Commentary by Joel Harris
To some Americans, the idea of retiring from their job is not the most ideal situation when they reach full retirement age. Some might need to continue to work to add to their retirement savings, while others choose to work because they enjoy interacting with their co-workers and would get bored if they retired.
If you find yourself in this situation and wondering whether or not you should file for your Social Security benefits while you’re still working, I will share an idea that you might consider. Dave and Julia both enjoy their jobs and want to work into their late 60s, early 70s. Dave is currently 66 and at full retirement age based on Social Security rules. His Social Security benefit at full retirement age is $2,600 per month based on his earnings history. Julia will reach full retirement age of 66 in April 2016, at which time her benefit will be $1,600 per month.
Dave is delaying his benefits because he wants to take advantage of the annual 8 percent simple interest growth to his benefits until he reaches the age of 70. Julia on the other hand wants to continue working past full retirement age, but instead of getting delayed retirement credits on her benefits, she thinks it will be best to start her $1,600 when she reaches her full retirement age 18 months from now.
Fast forward to April 2016 when Julia has turned 66 and is now considered to be full retirement age. Most people is Julia’s position will elect their own benefits, which in this example is $1,600 per month. Is there a different strategy available to Julia outside of just taking her own benefit at 66?
Yes, Julia can take advantage of spousal benefits at age 66, where she is eligible for up to half of Dave’s benefit which is $1,300 per month. Why in the world would Julia consider taking $1,300 in spousal benefits vs. her full amount of $1,600 per month? Well, in this example, Julia’s own benefit of $1,600 per month will grow 8 percent simple interest every year until the age of 70 if she elects to take the spousal benefit. One important caveat is that Dave needs to file for his benefits first before she elects spousal benefits. Since he still wants his own benefit to grow until 70, he decides to file and immediately suspend his benefits at 68, which in turn gives Julia the opportunity to file for spousal benefits.
Since Julia decides to take the $1,300 spousal benefit, her own benefit will grow from $1,600 to $2,112 at age 70. Furthermore, since Dave filed and suspended his benefits at 68, his $2,600 benefit will grow to $3,432 at age 70.
In this example, Julia and Dave gave up $300 per month by electing spousal benefits at Juila’s full retirement age vs. electing her own benefit, but received a very large bump in benefits at 70 by switching to her benefit that has grown under the delayed retirement benefits provision. Additionally, if Dave dies before Julia, she will have the ability to switch from her own benefit to Dave’s benefit of $3,432 under the surviving spouses provision.
Social Security will play a major role in your retirement income planning. Be proactive in seeking out information so you can identify possible strategies that can potentially help you maximize benefits during retirement.