How to Survive on Your Social Security Benefits

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Social Security Administration Building
Social Security Administration Building

Social Security benefits comprise a major portion of retirement income for many workers. Most financial planners recommend that clients use Social Security income as one of three major sources of income, the other two being IRAs and personal savings and pension income. However, poorer taxpayers often depend solely upon this form of income for survival, and there is much debate about the future of this program. Some feel that Social Security should be phased out, while others favor investing a portion of the proceeds in the stock market. Still others predict that the trust fund will run out of money within a few years. But a large percentage of retirees do not carefully consider all of their benefit options before they begin drawing income. Of course, most people know the basic rules of drawing Social Security income, such as that if they start taking benefits at age 62 instead of 65, then their benefit will only be three-quarters of what it is if they wait until full retirement age. Most taxpayers are also familiar with the basic rules of spousal and survivor benefits, which are equal to 50 and 100 percent of regular benefits. But many married or widowed retirees do not consider the possibility that they can come out ahead by opting first for a survivor benefit until they retire themselves and then their own, or vice-versa. There are also other, less common methods available for increasing Social Security benefits, such as the repayment option. Spouses who both work have additional options, such as claiming a spousal benefit while the other continues to work.Spouses who both work have additional options, such as claiming a spousal benefit while the other continues to work. Many couples come out ahead when one couple receives benefits early and the other receives them late. But regardless of which plan is chosen, spouses who understand their benefit options and plan accordingly can reap thousands of dollars more over time than those who opt for the simplest alternative. You may need to consult both your financial advisor and a Social Security benefits counselor in order to correctly discern which alternative is right for you.

Survivors can maximize their survivor benefits in several ways. One of them is for the surviving spouse to opt for the survivor's benefit until age 70, then switch to his or her own normal retirement benefit. Of course, this is only beneficial if the survivor's full benefit is larger than the survivor benefit. But this strategy may provide some filers with sufficient current income to allow them to delay receiving their own benefit until age 70. Calculations show that a 62-year old survivor with a full benefit equal to 80% of his or her spouse will come out slightly ahead by simply opting for the survivor benefit now and then switching to his or her own full benefit at age 70.

Consider the previous example with a different scenario. If the higher-earning spouse dies at 66 (full retirement age), then the survivor might still be better off claiming the survivor's benefit for four years until age 70. Then he or she could switch to his or her own benefit and again come out ahead.

Those with sufficient cash to do so may have the option of "doing over" their Social Security benefit. This involves repaying the entire amount of benefits previously collected and reapplying for a higher benefit based on the applicant's current age. The applicant will then receive a new higher payout. For example, someone who began drawing benefits at age 62 and put them in savings or invested them could earn interest on them for 8 years and then turn them back in and reapply for late benefits at age 70. You can also get a refund for any taxes paid on the benefits. However, the applicant takes the risk of not living long enough to benefit from the higher payment. If someone in the above example reapplies for a higher benefit at age 70 and then dies at age 72, then he or she would only have collected a total of 2 years of actual benefits that weren't refunded in their life, and most calculations indicate that it takes at least 8-10 years to recoup your investment this way. But the monthly payment with this strategy is usually higher than the straight life payout of a single-premium deferred annuity with an initial premium equal to the repayment amount.

Married couples also have the option of taking split benefits, where one spouse files early and the other files later. For example, one spouse can claim the spousal benefit while continuing to work, so that he or she can continue to accrue credit for a higher benefit at retirement. One spouse may retire early while the other continues to work until full retirement age, or one spouse may retire at full retirement age while the other works until age 70. Meanwhile, the spouse who works later in both scenarios will receive one-half of the other spouse's benefit until he or she retires.

Savvy investors may be wise to simply begin collecting benefits as soon as possible if they are able to make them grow in the markets. An early Social Security benefit is only three-quarters as much as the full benefit, but an investor who can make that money grow by five or ten percent a year may do better starting with a lesser amount a few years sooner.

Couples that have one spouse who earns significantly more than the other may be wise to try the "file and suspend" strategy. When the higher-earning spouse reaches normal retirement age, he or she files and suspends his or her benefits. Then the lower-earning spouse collects either his or her full benefit or the spousal benefit, whichever is greater, thus allowing the higher-earning spouse to defer benefits until perhaps age 70.

Tips & Warnings

  • All Social Security computations must take into account your risk tolerance, time horizon, financial situation and health and longevity. The rules outlined in this article are general in nature; not all options are appropriate for all people.

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