One of our biggest decisions regarding retirement involves when to elect Social Security benefits. We can elect to begin the benefit at age 62 but with an early election of benefits comes a permanent discount of 20% to 30% in annual payments for the duration of retirement. With the loss of pensions as a retirement income resource and a much heavier reliance on Social Security and your investment portfolio to provide for your retirement income, the decision you make regarding the election of Social Security benefits becomes very important to your overall retirement.
Waiting until your full retirement age to elect benefits will allow you to collect 100% of your Primary Insurance Amount, which is a function of your average indexed monthly earnings over time.
Your year of birth will determine your full retirement age for Social Security benefits. For instance, if your were born in 1943 through 1959, full retirement age is 66 with additional months added for 1955 through 1959; if you were born after 1959 full retirement age is 67 for Social Security benefits.
Every year you wait to elect your Social Security benefit beyond normal retirement age means benefits will increase automatically from your full retirement age to the date you elect to receive your benefits or until you reach age 70. For instance, if you were born in 1943 or later, an 8% increase to your benefits will be added for every year you delay taking your benefits beyond your full retirement age. Where else can you earn a guaranteed 8% rate of return on your money?
The decision you make regarding your Social Security benefit election date will also affect your spouse's benefit. If your spouse's highest benefit amount is 50% of your benefit and you elect Social Security benefits at age 62, you also lock them into a permanent reduced spousal benefit. This is referred to as the deemed filing rule which is a penalty to couples who file for benefits before their full retirement age. If an individual files early for benefits they are filing for both their own benefit and any spousal benefit for which they may qualify resulting in a permanently reduced personal and spousal benefit.
If you wait to file for benefits upon reaching your full retirement age, you can immediately file and suspend your benefit payments. This would allow your own benefit to continue to increase 8% until elected in the future or as late as age 70 but free up the spousal benefit to be elected by your husband or wife at 50% of your full retirement age benefit. Spousal benefits do not increase after attaining full retirement age. If your spouse elected his or her own benefit early then a reduction would still apply to the amount of the total benefit he or she would receive. However, at your death your benefit will now be available to your spouse at 100% of your age increased benefit.
If both spouses reach full retirement age and you both qualify to begin your own benefit you have the option to elect your own benefit or spousal benefit. This is referred to as a restricted claim application which again would allow the owner benefit not elected to increase with age at 8% annually.
Careful planning around the election of Social Security benefits can play an important role in your long range retirement success. Review of your benefit election options in conjunction with your overall retirement plan can provide important perspective necessary to make an informed decision about the election of benefits for you and your spouse.