Jan explains when the best time to claim social security benefits may be; why it makes sense to claim them as soon as possible; and the reasons people wait to collect.
A Deep Dive into Social Security
Hollis Walker: This is #NowMe, a podcast for financial advisors and their clients. Hello, I’m Hollis Walker with Jan Blakeley Holman, director of adviser education at Thornburg Investment Management. Welcome back. Thanks for joining us for another episode of #NowMe. On a recent #NowMe podcast, we discussed Social Security and at the end of that podcast, we agreed to dig deeper on that topic. Jan are you still game?
Jan Blakeley Holman: Absolutely Hollis.
Hollis Walker: Okay, then let’s go. To refresh everyone’s memories, when we discussed Social Security, you told us that even though the number of people retiring in the 12 months ending September 2021 had increased dramatically, the number of retirees claiming Social Security had declined. So, my first question is: what should we know about Social Security retirement benefits before making a decision about whether or not to claim them?
Jan Blakeley Holman: Well, that’s a great place to start, Hollis. I should also say that the great resignation continues. In November, 4.5 million people left their jobs. That was above the 4.2 million people who quit in October. So, not only are people still leaving jobs, but people are still retiring, people are still looking at Social Security, and I think we have to talk about claiming, as you said. In order to do that, let me back up a little bit and I think we need to review some of the rules relating to taking a retirement benefit from Social Security. I should preface this by saying, to make it easy to understand, we’re gonna focus on someone who’s been employed and who’s paid into the system. So, the first point is that any individual born after 1929 is eligible to claim a Social Security retirement benefit once they have paid into the system and have accumulated 40 credits. Now, what’s consistent with how Social Security works is that 40 credits is the same as 40 quarters, but of course, Congress couldn’t make it 40 quarters, they wanted to make it more complicated. So, individuals who stop working and begin again retain the credits they have in the system. That’s the first point. Your retirement benefit in Social Security is based on how much you’ve earned over the course of your credited working career. The age you decide to retire affects the amount of your benefit. Age 62 is the earliest possible retirement age. With Social Security, it’s important to understand that the earlier you claim your benefit the lower the benefit you will receive. There’s an expression in Social Security called full retirement age, and if you’re looking at your Social Security information at ssa.gov, which is the Social Security website, you’re gonna see that term: full retirement age, or FRA. Full retirement age is the age at which an individual becomes eligible for their full retirement benefit. Now, full retirement age applies to people born in 1943 or later. Full retirement age is the same for individuals who were born between 1943 and 1954, and then it increases each year between 1955 and 1960 and remains the same for those born after 1960. A lot of rules here. Regardless of an individual’s year of birth, Social Security benefits, as I said, can be claimed as early as age 62, but if you claim Social Security early, which is before your full retirement age, that benefit will be reduced and you will continue to receive that lower benefit for the rest of your life. Likewise, the longer an individual waits to claim their benefit after full retirement age, the higher the benefit will be. For example, let’s say a person was born in 1959. Their full retirement age is 66 years and 10 months. If they decide to claim their benefit at age 62, it’s going to be 29 percent less than they would have received at their full retirement age. Now, that’s a pretty healthy chunk of change. If that same individual decided not to claim their benefit until they’re older than their full retirement age, their benefit will increase 8 percent per year for the number of years they delay until they reach age 70.
Hollis Walker: Ooh, That’s a mouthful, Jan. So, that makes me wonder, knowing that you’d make more money in the long term if you postponed taking Social Security benefits, why would a person claim their Social Security benefit early, like at age 62?
Jan Blakeley Holman: Well, there are a number of reasons, and you know, some of these reasons are as individual as we are, but some of the biggies are the following. First of all, they may believe that Social Security is going to go bankrupt. Second, they wanna make sure that they collect the money they are owed. Another one, they face a current cashflow shortage and need another source of income. This might be particularly timely for people who find themselves out of work. Another one, they believe their own health issues or family health history indicates they’re gonna have a short life expectancy and they wanna claim their benefits as soon as possible for fear of missing out. Another reason, they anticipate spending more money in the early years of retirement when they may be more active, so they want that additional income right away. They are able to claim a spousal benefit to meet an immediate financial need, and as I said, we’re really focusing on people who earn Social Security, but it’s important to know another part of Social Security is spousal benefits that are paid to the spouses of people who have earned 40 credits, and that gets a little complicated. And the final reason is that they may have money invested in longer-term investments and they don’t wanna liquidate those investments. They wanna let them grow for the future and so they’ll take Social Security income right now.
Hollis Walker: Okay, this is getting a little clearer. How about the flip side of that decision. Why would an individual wait to claim Social Security benefits after reaching their full retirement age?
Jan Blakeley Holman: Well, this person might be the one who believes that Social Security is gonna remain solvent, which, as I said in our last podcast, I do. I tend to be optimistic about that. The person who waits may like the fact that their monthly benefit’s gonna increase if they delay, and it can increase, as I said, as much as 8 percent a year between full retirement age and age 70. These people are in good health. They have reasons to expect that they’re gonna live a long life and want to let that benefit grow. Another reason is that they plan to continue working and don’t have a reason right now to claim their Social Security benefit. The final reason is that they expect their spouse to live longer and they want him or her to receive the highest spousal benefit possible. The earlier the higher-earning spouse begins collecting their benefit the lower the benefit will be that is passed on to a surviving spouse.
Hollis Walker: Thanks Jan, that’s, that’s very helpful. There’s one other thing I’ve wondered about. In our first podcast about Social Security, we discussed the large number of people who retired in the 12 months that ended in September of 2021 and, as you pointed out, a lot more people have left their jobs since then, some of them retirees. So, what happens if a person retires, claims their Social Security benefit, and then decides to go back to work? I’m thinking some of those people who quit their jobs may change their minds. Can they tell Social Security to stop paying them and then later begin accruing their benefit again?
Jan Blakeley Holman: Yes. Of course, there is a little bit of complication of this too. Individuals who’ve been receiving Social Security benefits and then, let’s call it, unretire, can do so if they’re under age 70, and if it’s within 12 months of when they began receiving the benefits. To do so, they just fill out a form, which is SSA-521, and the name of that form is Request for Withdrawal of Application. They will also need to repay Social Security the benefits that they and any of their beneficiaries took and any money that was withheld from those Social Security checks, like Medicare payments. Once they’ve done that, they can let Social Security begin building again, and reapply later.
Hollis Walker: Wow. Okay, so Jan, that sounds pretty serious. Let me just make sure I understand. If I took the benefits for less than a year, and then I unretired as you called it, I’d have to come up with the cash to repay those benefits. What if you’re still working and you start taking Social Security? How does that work?
Jan Blakeley Holman: If you’re working and you take Social Security benefits, you’re fine unless you’re taking them before your full retirement age. Again, the little twist here is that if you’re working and decide to take Social Security at your full retirement age or later, you’re fine. But if you decide to take Social Security benefit before your full retirement age, there are hurdles that you have to overcome, and one is that there will be an earnings limit that’s applied to your income. And if you’re over a certain amount of income per year, money will be withheld from your Social Security check. Now, as you age, year after year after year, toward your full retirement age, the amount that will be withheld will be smaller. So by the point you reach your full retirement age, you’ll get the full benefit that you would have gotten when you started taking the benefit early. It will be lower, though, than the benefit you would’ve received at your full retirement age. Does that make sense?
Hollis Walker: It does make sense. It’s pretty complicated, but it does make sense. I still wonder, though, I mean, they set up Social Security this way a long time ago, and I know they’ve made adjustments to the law over the years. We keep hearing that our country may be facing a labor shortage and quite soon. That makes me wonder whether the government might eventually raise the age limit of full retirement age, for example, to discourage people from retiring relatively young. What do you think about that?
Jan Blakeley Holman: You know, this is one of those things where there are a number of moving parts, a number of variables that you could push on to determine how it affects the end result and the amount that’s in the Social Security trust fund. For example, one of them could be increasing the retirement age. Another could be limiting the amount of the benefit a person earning X number of dollars or more would receive. Another could be incenting people to not take Social Security until they’re older. Do you see what I mean? I mean, there, it’s almost limitless, the things that could be done. Additionally, those things could be done in conjunction with one another. So it’s pretty complicated and it’s gonna happen at some point, I believe, but I think it will make something that’s complicated really, really, really complicated. If that’s possible.
Hollis Walker: Well, I’ve got one simple answer to that, and that’s, that’s all the time we have today. You’ve been listening to #NowMe with me, your host, Hollis Walker and Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. If you want to suggest a topic for us, email us at NowMe@Thornburg.com. If you’d like to hear more episodes of #NowMe, you can find us on Apple, Spotify, Google Podcasts, or your favorite audio provider, or by visiting us at Thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe, share us on social media and leave us a review. Until next time, thanks for listening.
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