Social Security is a mystery to many Baby Boomers, but it is important to understand the rules in order to maximize one’s benefits. This is the message delivered by Gray Equity Management’s Daniel C. Romano during a seminar at the recent Southern New England Energy Conference.
Romano assured his audience that, despite the dire predictions we hear, the Social Security system has the solvency to provide retirement benefits to the Baby Boomer generation, which includes adults born between 1946 and 1964. Benefits are based on how much a person earns over their career and the age at which they apply for benefits. Payouts are calculated using the average indexed monthly earnings (AIME), which is based on the individual’s top 35 earning years.
Social Security uses a formula to calculate a person’s primary insurance amount (PIA), and the PIA is used as the basis to determine monthly payout. If a person collects at the full retirement age of 66, they will receive 100 percent of their PIA every month. Claiming Social Security at a younger age reduces the percentage of PIA received, while collecting at an older age increases the payout by 8 percent for each year that the recipient waits.
Filers can also increase their payout by claiming spousal benefits, provided the spouse’s payout was higher than theirs. A spousal benefit can be as high as 50 percent of the spouse’s PIA. If a husband or wife dies, the remaining spouse can claim survivor benefits, which allows them to collect their spouse’s benefit amount if it is higher than their own. Divorced spouses can also claim a spousal benefit, provided their marriage lasted 10 years and they remain unmarried.
When to Apply?
Romano said there are many factors to consider when deciding when to apply for Social Security benefits, including one’s health status, life expectancy, need for income, plans to continue working, and survivor needs. Delaying one’s benefits has a payoff of receiving larger monthly payments. For example, a recipient with a PIA of $2,466 would receive $2,307 a month by claiming at age 62, or $4,060 by waiting until age 70. Social Security also applies a cost of living adjustment (COLA) annually, which magnifies the effect of early or delayed claiming.
Given that difference, it might look like a no-brainer to delay filing for Social Security, but every case is different, according to Romano. If your family history and/or lifestyle suggest a relatively short life expectancy, then waiting to claim might not pay off, he said. One way to increase benefits is to raise one’s AIME.
If one’s current earnings are significantly higher than their earnings from any of the other 35 years on which their AIME is based, continuing to work will cause those lower earning years to be displaced directly by years at current earning levels, so there might be an opportunity to drive up the AIME. Recipients can also reduce the taxation on their Social Security benefits by making the right choices. It helps to reduce other income with tax-advantaged investment and to anticipate IRA Required Minimum Distributions (RMDs) to avoid being nudged into a higher tax bracket, Romano said.