The U.S. government provides eligible individuals a monthly Social Security check to offer financial support during retirement. This system, funded by U.S. taxpayers, has run smoothly since its inception in 1935. However, doubts about its sustainability in the future persist. Clients frequently question this very issue, including when taking their benefits would make the most financial sense. This article dives into the factors to consider when deciding when to take Social Security, the advantages and disadvantages of spousal benefits, and the outlook on the program.
Timing Social Security Benefits
Determining when to begin taking Social Security benefits can significantly impact your financial situation in retirement. Eligible individuals may begin taking Social Security as early as age 62, but doing so will reduce your monthly benefit. Alternatively, you may delay taking your benefits until full retirement age (FRA), which is 66 or 67, depending on your birth year. By waiting until your FRA, you ensure that you will receive your full benefit for the remainder of your life. If you decide to delay benefits even longer, until age 70, your monthly benefit will increase by a rate of 8% each year after you have reached your FRA.
Here are some factors to consider when deciding when to begin taking Social Security:
- Current financial needs
If you need income due to unexpected life events, reduced income from other sources, or other reasons, claiming your benefits early may be necessary.
- Life expectancy
If you expect to live longer than the average person or have a family history of longevity and good health, waiting to claim benefits may be advantageous as you would collect a higher monthly payment for a longer period of time.
- Employment
In 2024, if you work and begin taking Social Security prior to your FRA, Social Security will deduct $1 for every $2 you earn over $22,320. During the year you reach FRA, they will deduct $1 for every $3 you earn over $59,520 until the month you reach FRA. While this is an important factor to consider, it is worth noting that once you reach full retirement age, your Social Security benefit will be recalculated to account for prior benefits that were withheld.
Spousal Benefits
Spouses can claim their own benefit or 50% of their partner’s benefit, whichever is higher. This option is particularly beneficial for spouses who may not have accrued substantial earnings of their own. Here are key points regarding spousal benefits:
- Eligibility
To claim spousal benefits, the primary earner must have filed for their own Social Security benefits. Additionally, the spouse must be at least 62 years of age or have a qualifying child under their care. A qualifying child is a child under the age of 16 or who receives disability benefits. Spousal benefits will be reduced if the primary recipient takes Social Security before reaching their FRA.
- The Switching strategy
Couples used to maximize their Social Security benefits by taking spousal benefits and then switching to their own benefit later. However, if you did not reach the age 62 by the end of 2015, you can no longer claim spousal benefits and later switch to claim your own.
- Divorce
If the main beneficiary qualifies for Social Security but has not yet filed for their benefits, the ex-spouse may still be eligible for spousal benefits if you were married for at least ten years, have been divorced for two years, and are unmarried.
- Survivor benefits
If your spouse has passed away, the surviving spouse can generally claim 100% of their deceased partner’s benefit if they are at full retirement age. If the surviving spouse is age 60 or older but under FRA, they can receive 71.5% to 99% of the benefit.
The Current Status and Future of Social Security
Social Security has been a critical component of retirement planning for millions of Americans. However, concerns about its longevity have been brewing. Below, we explore the state of Social Security and projections for its future:
- Current financial health
It is currently projected that Social Security reserves will be depleted by 2035. If no changes occur, the program will only be able to pay about 78% of benefits based on current tax revenues.
- Demographic shift
The main contributor to the reduced Social Security fund is baby boomers retiring and a lower birth rate among younger generations. With more people receiving Social Security benefits and fewer people paying into it, the imbalance has strained the fund.
- Legislative proposals
Politicians often avoid the conversation of limiting or reducing Social Security benefits, given its popularity amongst voters. Therefore, there have been talks of possible solutions to boost the retirement fund program. Some of the options include raising payroll taxes, increasing the wages subject to Social Security taxes, raising the full retirement age, and reducing benefits for higher earners.
Conclusion
Deciding when to take Social Security or whether to utilize the spousal benefit option are important elements in retirement planning that require careful consideration. Every person’s situation is different, as financial needs, life expectancy, and employment status can vary greatly. It is important to weigh these pros and cons and make the decision that benefits you and your family the most.
As for the future of Social Security, it remains a cornerstone of American retirement and, as of now, is working properly. Staying informed on legislative changes and maintaining a diverse portfolio of investments for the future can help mitigate the impact of any reduction of benefits later on.
If you have questions or concerns about your Social Security strategy, reach out to a financial professional and they can better assist you.
Presented by Jack Russell
