial picture going into retirement. Review the guide below to gain a better understanding of what you can expect.

Social Security benefits: a snapshot

Social Security has gone through many changes since being introduced in the mid-1930s and the program now covers more beneficiaries than it originally did. When stripped down to the basics, Social Security represents a government-sponsored, inflation-adjusted, lifetime retirement income. Before jumping into more specific details about this benefit, there is some basic information you should know:

• Your Social Security Benefit is based upon your top 35 years of earnings. You become eligible for a benefit after 10 years of paying into the system.
• You must know if you should file for Medicare at 65, even if you are still working — or your premiums will go up.
• If your full retirement age (FRA) is 66 and you delay claiming Social Security until age 70, your benefit will be about 76% higher compared to starting at 62.
• A divorced spouse can get a benefit based upon the earnings record of her/his “ex” even if their “ex” has not filed yet (more on this later!).
• Disability benefits are separate from retirement benefits. Your Social Security benefit will not be reduced.
• To receive a widow(er)’s benefit, you have to be married to your spouse for at least 9 months.

Some headlines paint a dire picture for Social Security’s future, but it’s important to get all the facts so you can understand what’s ahead. Workers continue to pay into Federal Insurance Contributions (FICA) tax. These taxes are withdrawn directly from paychecks and are used to fund things like Social Security and Medicare. In the coming years, the Social Security program will owe more in benefits than it is taking in. While benefit cuts are a possibility, that doesn’t mean Social Security is going away.

How did we get here? One of the biggest impacts on Social Security’s long-term finances is demographics: Life expectancy is increasing longevity, meaning Social Security is paying benefits to more individuals for longer. The decline in birthrate means there are fewer individuals entering the workforce to support a growing and aging population.

The total amount paid into the program will affect the percentage paid out to those who qualify, which is why choosing the right age to file is important. The Social Security Board of Trustees’ 2020 annual report suggests that a benefit cut of up to 24% is possible once the retirement trust fund is depleted, which is estimated to happen in 20351.

During the 1970s in the Reagan administration, Social Security faced a similar predicament due to inflation. To address this, the Reagan Administration raised tax rates and increased the full retirement age from 55 to 66 (FRA). Changes related to the FRA weren’t felt until nearly 30 years later.

When to take benefits

Claiming Social Security benefits early

Deciding when you’ll begin taking Social Security is the most important decision you can make for your retirement plan. The earliest you can claim Social Security is age 62, and many will claim it then in fear of the program going away. Depending on your birth year, taking your payout as soon as possible could result in anywhere from a 25% to 30% reduction from what you would have received had you waited until your full retirement age (between 66 and 67). With life expectancy increasing, this early claiming decision could result in leaving substantial amounts of lifetime benefits on the table. Numerous experts recommend individuals delay the start of Social Security benefits for as long as possible because of the unique nature of this retirement income.

Claiming Social Security benefits at full retirement age

Those who claim Social Security at full retirement age would receive the full benefit amount without penalty. It’s important to note FRA will gradually increase to 67 for those born in 1960 and after. Your benefit is paid based on the top 35 years of earnings, and you become eligible for a benefit after 10 years of paying into the system.

Delaying Social Security benefits

Alternatively, you can delay your benefits and elect to receive them at a later age. Those who claim Social Security after the full retirement age receive delayed retirement credits (DRCs) – an 8% bump up to your monthly benefit. This percentage is added to each additional year past full retirement age. Just because you start later wouldn’t mean you lose out on benefits. In reality, you would receive the delayed retirement benefits and, in the end, see a greater return in benefits due to the larger checks you’d receive monthly.

But what is the breakeven? How long do you need to live to make it worth your while to wait to claim? The answer is average life expectancy. If you think you have longevity on your side and might live for a while, waiting may be beneficial.

Starting, stopping, and suspending benefits

Along with claiming Social Security, there are options to stop and suspend benefits. For example, many who file at age 62 may quickly realize they don’t love having their benefits reduced and want to catch up. They can do so by stopping Social Security.

If you are under full retirement age and want to stop receiving Social Security, you must:

1. File a request for ‘Withdrawal of Application’ within 12 months of claiming your benefits.
2. Re-pay all benefits received by you and anyone getting benefits on your record.
3. Re-pay Medicare premiums deducted from your checks.

If you started receiving Social Security and are past the 12-month period or don’t want to pay everything back but still catch up on benefits, you can increase monthly earnings by suspending your benefit if you are at least full retirement age. Suspending benefits may be an option for those who take benefits early due to unemployment or other unexpected events. Once you reach full retirement age and the benefits are suspended, the delayed retirement credits will accumulate and provide traction to help make up for the percent lost in filing before full retirement age. Once you re-start benefits, you will then have accrued delayed retirement credits and can begin receiving larger checks than originally estimated.

If you are at least full retirement age and want to suspend your benefits, you must contact Social Security. Unlike stopping benefits, there is no repayment required when you elect to suspend your benefits. One thing to note is anyone receiving a benefit tied to your record will have their checks suspended, too.

How your marital status affects benefits

Spousal benefits

When claiming Social Security, there is an option for married couples to receive a spousal benefit. If you have work history, you can either take your benefit or half of your spouse’s benefit, depending on which one is greater. One caveat is you can’t take this until your spouse starts claiming their benefits. Keep this in mind if there’s a large age difference between you and your spouse, or if your goal posts for retirement are years apart.

Divorced spouse benefits

Divorced spouse benefits are like spousal benefits. To be eligible for the divorced spouse benefit, you must be married a minimum of 10 years. The benefit is 50% of the ex-spouse’s full retirement age benefit. Other key things to consider:

• The ex-spouse must have started receiving Social Security, or the divorce has been finalized for at least two years.
• If you have more than one ex-spouse, your benefit is based on the “ex” with the higher benefit.
• In most cases, you lose the benefit if you re-marry.

Widow(er) or surviving divorced spouse benefits

If the death of a spouse occurs, you can technically file as early as age 60. If you were married to the person at the time of their death, you must have been married at least nine months. If you were divorced at the time of their death, the 10-year minimum still applies.

For widow(er)s, the amount of benefits that can be claimed depends on if spousal benefits were previously elected. If spousal benefits are claimed, 100% of the deceased spouse’s benefits at the time of death would be given to the survivor. If spousal benefits are not taken, or for those who are the surviving divorced spouse, 100% of the higher claim of the two would continue to be paid to the survivor. Take note:

• The widow(er)/surviving divorced spouse retains the ability to “restrict” benefit to just the spousal amount.
• If you outlive multiple spouses, your benefit will be based on the highest amount available.
• Any Social Security benefit received prior to FRA can be reduced by the “Earnings Test.”
• Only your own benefit earns DRCs if you postpone filing past FRA.

There are many complexities when it comes to claiming Social Security, and many scenarios that could affect what benefits are available to you. Work with your financial advisor to determine the best option for your unique situation. For a further in-depth analysis on the topic please watch General Electric Credit Union's (GECU) on-demand webinar, Securing Social Security.

Ready to begin planning, but not sure where to start? Contact Todd Blessing with Investment Services* today at 513.243.4328 x173 or [email protected] or Erik Waldron with Investment Services at 513.243.4328 x305 or [email protected].