The Federal Retirement System is meant to be a three part system comprised of the FERS Annuity, Social Security, and the Thrift Savings Plan. Because Social Security makes up 1/3 of the federal retirement program, it’s important to understand the ins and outs of the system.
It has been said in the past that there are thousands of different Social Security collection strategies. While I believe this statement is meant to be an exaggeration and scare people, it is still a somewhat complicated and detailed system that retirees should seek to understand before collecting benefits.
Here is a list of little known Social Security facts that can help you maximize your benefits and save money.
The early collection penalty. Everyone knows that you get a smaller benefit if you collect early, but what exactly is that reduction? Starting at age 62, the reduction is 5/9 of 1% for the first 36 months and 5/12 of 1% post 36 months until you reach Full Retirement Age (FRA).
Your Primary Insurance Amount (PIA) goes up 8% a year past FRA. Delaying past your FRA will increase your benefit by 8% per year until you reach age 70. Here is an article that provides compelling evidence to delay.
Your spouse must be collecting in order for you to receive a benefit based on their Primary Insurance Amount (PIA). If are planning to collect on your spouse’s benefits record, you will have to wait until your spouse applies to receive his/her benefits first.
Widows (and widowers) have the best benefits available. A widow can begin collecting at the age of 60. While collecting that benefit, their own benefit increases until age 70 at which time the widow can switch to the higher benefit (or any time prior to 70).
The minimum amount a widow or widower can collect based on their deceased spouse’s PIA is 82.5%. This is important for widows whose spouses collected early at age 62. Most people that collect at age 62 receive 75% of their benefit.
It can be beneficial to delay collecting until after age 70. This sounds odd, but is somewhat common. The reason to delay past age 70 would be for a spouse that doesn’t have an earnings history of their own and plans to collect based on their spouse’s PIA. If their spouse is six years younger, then it may be beneficial to delay until the spouse turns age 66 or even later.
You can get up to a 12 month “do over.” If you change your mind within 12 months of collecting, you can pay back all benefits that you have received and continue on as if you never began collecting in the first place.
You can suspend benefits at any time. If you start collecting at age 62 and get a full-time job a year later, it may be wise to suspend your benefits as the earnings could reduce or eliminate your benefit. It might also make sense to suspend benefits if your circumstances change and you opt to delay in return for an increased benefit.
January 1, 1954 is a magic date. People born prior to 1954 can do a restricted application. A restricted application allows a person to restrict their claim upon reaching Full Retirement Age (FRA) to their spouse’s benefit while their individual benefit continues to increase until age 70.
The spousal benefit stops increasing at Full Retirement Age. There is no reason to delay collecting past FRA if you plan on collecting based on your spouse’s PIA (unless, of course, your spouse isn’t collecting yet).
A minor can collect based on their parent’s earning record. I have seen a case where a 62-year-old with an 8-year-old started collecting early (at the age of 62) so his son could collect $1000 a month from his $2000 PIA. His son can continue to collect until he turns age 18 or graduates from high school.
Divorcees may have multiple options. When it comes to divorces, there are a number of details to consider when collecting Social Security. Specifically, if you were married to your ex-spouse for 10 or more years consecutively, you can potentially collect based on your ex-spouse’s benefit in lieu of your own. If you were married three different times for a period of 10 years, then you could potentially collect based on the highest of the three ex’s PIA.
The Windfall Elimination Period (WEP) and Government Pension Offset (GPO) may reduce your Social Security. This applies to retirees who worked for an employer that didn’t pay into the Social Security system, such as CSRS federal employees. The WEP will likely reduce the amount of Social Security that the CSRS retiree can collect, and the GPO will likely eliminate the possibility of collecting a benefit based on a spouse’s PIA.
Figuring out when to collect is half the battle when it comes to working Social Security into your overall retirement plan, and having a working knowledge of the details will help you make the optimal choice. If you are approaching retirement and would like a partner to help guide you on your retirement journey, schedule an introductory call today. We specialize in assisting Federal Employees plan for and enjoy the next chapter of their lives.
Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees.