Money matters: The scoop on Social Security

With many factors at play, deciding when to tap Social Security benefits is an individualized decision. (iStock.com/ Domepitipat)

Money Matters is a monthly column exploring pertinent financial issues for older adults in or near retirement. In this installment, columnist Jenny Callison shares tips on how to navigate the complex decisions around claiming Social Security benefits. 

Deciding when to start taking one’s Social Security payments is one of the most important decisions a person can make, but, ironically, there are no fixed rules about when is best to tap into that resource. Everyone’s situation is different, said Kelly Luckhaus, a financial adviser with Edward Jones in Wilmington.

“Just because you can doesn’t mean you should,” she advises her clients. “This needs to be an individualized conversation. And you need to start that conversation talking about cash flow.”

Most of those conversations involve a married couple, and include a review of their expected expenses in retirement and their wants and needs in that phase of life, Luckhaus said. Next, they need to look at their sources of income other than the anticipated Social Security benefits.

“Is there a pension for one or both of them? Do they have rental income? Do they have an annuity? Does that income cover their desired spending, or is there a gap?” she continued.

The need to fill an income gap impacts when one or both people decide to start drawing Social Security. The window opens at age 62; individuals reach their Social Security full retirement age at 67 if they were born in 1960 or later. The younger a person when he or she begins drawing Social Security payments, the less the payment will be.

“We go back to cash flow,” Luckhaus said. 

If her clients have enough retirement income without Social Security when they are ready to retire before full retirement age, she may counsel them to wait until full retirement age. If not, it may make sense to turn on the Social Security tap at, say, 65. But there is a further caution to those who start their payments before reaching full retirement age: an earned income limit.

In other words, if you start drawing Social Security before you reach the full retirement age of 67 and you plan a new career as a hedge fund manager, your benefit will suffer. Even if you don’t aim so high, continuing to work can work against you.

“Prior to the year of your full retirement age, the earned income threshold – the amount you can continue to earn through a job – is $21,240,” Luckhaus said. “If you earn more than that, your Social Security benefit will be reduced by $1 for every $2 earned over that limit. During the year you turn 67, your full retirement age, the amount that can be earned goes up to $56,520 and the reduction is $1 for every $3 earned. There is no income limit after you hit age 68.”

Meaning, that big-bucks career as a hedge fund manager can start when you finish your full retirement age year. 

Don’t need to start Social Security payments at 67? There’s a modest bonus for waiting, says Luckhaus.

“Between the ages of 67 and 70, your [untapped] Social Security benefit increases at 8% a year. At the age of 70, a person’s benefit stops increasing, so there’s no further advantage to delaying the start of payments,” she explained. 

The chances are, one spouse will outlive the other. How does that affect Social Security benefits? Some strategic planning early on might help.

“If they have been married at least 10 years, the surviving spouse will get the larger of the two Social Security checks, losing the other,” Luckhaus said. “So, when making your Social Security decision, it might make sense to let the higher wage-earner keep working longer to keep that account building until age 70, while going ahead and taking the benefit belonging to the spouse who earned less during his or her career.”

What if a dual-income couple divorces at some point? That same 10-year rule applies, meaning that if the couple was married for at least that length of time, the lower-earning former spouse is eligible to receive up to half of the higher-earning former spouse’s benefit, without reducing the primary Social Security holder’s income, Luckhaus said.

What happens to Social Security benefits when two widowed or divorced individuals marry again? Anyone eligible for a spousal benefit who remarries before the age of 60 loses the spousal benefit, according to the Social Security Administration. After the age of 60, there is no longer a penalty for remarrying. That law changed in 1979.

“Under current law, there is no penalty if the remarriage occurs at 60 years of age or later,” the administration states. “The Social Security rules on remarriage have changed over time. Only since 1979 have widow(er)s been allowed to marry at or after age 60 and not face reductions in benefit amounts.”