For most workers, their ability to claim Social Security benefits starts at age 62 and many advisors recommend their clients start claiming benefits at this age. In previous $mart Social Security articles I have addressed this concept, proving that this is generally the wrong strategy for most people. Following that advice could cost hundreds of thousands of dollars in lost benefits. Instead of giving up these benefits, in today’s article I will illustrate how to optimize them through a strategy called The CINCIL.
Before we get into the details of this strategy it will be helpful to understand how your earn Social Security benefits in general. To qualify for benefits you must work for a minimum of 40 quarters. For most people this represents 10 years of employment. However, these quarters do not need to be consecutive and the years worked do not have to be consecutive either. To calculate how much your particular benefit will be the Social Security Administration will look back at your work history and pick the 35 years where you earnings were the highest. The Social Security Administration will disregard the lowest earnings years, even years with no earnings may be discarded. Then, they will index these 35 years of earnings for inflation. Indexing will increase the value of income you made years ago so it becomes somewhat equal to the value it would be in today’s dollars. To put this in perspective, if I had earned $10,000 in 1971 that would be the same as earning approximately $57,000 today after indexing it for inflation. These index-adjusted values are then used to determine your average annual income over the 35 year time-frame. Then, they divide that indexed average annual income by 12 months and the result is referred to as your AIME or your Average Indexed Monthly Earnings. Finally, the Social Security administration applies “Bend Points” to your AIME. (Bend Points will be explained in more detail in a future article.) When these Bend Points are applied the result is the number called your Primary Insurance Amount. Also referred to as the PIA, this value is used for most of the calculations we need to determine your benefits and optimize your benefits claiming strategies. In summary, your top 35 years of annual earnings are indexed and averaged. The average annual earnings are converted to monthly amounts, bend points are applied and you finally end up with your PIA.
Confused? Forgive yourself. This is confusing! Don’t worry, however, because you can go to the Department of Social Security’s official web site www.SocialSecurity.org and very quickly and easily obtain your PIA with all of the math done for you. Within a few minutes, and based on your actual earnings records, you will have an accurate PIA courtesy of the Social Security Administration. As mentioned PIA is a very important number for several reasons. Deductions are made from your PIA if receive your Social Security benefits early. Conversely, delayed credits are applied to your PIA and increase your benefits should you wait to receive them. Additionally, Spousal Benefits are based solely on your spouse’s PIA. Now, armed with this information let’s put it to work using The CINCIL claiming strategy.
CINCIL is an acronym for Claim It Now, Claim It Later. This is a strategy primarily for married couples and the goal is to maximize the total benefits a couple could receive over their joint lifetimes. This is a fairly complex strategy so to keep my example simple, Bob and Sally will be the same age and Sally has earned less income during her working career. The result of this scenario is that both Bob and Sally will qualify for Social Security benefits at the same age, however, Sally’s Social Security benefits would be lower due to the lower income. The CINCIL will focus on three key concepts; Spousal Benefits, Delayed Credits and Restricted Applications.
Spousal Benefits – These are benefits available to the partners in a marriage based on each other’s earnings records. In other words, Bob’s spousal benefit is based on Sally’s earnings record and Sally’s spousal benefit is based on Bob’s earnings record. The spousal benefit is equal to 50% of the partner’s PIA. Therefore, if Bob’s PIA is $2,000 and Sally’s is $1,500, then Bob would be entitled to a spousal benefit of $750 (50% of Sally’s $1,500 PIA) and Sally would be entitled to a spousal benefit of $1,000 (50% of Bob’s $2,000 PIA).
Delayed Credits – If your FRA is 66 years old, then for every year you delay receiving your Social Security benefits beyond 66 you earn an 8% credit per year. Therefore, delaying those benefits for 4 years until you are 70 years old before starting to receive will increase those benefits by 32%. This significant increase is permanent and will effect the total benefits you receive over your lifetime. Additionally, when one spouse dies the surviving spouse will become eligible to receive a survivor’s benefit. If the deceased spouse’s benefit is greater than the benefit the surviving spouse is currently receiving, then the surviving spouse will receive the higher of these two benefits. Assuming that statistically Sally will outlive Bob, then Sally would receive Bob’s higher Social Security benefit and Bob’s 32% increase in benefits will significantly effect Sally’s income over her lifetime.
Restricted Applications – It is important to note that spousal benefits do NOT earn delayed credits. Because there are no delayed credits to increase the value of a spousal benefit, in many instances it is best to claim them as soon as possible. However, if you wait until your have achieved your Full Retirement Age (FRA) to claim your spousal benefit you can restrict your application for Social Security benefits to just the spousal benefit. In doing so, you are allowed to claim and receive a spousal benefit today while your own benefit, the benefit based on your earnings record will receive delayed credits for waiting.
The CINCIL – (Claim in Now, Claim It Later): At 66 years of age, Bob files a restricted application for Social Security benefits, restricting his application to his spousal benefits only. Concurrently, Bob suspends his application for his benefits so those benefits can continue to earn delayed credits of 8% per year. As Sally also is 66 years, old she files for her benefits now as well so that both Bob and Sally are receiving some benefits now. They have completed Step 1 of the CINCIL, Claiming It Now. To complete Step 2 of the CINCIL Bob, at age 70, re-files for his Social Security benefits and switches from his spousal benefit to the benefits based on his earning record instead. By utilizing this strategy Bob and Sally were able to claim their benefits now at 66, and it allowed Bob to claim 32% more in benefits later.
Keep in mind that using this strategy Sally cannot file for a spousal benefit. While Social Security benefits are very generous they will not allow for spouses to both claim spousal benefits simultaneously so that both partners could earned delayed credits. Another thing to keep in mind is that because both Bob & Sally reached full retirement age (FRA) before claiming their benefits, that either of them could continue to work and receive their Social Security benefits without any restrictions to the amount of money they earned. One last thing to keep in mind is that this strategy will not work for every couple. Meaning, it may impossible to delay benefits due to health, current income needs, taxation or other issues which would alter the benefits of this strategy. This is the main point of this article. That is, claiming Social Security benefits is both very personal and potentially complicated. The appropriate and optimal strategy for one couple is unlikely to be the same for another. As a result, claiming Social Security benefits should be made in the context of your overall financial plan. Finally, and this is very important to remember, please understand that once the decision to receive benefits has been made there may be little if anything you can do to change your mind, even if it was in your best interest to do so.
It’s a Good Life!
Randall A. Luebke RFC, IAR, RMA
President – Lifetime Paradigm, Inc.
Main Home Page – www.LifetimeParadigm.com