Your Social Security Advisor

High Earners and the Family Maximum – Ask Rusty

earners earnings money cash incomeDear Rusty:  My question is this:  If both spouses are high earners with significant Social Security contributions in their own right, delaying their benefits to get a bigger Social Security amount could mean they well exceed the maximum “family” payment.  Isn’t it to their advantage for both spouses to take social security at 62 at the “reduced amount” if together they would still exceed the “family maximum”? Otherwise, aren’t they leaving money on the table and getting no increase in payment by delaying collecting?  Signed:  Inquiring Mind

Dear Inquiring:  What an excellent question!  Let’s lay out the pieces:

1) Regardless of how much these hypothetical “high earners” actually earned, they would have only paid payroll taxes up to the annual contribution limit for each year they worked.  That limit – $127,200 for 2017 – increases periodically if a formula used by the Social Security Administration calls for it.  Once they reached the earnings contribution limit each year they would have no longer paid into Social Security for that year.

2) Let’s assume that the earnings of both were greater than the annual contribution limit for their entire careers, and that they are both eligible for the maximum monthly benefit ($2,687 for 2017) at their full retirement age.  Their combined SS benefit based upon their own work records at their full retirement age (assumed as 66) would be $5,374.

3) The Family Maximum applies to survivors, spouses, children, etc. families who receive benefits based upon a primary wage-earner’s work record.  Couples who collect only retirement benefits are not affected unless three or more family members receive benefits.  So, in this hypothetical example of two high wage earners, the Family Maximum benefit does not apply.

So the answer to your question is: For these two high-earners, applying early for both of their benefits at age 62 will cause them both to receive benefits at a permanently reduced rate of about 75% ($1,934) of their full amount.   If they delay they can both receive their full benefit amount ($2,687) at their full retirement age, and if they choose to defer beyond their full retirement age their benefits will continue to grow at about 8% per year until they are age 70, when their monthly benefit amount would be about $3,546 each, or $7092 combined.

The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation’s Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation’s Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services. The Foundation welcomes questions from readers regarding Social Security issues. To submit a request, contact the Foundation at [email protected].


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Jacque
5 years ago

If they take their Benefits early they would be receiving raises during those years. Once you are at the max can you still get the raises? If not that would also figure into you loses or gains.

PaulE
5 years ago
Reply to  Jacque

If you are referring to the annual COLA, when SS actually gives such an adjustment, then yes you are still eligible for those. The COLA is a different item from what this article is about.

David Smith
5 years ago

Wait a minute. Is Rusty saying there is no Social Security withholding after age 70, or am I loopy as usual?
All I know is that the (current) tax code covers more major land masses than the “Encyclopedia Galactica” (Hitchhikers Guide to the Galaxy, Douglas Adams).

Rusty
5 years ago
Reply to  David Smith

David, the age 70 referred to in the article is the age at which the maximum Delayed Retirement Credits are earned to increase one’s Social Security benefit. “Social Security withholding” is part of the FICA payroll tax which is withheld from the earnings of all those working, regardless of age or whether or not they are collecting Social Security. I hope this clarifies, but if you have further questions please contact us as indicated at the end of the above article.

Maria Rose
5 years ago

The examples in this article are okay along as the people in this article realize they are liable for tax on that benefit also, and their overall income will lower to that $46,000 income at full working retirement. Most people fail to realize that retirement income is not the same level as working income ( it is drastically lower).
I would live quite comfortably myself with that income even though I would have to pay tax until I die ( we are only allowed $25,000 total yearly income for a single individual to not pay taxes which is by national average in the poverty level.
I just wish when you write these articles, you mention tax liability.

Rusty
5 years ago
Reply to  Maria Rose

Maria, thanks for your feedback. You are correct that tax liability should always be considered when considering when to apply for Social Security. Unfortunately, due to space limitations, we’re not always able to address all implications when answering a question about Social Security. For information, income tax on Social Security benefits is the topic of a future Ask Rusty article. Again, thank you for your feedback, which is always welcomed.

Cynthia Churchill
5 years ago
Reply to  Maria Rose

Good point Maria Rose. This is a primary implication and should be addressed since it certainly would have a profound impact on an individuals welfare.

Mgy
5 years ago

My wife took her benefits at 66 (her full retirement age) getting about 1340 per month. I’m still working at and just turned 68. My plan is to work 6 more months giving me 2 1/2 years extra at 8% a year which basically should give me an extra 20% total I think. Mine is calculated at the max 2687 at age 66. Do I multiply the max 2687 x 20% to get my estimated monthly payout at 2 1/2 years over.

Rusty
5 years ago
Reply to  Mgy

Yes, 20% is the right increase percentage for 2 1/2 years of Delayed Retirement Credits (DRCs). But be careful with the math, because Social Security only adjusts benefits for DRCs in January of each year, so if you apply for SS in mid-year you won’t see the DRC increase in your benefit amount until your February benefit payment, and the increase won’t be retroactive to when you applied. The subject of DRCs can be a little tricky, so please contact us at the phone/email at the end of the above article if you’d like a more detailed evaluation of your specific circumstances.

Randall R. Norton, CPA (Retired)
5 years ago

While I understand the math, I question so many professionals advising this technique of waiting until full retirement age, or worse yet, waiting until age 70 to collect. In the example, the couple, at age 62, will begin collecting over $46,000 per year. By the time they reach age 66, that’s a 4-year total exceeding $185,000. The extra they will receive by waiting to FRA is about $1,500 per month, meaning it will take until age 76 just to “catch up” with the early $185,000 they could have received. Many retirees would prefer to have the $185,000 during ages 62-66, while they are most likely in better health and more ambulatory than from ages 76 onward. Additionally, not knowing when we are going to pass away throws a “curveball” at the delay method. People passing before age of 76 who postponed benefits never “catch up” with the benefits they could have had by claiming at age 62. If I live past age 76, I understand how the math is better over the long run, but it means waiting 14 years (from 62 to 76) before any financial benefit even begins to occur and then occurs at my age when I expect to be less likely to appreciate and use the extra benefits.

PaulE
5 years ago

Exactly correct Randall. The factor of the likely declining physical or mental health of the SS recipient over time, and thus the ability to actually enjoy any income derived from SS, is usually completely omitted from most explanations of when to begin taking payouts. The other factor never discussed is if a retiree is not solely financially reliant on SS for their retirement, which is how the system was originally designed to be in the 1930’s, taking SS early might afford the person the ability to invest that SS money into an income generating investment. Either a low cost income mutual fund or ETF with a monthly payout, that the retiree could either take each month or chose to re-invest back into the fund to compound the growth of their money over time. That would further enhance one’s overall retirement income and financial independence over time and make the retiree far less dependent on the pathetically small annual cost of living adjustments SS is historically known for. There is a lot of be said for factoring in the NPV of money.

Mike C
5 years ago

Join the discussion Like you Randall, I too question so many “professionals” particularly with regard to waiting until 70 so as to increase benefits by 32%. All these math calculations can’t quantify the 2 most important variables. You have properly identified death as one of them. The other is an elephant in the room that the professional math projections ignore because “it will never happen” . They also said they’d never tax social security benefits. What should also be considered is that by waiting for benefits at 70 you are relying for the math to be correct based on nothing more than a political promise to pay those amounts rather than any real guarantee. Since you are already being told that the benefits as currently promised are not sustainable and reductions to the projected benefit payments “may” be necessary the “professionals” are doing a math projection based on a political promise. Good luck with that working out as projected. If a future reduction in benefits is required what do you think the chances are of an increasingly socialist government making those reductions on all recipients across the board. They will of course decide the only “fair” thing to do is to means test the benefit payments. Consequently it wouldn’t be surprising that the decision is to apply the reductions to those who don’t need it. Obviously, anyone who could afford to wait until 70 didn’t and doesn’t “need” the benefits so they should be the first group to see their decision to defer be regrettable. The may also choose to be able to deny that they are the liars they are by destroying the purchasing power of the currency while leaving the benefits alone. After all they have been doing that already since 1913 so no problem if the financial and actuarial math doesn’t work anymore. More borrowing and printing should take care of that. From the socialist government viewpoint all that a means test demonstrates is that if you happen to have anything left after their lifetime of theft and redistribution then we “means to take whatever is left”. Of course none of these considerations can be entered in the “professional” math projections but you’d be foolish not to consider them in your own decisions.

Grania
5 years ago
Reply to  Mike C

If the person who chooses to accept those reduced benefits saves the money, it’s a pretty nice amount of money to have set aside. Another factor is if in retirement they might be eligible for Senior discounts on property tax, utilities (etc) if they fall under certain income levels. Every situation is unique. People need to look at their own circumstances and not rely on general advice from others.

Rusty
5 years ago

Hi Randall. Thanks for your feedback. Your calculations are valid, but please note that deciding when to start Social Security is always a very personal decision based upon an individual’s (and a couple’s) specific circumstances. We don’t actually “advise” people when to start their benefits, but rather try to present them with all the facts they need to make their own informed decision. And we always try to correct any misconception that a questioner has about the Social Security program, which in the case of the questioner in the article was an incorrect understanding of how the “family maximum” works. That misunderstanding could have led the questioner to take benefits earlier than they wanted or needed to. Keep in mind also that benefits taken before full retirement age (e.g., 66) are subject to SS’s earnings test, and if a person continues to work and earns over that limit Social Security will withhold up to half of the excess over the limit from future benefits. So there’s a lot more to consider than just the math. Again, thanks for your feedback. We appreciate your insight. And if you’d like to discuss this further, please feel free to contact us as indicated at the end of the article.

Sydnee
5 years ago

My husband concurs.

Van Hamlin
5 years ago

People qualifying for full social security would be roughly 66+ years of age, which means that the 2034 projected failure date for social security provides them with 17 years to collect under the rules that currently apply. What the rules will be for whatever program is called social security will probably be different. Is it prudent to wait the added 4 years to collect more monthly income at 70? What is the difference in total funds collected?

Van Hamlin
5 years ago
Reply to  Van Hamlin

My calculations indicate a person awarded a max benefit at age 66+ would receive $2687.00 for 204 months, which equals $548,148.00. A person awarded the max benefit four years later, at age 70, would receive $3546.00 for 156 months, which equals $553,176.00. This is a difference of $134,004.00 over the 156 month period establish for the 70 year old payout. Is there a gamble in waiting for this larger payout? Will social Security collapse before the 2034 projected date?

Rusty
5 years ago
Reply to  Van Hamlin

Van, what you refer to as the “projected failure date” of Social Security isn’t a date when they will stop paying benefits, but rather a date when (if Congress does nothing to fix) SS will only be able to pay out what they take in. That could mean a benefit cut of 21% (again, if Congress does nothing), but benefits will not totally cease on that date. No one can forecast the future, but chances are pretty good that Congress will eventually find the courage to implement some of the fixes that are already proposed in various Congressional Bills. One thing is sure: The Social Security program will continue to exist beyond the currently projected Trust Fund depletion date of 2034. If you’d like more information on this topic, please contact us at the phone/email shown at the end of the above article and we’d be happy to help, at no charge.

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