Claiming early
December 16, 2015 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
A Case For Claiming Social Security Benefits Early

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So many Social Security claiming recommendations on our blog and elsewhere in the press involve reasons to delay claiming, we wanted to offer up a case for claiming early.  By the way, the reason we so often encourage people to delay claiming Social Security is due to its uniqueness as a lifetime, inflation adjusted income stream unlike anything most people have available to them today, as well as tax benefits unique to Social Security that do not apply to other options.  But sometimes a situation arises that points us to recommending a person claim sooner than later.

State’s Defined Benefit Pension

The following situation is based on a person who contacted us recently.  This person, we will call him George, is 66 and still working at his job as a state employee.  He participates in his state’s defined benefit pension plan (DBP).  Years ago his state chose to Opt-OUT of Social Security and instead offer this DBP.  Certain governmental agencies are able to do this under Social Security rules.  The DBP essentially takes the place of SS instead of being “in addition to”, as most people’s 401k accounts or other employer plans are.  He is in the position to have also earned a Social Security retirement benefit for work done prior to joining the state employer he works for now.  His Social Security benefit is not very large since he only worked 10 years in that job before going to work for the state.  His question to us was whether he should claim now or wait until he stops working.  Our advice….RUN, don’t walk to Social Security and claim RIGHT AWAY!!!

Windfall Elimination Provision

George is subject to the Windfall Elimination Provision (WEP) of Social Security.  The fact that he has a DBP from an employer who opts-out of Social Security causes any SS benefit to be reduced by $413 per month (2015 numbers).  The WEP changes the formula for calculating his benefit and causes this $413 reduction.  We have written many times on WEP, so for more details on this please refer to our other blog posts by searching for WEP in the upper right side of our blog page.  Since George has a small SS benefit to begin with, being subject to WEP has a HUGE impact on what he would otherwise receive.  One thing to remember is the WEP only takes effect once the pension starts to pay him.  I mentioned that George is still working.  He plans to work, if able, all the way to age 70 when he will retire and start to draw his pension.  His Social Security will be UNAFFECTED by WEP all the way up to when he starts his pension.  He is also over his Full Retirement Age (66) so he is unaffected by any earnings test.  Therefore George can claim now a 100% unreduced Social Security benefit from as soon as age 66 to when he starts his pension when most of his SS will be wiped out by WEP.  Not only should George claim now, he should claim RETROACTIVELY to ask for benefits up to 6 months prior to his application.  These retro benefits cannot go back farther than the day he turns 66, but he can essentially fix, at least partially, his mistake of not filing right at 66.  George has a window of opportunity before WEP kicks in where he needs to draw as much Social Security as possible; otherwise he is leaving behind benefits he has earned.

 

For more information on this topic, please use the play button below to listen to our audio post.

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