Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Social Security is a linchpin of most retirement plans, but there's still plenty of confusion about filing strategies. Joining me to discuss some points of confusion and to clear them up is Andrew Salata. He is a public affairs specialist with the Social Security Administration.
Andrew, thank you so much for being here.
Andrew Salata: Thank you for the invite. I always feel that it's a great opportunity to just talk a little bit about our programs as well as our website at socialsecurity.gov because we have our planner page, which helps kind of guide individuals through that confusion or their options even.
Benz: OK. That's a great resource. Let's dive into some of the filing strategies. The reason we wanted to revisit this is because there were some significant changes that went into effect and are kind of going into effect in the years going forward that affect filing strategies. You say that these are stirring up a lot of confusion when you are out and about talking to the public about Social Security.
So, let's start with one that I know was of keen interest to a lot of our Morningstar.com users. This is a strategy that is called file and suspend, and the bottom line here is that if you are someone who is just looking at filing, this is something that's off the table for you that you might have heard of in the past, but it's not going to be available for you.
Salata: Correct. File and suspend is still available for everyone that's at full retirement age. What file and suspend allowed individuals to do is to suspend receipt of their retirement benefits to earn delayed retirement income. The advantage to that is what we had removed based on Balanced Budget Act of 2015, and that is, when an individual filed and suspended, that allowed for family members to receive benefits. As of April 29 of 2016, anyone who files and suspends will no longer have that advantage where if you're in suspend status so are all the benefits to family members or dependent members.
What is an advantage still is, say, an individual approaches retirement and took the benefits early, at early retirement age, had that reduction for taking it early, and then later was able to manage their financial portfolio to not need the Social Security, whether some other income came in, and they are not needing the Social Security benefit. At full retirement age, they can still suspend their benefits, earn those delayed credits, and in fact, removing some of that reduction or even all of that reduction as they wait till age 70.
Benz: OK. Let's discuss another strategy, and this is one that might still be or is still available for certain section of people closing in on retirement. Let's talk about restricted application, what this is and this tends to be something that's of greatest interest for maybe dual-income couples where you've got people with their own work track records, their own earnings histories where filing on their own work histories is generally going to be more beneficial than claiming the spousal benefit. Let's talk about what's going on with restricted application, how the rules there are changing, but some people can still get on board.
Salata: Yeah. Social Security as a retirement program was always there where we had the family benefits as well--the spousal, dependent benefits, the family benefits as well as survivor benefits. In this case, this relies more on the spousal benefit where once a retired worker is receiving their retirement benefits, a spouse is eligible on a record. What we have though is, if you're taking retirement benefits early, we always had the deemed filing provision where you are in effect filing for all of your benefits, your spousal and your retirement, and we pay you the higher of the two. We had a certain loophole or strategy that can be used for those that waited till full retirement age where they can restrict the application from not retirement to just the spousal benefit, and we allowed it for those that were full retirement age or have turned 66.
We still have that option for a small window still. The Balanced Budget Act of 2015 also adjusted this option where if individual who are born before Jan. 2 of 1954, they still qualify to have a restricted application at full retirement age. So, if you are turning 66 this year or in the coming couple of years, you still have that option of holding off on your own retirement, taking the spousal benefit so you can receive some benefit, and then wait until age 70 or anywhere in between to get your higher retirement benefit. If unfortunately, you're born Jan. 2 of 1954, or later, then whenever you file, at whatever age you are, you will fall under that deemed filing provision where you are in effect filing for all of the possible benefits and we will pay you the higher of the two versus spousal or retirement.
Benz: OK. So, if my own earnings history is the one that's going to give me the higher benefit, you are going to automatically opt me into that one. I can't say, oh, no, for now I want the spousal benefit and later on perhaps I'll take my own benefit. No more of that if I was born after those dates that you talked about, that 1954.
Salata: Yes. The only thing that it doesn't apply to is survivor benefits. We still have that opportunity where individuals who may be a surviving spouse may qualify under a survivor widow/widower benefit as early as age 60, but they can take it at any age after age 60. So, they can pick, say, a smaller benefit and save a higher for later. So, the deemed filing is only for the spouse, living spouse benefit and retirement but not a survivor benefit. So, we still have options where individuals can qualify for a survivor benefit, take that at a reduced rate, and then save their retirement for later.
Benz: OK. Another point where you say people are really tripped up and confused oftentimes is this idea of filing early, so as early as age 62 starting some benefit. You say that people sometimes think, well, I'll settle for that lower benefit until I'm full retirement age, but people think that then I'll be eligible for a higher benefit once I hit full retirement age. That's not how it works, that that early filing determines the amount that you get from the program throughout your retirement years.
Salata: Correct. Yes. When the earliest--because a lot of times we do get the question, well, when is the earliest I can retire, because even though our full retirement age is increasing and this year for those that are turning 62 this year, they were born in '55, so their full retirement age is 66 and two months--we still have early retirement at 62, but for every month basically that you go early we have a reduction, it's about 0.5%. It actually is five-ninths of a percent for the first 36 months of going early and then anything over 36 months, it's five-twelfths of a percent. But it comes out to about 0.5% per month.
So, when you do that, if you go as early as now if you're just turning 62 this year, you can possibly get 50 checks early, so that reduction will be almost 26% and then that means that it stays at that amount. It doesn't go to 100% when you reach your full retirement age. So, that reduction is permanent, and it's something that we always want individuals to think about. That's why we have our statement online as well as a retirement estimator. So, that way, we have those calculators to let people know how their future plans may affect their future benefits and going on.
Benz: And there might be some instances where that filing early is the right way to go, for example, if someone's health is not good. But in many instances, if you're able to delay, if you're able to push off at least until your full retirement age, that's often the thing to do if you think you'll have at least average life expectancy.
Salata: Yeah, because, I mean, a lot of times individuals think about, well, if I take it early, I'm that much ahead. But we really have to think about our life expectancies and we're living longer. One in three 65-year-olds today are expected to live past age 90. So, that retirement career can be longer than we really think it will be. And that way, taking that early benefit just to have that money upfront may affect us later. And yeah, life expectancies, if we may have poor health, that could be a factor. But then, we still have that survivor benefit in place, because Social Security, as we secure your future today and tomorrow, we have that installed benefit where your survivor may receive a benefit. So, we may have to think about retirement as a couple as well where if I take my retirement early, that may reduce my surviving spouse's benefit in the future.
Benz: A related question, and this is one I often get, is people say, well, I've heard that I should delay until age 70 or as long as I can, but what's my break-even point if I delay? So, how long do I have to live beyond age 70 to make that be the better decision for me? Can you address that question?
Salata: Yeah. We normally don't talk about the break-even points anymore, because it oversimplified the whole retirement planning. Because if we look at the break-even being ahead 10 years, 12 years, it makes it difficult to choose. And the way the Social Security benefit is set up, the actuarial part is, the break-even is about 82.5 years of age, which is our life expectancies on average. But what we have to think about is, are we in that average life expectancy because the closer we get to that 65, the better our odds of living longer are. So, it's thinking not so much about will I break even, but what will I need as I progress into my retirement.
Social Security, on average, replaces about 40% of someone's preretirement income, but with Social Security there is a cost of living adjustment in place, where Social Security benefits may rise with inflation or come close to rising with inflation. So, within our first five years of retirement we'll start relying on Social Security more and more as the cost of living adjustments go with that, where versus most of our other financial portfolio may just be savings, investments but don't have that cost of living adjustment, where instead of putting in, we're now taking out. So, by year 10, we could be relying on Social Security for more than half of our income versus what we had when we started. So, it's not so much the when will I break even, but what will I need as I progress.
Benz: Right. Important set of topics. Andrew, thank you so much for being here to discuss them with us.
Salata: Thank you. As always, Social Security is with everyone through their life's journey, from the time they were born to the time we get to go to their retirement party.
Benz: Right. Andrew, thank you. Thanks again.
Salata: Thank you.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.