With average life expectancy at an all-time high and more than half of the workforce without private pension coverage, all sources of retirement income, including Social Security, become important when planning for what could be a 30-year retirement.
For single individuals in particular, Social Security will likely play a significant role when planning for the future with one income. Today, 59 million people receive Social Security benefits, and for 74% of unmarried people, the benefit represents 50% or more of their retirement income.
Although there is a standard formula for benefits, the timing and process of filing a claim can make a major difference in the level of benefit received.
Here are some considerations for unmarried individuals seeking to optimize their Social Security benefits.
If possible, single workers may want to wait until Social Security Administration’s defined “full retirement age” to avoid a reduction in benefits. For example, for someone born before 1960, the full retirement age is 66.
Singles may also consider filing and suspending at full retirement age. This would allow the retirement benefit to grow 8% annually up to age 70. The process allows individuals to change their mind and “un-suspend” benefits, which will trigger the receipt of a lump sum retroactively based on age. The strategy also provides flexibility for individuals dealing with the unexpected, such as illness or a change in life expectancy.
A divorced person may still be entitled to a spousal Social Security benefit. If the marriage lasted at least 10 years and the couple has been divorced for at least two years and and neither ex-spouse has remarried, an individual would be eligible for the divorced spousal benefit. Individuals with a good earnings history who are willing to wait until full retirement age, can restrict an application to the divorced spousal benefit only, while letting their own benefit grow by 8% a year up to age 70. This allows the individual to receive some benefit based on the ex-spouse’s earnings history while maximizing what they will receive when they “switch over” to their own benefit.
There are some facts to consider. An individual does not have legal access to their ex-spouse’s earnings history and cannot request this information from Social Security. Therefore, for planning purposes, they may have to estimate the benefit amount. Also, if the individual takes early benefits, Social Security will consider this as taking their own retirement benefit first. If the spousal benefit is higher, it will be adjusted upward to reflect the difference. However, an individual cannot choose one benefit over the other — single or divorced spousal — unless they are at full retirement age.
Unlike married couples or divorced spouses, widows and widowers can choose to receive survivor benefits early and then switch to their own benefit later.
Widows and widowers may choose to receive benefits as early as age 60, but the benefit amount would be reduced to 71.5% of what they would have received at full retirement age. If taken at full retirement age, the survivor benefit is equal to the full amount of the deceased spouse’s benefit.
A widow or widower with an earnings history that is equal to or more than the survivor benefit may consider “restricting an application.” With this strategy, he or she may choose to take the survivor benefit early, even if reduced, and allow his or her own benefit to grow until full retirement age, or even up to age 70, to take advantage of delayed retirement credits. Assuming their own benefit will be greater than the survivor benefit, this provides the maximum lifetime guaranteed benefit for the widow or widower once they switch to their own delayed benefit.
Conversely, if the widower or widow has lower lifetime earnings, he or she may want to take their own reduced benefit as early as age 62 and then switch over to the larger retirement benefit at age 66. This way, the lifetime survivor benefit is not reduced by taking it prior to full retirement age.
While some strategies for claiming Social Security benefits provide flexibility, there are rules around the timing and how claims are made that could affect the level of benefit. It is important to review your retirement plan with a financial professional to explore strategies to optimize your benefit.
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