Social Security Planning

<div class="Section1">As most clients know, waiting past the normal retirement age to begin collecting Social Security allows the client to earn delayed retirement credits, which increase the eventual benefit by 8 percent for each year in which benefits are delayed. Because of this special treatment, most advisors counsel clients to delay claiming benefits for as long as possible in order to ensure the maximum monthly benefit level. Clients who do not wish to follow this advice, and who choose to instead claim Social Security early, can potentially benefit from using a qualified longevity annuity contract (QLAC) in their Social Security planning.</div><br /> <div class="Section1"><br /> <br /> A QLAC is an annuity contract that is purchased within a traditional retirement plan, under which the annuity payments are deferred until the client reaches old age (they must begin by the month following the month in which the client reaches age 85) in order to provide retirement income security late in life. The value of the QLAC is excluded from the retirement account value when calculating the client’s required minimum distributions (RMDs) once the client reaches their required beginning date, though the client is limited to purchasing a QLAC with an annuity premium value equal to $200,000 (the limit was the lesser of 25 percent of the account value or $130,000 pre-SECURE 2.0).<br /> <br /> The introduction of QLACs can now allow clients who have saved for retirement to avoid delaying Social Security benefits entirely-and, because of volatility in the Social Security system and the uncertainty of a client’s lifespan generally, many clients are receptive to this idea because they are reluctant to delay in the first place. For most clients, delaying Social Security benefits past retirement age means that withdrawals from tax-preferred accounts must increase during the deferral period in order to ensure sufficient income while maximizing the benefit level for a later time. However, this means that tax-preferred accounts are depleted at a much more rapid rate early in the client’s retirement-leaving a lower account value to grow over subsequent years.<br /> <br /> By purchasing a QLAC within the retirement account, the client can reduce his or her account distributions and eliminate the associated income tax liability, yet still secure a higher level of guaranteed income to supplement Social Security later in retirement. If the client claims Social Security benefits early in retirement, the amount that must be withdrawn from tax-preferred accounts is reduced and a larger portion of his or her retirement savings can be left intact to grow-generating a higher account balance in the long run. With the QLAC, the client still has a guaranteed source of income late in life-regardless of poor market performance or unforeseen circumstances-to supplement the lower Social Security benefit level that reduced the need for high withdrawals early in retirement.<br /> <br /> </div>

<div class="Section1">In general, if an individual waits until full retirement age to claim Social Security benefits, he or she may be eligible for up to six months’ worth of retroactive benefits. For example, if an individual claimed Social Security benefits at age 67 and his or her full retirement age was 66, he or she would be entitled to up to six months’ worth of retroactive benefits. If the individual claimed Social Security benefits at age 66 and 3 months, and his or her full retirement age was 66, he or she would be entitled to up to three months’ worth of retroactive benefits.</div><br /> <div class="Section1"><br /> <br /> If the individual chooses to claim retroactive benefits, his or her permanent ongoing monthly benefit will be reduced based upon the number of months’ worth of retroactive benefits that are claimed.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Delayed retirement credits allow an individual’s eventual monthly benefit to grow by 0.66 percent per month, or 8.0 percent per year, in the time that elapses between full retirement age and claiming benefits. The latest that an individual can claim Social Security benefits is age 70.<br /> <br /> <hr /><br /> <br /> Retroactive benefits are received in a lump sum payment.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Individuals considering claiming retroactive benefits should consider the potential tax consequences of the lump sum distribution, as well as any potential impact on income levels for purposes of the Medicare income-based surcharge.<br /> <br /> <hr /><br /> <br /> Retroactive Social Security benefits can be valuable with respect to survivor and spousal benefits, which do not earn delayed retirement credits and reach 100 percent of their value when the surviving spouse or spouse reaches full retirement age. If a surviving spouse or spouse claims these benefits after reaching full retirement age, he or she should request up to six months’ worth of retroactive benefits (depending upon the time period that has elapsed between reaching full retirement age and claiming spousal or survivor benefits). However, in order to do so, the deceased spouse must have begun collecting Social Security benefits before full retirement age.<br /> <br /> The surviving spouse or spouse’s own Social Security retirement benefits (i.e., based on the spouse’s own earnings record) will not be impacted, and can continue to earn delayed retirement credits until he or she eventually claims Social Security benefits.<br /> <br /> </div>

<div class="Section1"><br /> <br /> If two individuals divorce, but have been married for at least 10 years, a divorced spouse can continue to receive benefits based on his or her ex-spouse’s earnings record, even if that ex-spouse has remarried, in the following situations:<br /> <blockquote>The individual is unmarried,<br /> <br /> The individual is age 62 or older,<br /> <br /> The ex-spouse is entitled to Social Security or disability benefits, and<br /> <br /> The benefit the individual is entitled to receive based on his or her own earnings record is less than the benefit the individual would receive based on the ex-spouse’s working record.</blockquote><br /> The benefit received as a divorced spouse is generally equal to half of the ex-spouse’s full retirement amount if the individual begins to receive benefits at full retirement age. The individual’s benefit based on the ex-spouse’s record does not include delayed retirement credits that the ex-spouse may receive.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> Even if the ex-spouse has not yet claimed benefits, but would qualify to do so, a divorced spouse can claim benefits based on that ex-spouse’s earnings record if they have been divorced for at least two years.<br /> <br /> <hr /><br /> <br /> With divorced spouses, the continued earnings of a former spouse also does not impact the ability of the other ex-spouse to claim benefits based on that working ex-spouse’s earnings record. Further, a divorced spouse’s claim to Social Security benefits based upon the earnings record of his or her ex-spouse does not impact the Social Security benefits that the ex-spouse and his or her current spouse are entitled to receive.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> The file and suspend strategy may still be available for divorced spouses who have reached full retirement age if they were born before January 2, 1954.<br /> <br /> <hr /><br /> <br /> </div>

<div class="Section1">Spousal benefits are benefits that an individual may be entitled to receive based on his or her spouse’s earnings record. This essentially means that married clients may be eligible for Social Security benefits regardless of whether they have ever earned income. This spousal benefit can equal up to 50 percent of the working spouse’s benefit if the nonworking spouse waits until his or her full retirement age to claim Social Security benefits. If the spouse claims benefits early, the percentage is reduced based on the number of months remaining until the nonworking spouse reaches full retirement age.</div><br /> <div class="Section1"><br /> <br /> It is also possible that the nonworking spouse actually did have enough earned income to qualify for traditional Social Security benefits, but those benefits may equal less than the 50 percent spousal benefit. In this case, that spouse is eligible for the higher level benefit, but it will be made up of a combination of the nonworking spouse’s own benefit and a portion of the spousal benefit—the full amount of both benefits cannot be claimed.<br /> <br /> </div>

<div class="Section1">If the surviving spouse remarries before reaching age 60, he or she will no longer be entitled to Social Security survivor benefits based on the prior spouse’s record unless the subsequent marriage ends. Remarriage that occurs at age 60 or later does not impact the survivor benefit rules.</div><br /> <div class="Section1"><br /> <br /> Further, an ex-spouse who was married to the deceased spouse for at least 10 years is entitled to survivor benefits based on his or her former spouse’s earnings record even if the deceased spouse had remarried.<br /> <br /> </div>

<div class="Section1">After the death of a spouse, the surviving spouse can begin to claim Social Security survivor benefits as early as age 60, although the benefit will be reduced based on the number of months remaining until the survivor reaches full retirement age. Like a traditional spousal benefit that is received when both spouses are alive, the amount of the survivor benefit is based on the deceased spouse’s traditional retirement benefit, meaning that the benefit increases in proportion to how much the spouse earned during working years.</div><br /> <div class="Section1"><br /> <br /> If the surviving spouse reached full retirement age before his or her death, the survivor’s benefit will equal 100 percent of the deceased spouse’s benefit. If the deceased spouse was receiving a reduced benefit, the survivor is only entitled to receive that reduced amount. However, if the surviving spouse had reached full retirement age at the time of the claim, he or she will be entitled to the higher of the reduced benefit or 82.5 percent of the deceased spouse’s full benefit.<br /> <br /> If a surviving spouse is between ages 50 and 59½ and is disabled, he or she is entitled to receive a reduced benefit (71.5 percent of the deceased spouse’s benefit).<br /> <br /> However, additional complexities come into play when a surviving spouse is also entitled to claim his or her own retirement benefit. If both spouses are already claiming benefits, the higher benefit amount automatically will become the survivor’s benefit. If the surviving spouse has not yet claimed his or her own benefit, he or she is entitled to receive the survivor’s benefit <em>or</em> his or her own benefit. For many surviving spouses who have yet to reach full retirement age, it can be beneficial to take the survivor benefit and allow his or her own benefit to grow. When the surviving spouse reaches age 70, he or she can switch from the survivor benefit to his or her own benefit, and receive an increased benefit.<br /> <br /> In determining which benefit to choose (and when), it is important that both the size of the benefits and the client’s life expectancy are taken into account. A client who has a long remaining life expectancy may choose to take a lower survivor benefit for several years in order to eventually switch to an increased benefit at age 70 (survivor benefits do not increase if claimed later than full retirement age).<br /> <br /> </div>

<div class="Section1">The rules governing Social Security claiming have changed so that the file and suspend strategy is now generally unavailable for most individuals. Although the file and suspend strategy is generally now unavailable for most, for older clients (those who were at least 66 years of age by April 29, 2016) who have already filed and suspended, the strategy remains available. Under the new rules, individuals can still file and suspend, but the benefits received by others (a spouse or dependent) that are based on the individual’s earnings record are also suspended.</div><br /> <div class="Section1"><br /> <br /> Divorced spouses, however, may continue to receive benefits even if one spouse chooses to suspend his or her benefits. A spouse of a client who filed and suspended before the deadline is entitled to collect his or her full retirement benefit if he or she was 62 years of age on January 1, 2016.<br /> <br /> For individuals who were born in 1954 or thereafter, the option of choosing between two spouses’ benefits is no longer available—the individual will automatically receive the higher of the two benefits when he or she applies for Social Security (known as a “deemed filing” requirement). The individual will automatically be deemed to apply for both available benefits.<br /> <br /> Surviving spouses (or divorced surviving spouses) are not subject to this rule, and are still permitted to apply for survivor benefits and subsequently switch to his or her own retirement benefits at a later date if the retirement benefit would produce a higher total benefit. Deemed filing also does not apply to a individual who is receiving a spouse’s benefit and is also entitled to disability benefits.<br /> <br /> In the past, the file and suspend strategy allowed one spouse to begin collecting spousal benefits without jeopardizing the amount of the second spouse’s retirement benefit. The second spouse was permitted to file for his or her benefits and then make a subsequent filing to suspend those benefits.<br /> <br /> During the time that the benefits were suspended, one spouse earned delayed retirement credits, which increased the eventual benefit level by 8 percent for each year in which benefits were suspended. The taxpayer was, however, required to begin collecting benefits by age 70, by which point the benefit level could be increased substantially.<br /> <br /> A spouse who was still working was permitted to collect spousal benefits but could similarly suspend any work-related benefit, so that it too could continue to grow until the working spouse reached age 70. At that point, both spouses would be entitled to a larger benefit and would still have collected some Social Security income in the intervening years.<br /> <br /> </div>