Strategies for an Unplanned Early Retirement and Social Security Benefits

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Maximize Your Early Retirement Benefit

According to research by the Pew Charitable Trust in the first quarter of  2012, approximately 29.5 percent of the nearly 13.3 million Americans who were unemployed were jobless for a year or more (based on data released by the U.S. Department of Labor Statistics). The Pew Charitable Trust points out that this percentage translates into about 3.9 million workers, slightly more than the population of Oregon.

Is it no wonder that many of these individuals elected to start early Social Security retirement benefits. For individuals who had pared down their spending, had reliable health insurance coverage, relatively few debts, financially independent children, and other assets to supplement their lifestyles this unplanned early retirement decision may not have been a bad choice. For others who were not prepared for early retirement this was not a welcomed event.

THE BREAK-EVEN POINT  Let’s say that the Full Retirement Age (FRA) of John is 65. John elects to retire at age 62. If John retires at age 62 he will receive 80 percent of his FRA benefit. If John retires at 65 he will receive his full FRA benefit. When comparing these two strategies, John will receive the same cumulative amount of benefits at age 77. After this “breakeven” point John will receive less cumulative income if he selects the early retirement strategy.

Maximizing Your Early Retirement Benefits

The spousal benefit is 50 percent of the primary worker’s benefit. If the spouse decides to take early Social Security spousal retirement benefits the amount the household receives can be permanently lowered if the spouse is not FRA when he or she applies for benefits. A spouse can choose to retire as early as age 62, but doing so may result in a benefit of as little as 32.5 percent of the worker’s monthly benefit amount. A spousal benefit is reduced 25/36 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. The amount of reduction depends on when the person reaches full retirement age.

For example:

  • If FRA is 65, a spouse can get 37.5 percent of the worker’s unreduced benefit at age 62;
  • If FRA age is 66, a spouse can get 35 percent of the worker’s unreduced benefit at age 62;
  • If FRA age is 67, a spouse can get 32.5 percent of the worker’s unreduced benefit at age 62.

To sum it up, the amount of the benefit increases at later ages up to the maximum of 50 percent at FRA. If FRA is other than those shown here the amount of the benefit will fall between 32.5 percent and 37.5 percent at age 62.

Here is an example of how this decline in benefits works. For a spouse who is not entitled to benefits on his or her own earnings record, a reduction factor is applied to the base spousal benefit, which is 50 percent of the worker’s monthly benefit amount. For example, if the worker’s monthly benefit amount is $1,600 and the worker’s spouse chooses to begin receiving benefits 36 months before his or her FRA, the Social Security Administration (SSA) will first take 50 percent of $1,600 to get an $800 base spousal benefit. Then compute the reduction factor, which is 36 times 25/36 of one percent, or 25 percent. Applying a 25 percent reduction to the $800 amount gives a spousal benefit of $600. Therefore in this example, the final spousal benefit is 37.5 percent of the worker’s monthly benefit amount. Note: This reduction is permanent and will not increase when the spouse reaches FRA.

If you are a married couple and the primary earner is forced to take early retirement because he or she can’t find full-time work or you have day-to-day cash needs, if at all possible do not apply for spousal benefits until FRA.  

There are two strategies that can assist you in maximizing your early retirement benefits:

  1. During the first 12-months that you begin to receive your Social Security benefit you may want to withdraw your application and re-apply at a later time. This is called the “Reset Approach” and it is a once in a lifetime SSA approved option. You must repay all benefits that you have already received as per your original retirement application. Additionally, repayment includes any benefits received by family members and taxes that are due.
  2. Working part-time is an excellent way to maximize your early retirement benefit. Early retirees can earn $15,480 a year and not lose any benefits in 2014. For early retirees, the Social Security Administration (SSA) will deduct $1 in benefits for every $2 earned above $15,480. The same earnings limits apply to a child or spouse who works and receives benefits on your record. Note: After FRA Social Security claimants can earn as much as they want without any loss of benefits.

About ksindell

Kathleen Sindell, Ph.D. is the author of numerous academic, popular, and professional finance articles, Web sites, proposals, and books. This includes the bestselling reference book, "Investing Online for Dummies, Eds 1-5" (listed for two consecutive years on the Wall Street Journal's Bestselling Business Book List). Her most recent book "Social Security: Maximize your Benefits" has been listed in Amazon's Top 100 Bestselling Retirement Planning Books. It is important to note that "Social Security: Maximize Your Benefits, 2nd Edition" was just released. Sindell has an in-depth understanding of the financial services industry and has held Series 7, 63, and 65 licenses. Dr. Sindell is regularly tapped as a financial services expert on ABC World News, The Nightly Business Report, and at popular online and print outlets. Kathleen Sindell, Ph.D. is a member of the Board of Directors for the Financial Planning Association, National Capital Area (FPA NCA), is on the Editorial Advisory Panel of the Journal of Financial Planning, and is Co-Chair of the Metro Washington Financial Planning Day. Sindell is a Course Chair II, CFP Program Academic Officer, and adjunct full-professor at the University of Maryland, UMUC, School of Undergraduate Studies. Contact Information: ksindell@kathleensindell.com or 703-299-1700
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