As a result of job losses related to the coronavirus pandemic, many more people are reconsidering when to start their Social Security benefits. If you are in this situation, here are some things to consider.
The first factor to consider is the relationship between your benefit and your age — specifically, how near you are to “full retirement age,” or FRA. If you initiate Social Security benefits prior to reaching your FRA, then your benefits can be reduced for life. If you wait until FRA to claim benefits, then you are entitled to full Social Security benefits based on the highest 35 years of earnings while you were working under Social Security. If you postpone applying for benefits after you reach your FRA, then your benefits increase by 8% every year you delay year up to age 70. At any time you wish after your FRA, you can claim benefits and receive the 8% per year bonus. Another advantage of postponing applying for benefits after you reach your FRA is that your surviving spouse is then eligible for higher benefits. For example, if your spouse has reached his or her FRA after your death, he/she is entitled to 100% of the benefit you are receiving at the time of your death.
If you were born in 1960 and later, your FRA is 67. If you were born between 1943 and 1954, your FRA is 66. Between 1955 and 1960, your FRA would be pro-rated between 66 and 67. If you were born in 1937 or earlier, your FRA is 65. Between 1938 and 1943, your FRA is prorated between 65 and 66.
If you decide to claim benefits earlier than your FRA, your benefits will be reduced from your full FRA benefit as follows: The benefit is computed by counting reduction months (RMs) before your FRA in two stages. Stage 1: For the first 36 RMs, the payment is reduced 5/9 of 1% for each month. Stage 2: For any additional months, the payment is reduced 5/12 of 1% for each month.
If you are facing unemployment now, and decide to file for benefits earlier than your FRA, you have two options to avoid a lifetime reduction in benefits. One option is to repay Social Security for all the payments you received prior to reaching your FRA. Then you can apply for benefits at your FRA or later, and then receive full benefits at FRA or receive full benefits plus 8% per year for each year you wait after your FRA. The second option is to tell the Social Security Administration to stop your payments and wait until FRA to resume benefits. Your benefits at FRA would be reduced slightly (based on how many payments you received). Using one of these options would prevent your lifetime Social Security benefits from being reduced significantly for your lifetime.
Restricted spousal option
For some working couples, the restricted spousal option is an attractive option if the higher-paid spouse was born before January 2, 1954. Even if the lower-paid spouse has not reached his/her retirement age, this option can work. With this option, the lower-paid spouse can apply for benefits as long as he/she has reached at least 62. Then, the higher-paid spouse can then apply for spousal benefits, and wait up to age 70 to apply for benefits based on their own work history, thereby receiving the 8% per year bonus for waiting. When the higher-paid spouse then applies for benefits, the lower-paid spouse can then file for a spousal benefit, and perhaps receive a higher Social Security benefit. This spousal benefit would be based on the full retirement benefit of the higher-paid spouse. An additional advantage is that if the higher-paid spouse predeceases the lower-paid spouse, the survivor benefit would be 100% of the benefit the higher-paid spouse was receiving at age 70.
Many eligible couples have not taken advantage of this option. Some have avoided this option because of the penalty associated with applying for benefits prior to FRA, but the penalty becomes less important because of the additional income available to the higher-paid spouse, the higher survivor benefit, and because the lower-income spouse may be eligible for a spousal benefit which may be higher than the discounted Social Security benefit being received.
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Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.
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