Social Security is a big asset—one that could potentially exceed a million dollars—and it poses a number of complex decisions requiring financial projections as well as knowledge of the law. It is important that you ensure your entire financial plan is ready to withstand potential changes.

As a reminder, the “File and Suspend” strategy is no longer available as of the end of April 2016.  The “Restricted Application” strategy is still available for anyone who was age 62 or older by December 31st, 2015.  Only the spouse who is filing a restricted application needed to be 62 by that time.  For example, a husband and wife are 65 and 61 years old at the end of 2015.  The husband will still be eligible to file a restricted application at age 66 (FRA) for spousal benefits based on his wife’s benefit, once his wife starts drawing her own.

While some of the strategies below may seem complex, they are everyday calculations for financial advisors. 

Strategy #1 – Decide When to Claim Social Security Benefits

When to start claiming benefits is perhaps the most complicated decision of all. You need to consider Social Security in the context of your entire financial situation. Follow this simple principle: The later you begin receiving benefits (up to age 70), the larger those benefits will be.

The full retirement benefit is based on applying for benefits at Full Retirement Age (FRA), which is currently age 66 for those born 1943-1954 and a few months older for those born in later years. For every year you wait after you reach FRA to apply for benefits, up until age 70, you get an increase above that full benefit.

You can apply before FRA, as early as age 62, and receive a reduced benefit. For those born 1943-1954, that is a reduction of 25%; that is, you would receive only 75% of your full retirement benefit. 

Strategy #2 – Consider the Impact of Working in Retirement

Many retirees plan to continue working, most often part-time. While this can be a great way to stay active and maintain a steady income, working in retirement can actually reduce your Social Security benefits.

If you claim Social Security prior to reaching FRA, your benefits will be reduced by $1 for every $2 you earn over $15,720. It’s important to note, however, that the reduction becomes less severe the calendar year you reach FRA. The earnings limit of $41,880 only applies during the months prior to reaching FRA, reducing benefits by $1 for every $3 you earn over $41,880. The month you reach FRA, none of your benefits will be reduced, regardless of how much you earn. 

Strategy #3 – Employ Effective Tax Planning

Whether or not you continue to work, you will continue to pay taxes. It’s important to know that Social Security benefits are taxable for all except the lowest income retirees. Only individuals with provisional income under $25,000 ($32,000 married filing jointly) have tax-free benefits. Otherwise, up to 85% of your Social Security benefits will be included in taxable income. 

Strategy #4 – Don’t be Shortchanged on Marital Status

After deciding when to file, the Social Security options based on marital status are the next most complex decisions you will make. File the wrong way, and you could lose thousands.

Married couples face a variety of complexities including whether or not to claim a spousal social security benefits, which is 50% of the other partner’s retirement benefit. In general, couples with similar earning histories usually are best off both applying for their own benefits. Both are also usually best off waiting until FRA or beyond to claim benefits, but there are some exceptions.

Single, never married people have a simple claim. There is no benefit to claim other than your own.

Divorced individuals may qualify to claim on their ex-spouse’s earnings history, if they were married for 10+ years and are not currently married. The ex-spouses does not need to approve of the other’s benefits claim, nor will it affect his or her own benefits. In addition, if your ex-spouse dies, you may claim 100% of that late ex-spouse’s retirement benefits, even if another spouse or ex-spouse is claiming that same benefit.

Widowers may receive 100% of your late spouse’s retirement benefit, which may be higher than your own benefit or a spousal benefit. If you are receiving Social Security benefits when your spouse dies, you are eligible to have your benefits increased to those of your late spouse.

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The information presented in this material is for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Ryan McKeown

Ryan McKeown

Senior Vice President, Financial Advisor