18Nov2015
5 Question Regarding Social Security
by Bryan Ward, CFP®, CIMA® in Ideas, Hints, Tips, Retirement, Social Security

5 Questions my clients usually ask me regarding Social Security:

1. What happens if I retire at age 60, but do not start to collect social security until I hit my full retirement age?

The administration assumes you will continue to earn the same amount of money until full retirement. If you retire before full retirement, your estimated benefit stated on your annual statement may have to be revised for you not paying into Social Security up until full retirement. The estimate may have to be revised lower because your estimated benefit is based off your 35 highest years of income.

2. Can you start to collect benefits and then change your mind?

This used to be a popular strategy for many who did not need social security right away. You would start to collect your benefits. You would then invest those benefits so that you could earn interest or a decent return. Then after a few years you would submit a withdrawal of benefits and then refile for benefits again at the older age and greater benefit. In doing so, you would be required to pay back the amount you received over the years, but you would not be charged any interest and you were able to keep the interest you earned by investing your benefit over the years. Seems like a great strategy right? Of course it does, which is why this rule has changed significantly.

Now if you start to take benefits, you have only 12 month to request a “Withdrawal of Application” and the request must first be granted by the administration. You will still have to repay the benefits you received and will be able to refile. Though you will only be allowed one withdrawal of application in your lifetime.

3. What happens to my benefits if I start collecting social security, but continue to work or go back to work either before or beyond my full retirement age?

This question is not all that straight forward. The earlier you start collecting your benefit, the larger the reduction in your benefit will be. Any reduction due to collecting early is permanent. However, if you go back to work, the SSA will automatically recalculate your benefit each year as long as the income you are earning increases your previously calculated “35 year earning average”. Though going back to work could have other effects on your benefit. Going back to work prior to full retirement age, based on the wages you earn, part or all of your benefits may be withheld. You will not have that problem going back to work after full retirement age. But in either case, there will be a good chance your benefits will be taxed.

4. My Social Security benefit can be taxed?

Yes, if your provisional income exceeds certain thresholds, up to 85% of your benefit could be included in your taxable income for federal tax purposes. To figure out your provisional income, you take your modified adjusted gross income (MAGI) and add 50% of your social security benefit. Below is a chart on provisional income limits for 2015

Income for Single or Head of Household Income for Married, Filing Jointly
Up to $25,000 = Not Taxed Up to $32,000 = Not Taxed
$25,000 – $34,000 = up to 50% taxable $32,000 – $44,000 = up to 50% taxable
Over $34,000 = up to 85% taxable Over 44,000 = up to 85% taxable

5. When can I start collecting spousal benefits?

You must wait until your spouse has filed for benefits but currently you don’t have to wait until he or she collects the benefits. If your spouse is at full retirement age, they can apply for benefits and then suspend collection until a further date. This has also been a popular strategy for many individuals to take a spousal benefit before starting their own higher benefit. Though there have been some recent rule changes to this strategy that limit the benefits that will take effect in April of 2016.

  • Change #1: if you are going to receive a spousal benefit that is greater than the benefit you would receive based on your own earnings record. This usually happens if you did not work a full career, or earned wages substantially less than your spouse. In this case, the spousal benefit cannot be started until the primary wage earner starts his or her benefit. You can start your own smaller benefit based on your own earnings record. Later, when your spouse starts their benefit, you will start receiving the larger spousal benefit.
  • Change #2: if you are going to receive a spousal benefit based on your spouse’s earnings record that’s less than the benefit based on your own earnings record. In this case, you cannot start just the spousal benefit. You will have to start the benefit based on your own earnings record.

Note: You can still use the restricted application and file-and-suspend strategies up until April 2016 if you as the spouse are at least age 62. One common use of these strategies goes like this:

  • The primary wage earner wants to delay receiving benefits as long as possible, until age 70, to receive delayed retirement credits.
  • The primary earner files for benefits but immediately suspends them on or after attaining full retirement age (currently age 66). This enables the spouse to start spousal benefits at that time, provided the spouse has at least attained age 62. The spousal benefits provide some cash flow to the couple while the primary wage earner is delaying benefits.
  • In this scenario, if your spouse has earned a larger benefit based on his or her own earnings record, he or she could file a restricted application that starts only the spousal benefits. This enables your spouse to receive delayed retirement credits on the larger benefit based on his or her own earnings record.
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