The Top Ten Questions Retirees Should Ask Regarding Social Security:

1. How much can I expect to receive?

Social Security accounts for 42% of the average American retiree’s income. While it is certainly not, in and of itself, sufficient income to live comfortably on during retirement, it does provide a foundation upon which a retirement income plan can be built.

If you have a work history of at least ten years (forty-quarters), you are eligible for Social Security benefits.

The amount of the Social Security retirement benefit you are entitled to is based on two criteria: your inflation-adjusted, thirty-five highest-earning years and the age you started Social Security retirement benefits.

Find out your benefit amount by going here: www.ssa.gov/retire/estimator.html

Before we discuss how benefits are calculated, you should familiarize yourself with two basic terms. These are used as starting points for calculation reductions or increases in benefits. Knowing these terms will help you understand the information in this chapter.

Full Retirement Age (FRA): 

This is the age at which a person may first become eligible for full (unreduced) Social Security benefits. It is based on your year of birth. You can find your FRA using the table below:

AGE WHEN YOU ARE ELIGIBLE TO RECEIVE FULL SOCIAL SECURITY BENEFITS
YEAR OF BIRTH FULL RETIREMENT AGE (FRA)
1943 - 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 67

 

Primary Insurance Amount (PIA): This is a calculation by the Social Security Administration based on your highest thirty-five years’ worth of earnings. It represents the amount you would receive monthly if you began collecting benefits at FRA. You can find this number by referencing your annual Social Security statement online.

Retirees who wait until their full retirement ages (FRA) will receive 100% of their primary insurance amount (PIA).

2. What if I apply for benefits between the ages of 62 and FRA?

You are allowed to claim benefits as early as the first full month after you turn age sixty-two. Doing so will result in a permanent reduction in your monthly benefit (PIA). You can claim benefits anytime between age sixty-two and FRA. Your benefits will be reduced according to how many months remain until your FRA at the time you file. As you can see from the chart below, if your FRA is age sixty-six and you file at age sixty-two, you will receive only seventy-five percent of your PIA. So, if Boomer Bob applies for Social Security at age sixty-two, he will only receive $1,650 monthly, versus the $2,200 that would be available if he waits until his FRA. This benefit amount is what he would receive for the rest of his life, increased only by cost-of-living adjustments (COLAs).

AMOUNT OF SOCIAL SECURITY BENEFIT RECEIVED AT DIFFERENT AGES
AGE BENEFITS ARE CLAIMED PERCENT OF BENEFIT RECEIVED BENEFIT IN TODAY'S DOLLARS IF BENEFIT AT FULL RETIREMENT AGE IS $2,200
62 (earliest) 75% $1,650.00
63 80% $1,760.00
64 87% $1,907.00
65 93% $2,025.00
66 100% $2,200.00
67 108% $2,376.00
68 116% $2,552.00
69 124% $2,728.00
70 (maximum 132% $2,904.00

 

3. What if I apply for benefits after my FRA?

If at age sixty-six, you attain your FRA, you can now start receiving your full, unreduced primary insurance amount, or PIA. If you delay the onset of benefits past age sixty-six, you will earn delayed credits. For each year you delay the start of benefits, your benefit will increase by 8% until age seventy. After age seventy, no further credits can be earned for delaying benefits. So, if Boomer Bob decides to wait until age seventy to apply for benefits, his $2,200 PIA he would have received at age sixty-six (FRA) increased by 32% to $2,904 (not including COLAs).

4. How do cost-of-living adjustments (COLAs) affect Social Security benefits?

Every October, the Social Security Administration announces the amount Social Security benefits will be increased starting the following January. These cost-of-living adjustments are based on the previous year’s inflation rate, as measured by the consumer price index.

COLAs are also applied to benefits that haven’t yet been paid. If Boomer Bob waits until age sixty-six to begin receiving benefits, his PIA will be increased each year he waits by the COLA amount announced by the Social Security Administration. When he finally applies for benefits, they will be higher than the PIA that was calculated for him at age sixty-two.

There is no way of knowing what COLAs will be in the future. The Social Security trustees estimate annual inflation adjustments of 2.6% in their calculations and projections. You may want to use this estimate in your own planning.

TOTAL LIFE-TIME BENEFIT RECEIVED FOR A RETIREE LIVING TO AGE 92
Age you begin Benefits 62 66 70
Without COLA $673,200 $792,000 $906,000
With COLA $1,061,106 $1,305,018 $1,562,031

 

5. When should I apply?

In a rare act of bipartisan cooperation, the Republican Congress and President Obama came together in 2015 to close some perceived loopholes in the Social Security rules. These rule changes took away some of the claiming strategies that couples had used for decades that allowed savvy married couples to claim more Social Security benefits than what Congress and the President apparently thought was fair. The unique claiming strategies couples used in the past to maximize Social Security benefits disappeared.

So, the big question remains, when should retirees apply for their Social Security benefit? New retirees are sometimes told, and unfortunately sometimes follow, uninformed “financial professionals” and even Social Security employees that suggest they apply for benefits as early as possible, or at age sixty-two “in order to get the most out of the system.” “Apply as soon as possible” is the default answer of the ignorant and the uninformed. Taking Social Security early is rarely the best answer when trying to maximize lifetime benefits. The general rule is that the longer benefits are put off, the larger the monthly check will be; and with a larger check, eventually, the Social Security recipient will receive more benefits than they would have received had benefits been taken early.

However, there is no one-size-fits-all answer to this question. Some retirees should absolutely wait until age seventy to apply for benefits because they are still working or simply don’t currently need the money. There are others who either need the money at age sixty-two or are in poor health who would benefit from taking benefits early despite the drawbacks of applying early. No matter what category a retiree falls into, a well-thought-out, individualized Social Security maximization plan is a major asset during retirement.

It is highly recommended that Social Security payments be part of a comprehensive retirement income plan. In other words, don’t just follow the herd and elect to start Social Security at age sixty-two because it’s the youngest age you can file and because that’s what everybody else is doing. The decision of when to file for Social Security benefits is, for the most part, irreversible and can result in many thousands of dollars’ less in benefits paid during a retirement. Do your homework. Don’t take this decision lightly!

6. Is my spouse eligible for a Social Security check based on my own work history?

The goal with spousal planning is to maximize the amount of benefits a couple will receive for as long as at least one of them is living. When I talk of spousal benefits, I am speaking of the non-working spouse receiving an income based on the working spouse’s work history. Keep in mind that Social Security is gender neutral, so either spouse can collect a spousal benefit on their spouse’s work record. For ease of explanation, I will refer to the husband as the higher earner and the wife as a lower earner. I realize this stereotype is no longer accurate in many cases, but it will aid in making explanations easier to understand.

As long as the working spouse qualifies for Social Security and has filed for his Social Security benefit, the non-working spouse is entitled to receive a Social Security check of her own, based on her working spouse’s employment history. A spousal benefit is equal to half of the working spouse’s PIA. For example, a wife who had little to no earnings record could collect half of her husband’s PIA if she waits until her FRA to apply for the benefit. If Brent’s PIA is $2,000, Mary could collect a separate benefit of $1,000. If Mary had worked enough to be eligible for her own benefit, she would receive whichever was greater: her own benefit or her spousal benefit. For example, if Mary’s own benefit (PIA) from her personal work history is $675, she would still receive the spousal benefit of $1,000 because it is greater than her own PIA.

It is important to note that spousal benefits are based on the worker’s PIA and not the worker’s actual monthly payment. Remember the worker’s actual benefit is determined by when the worker applies for his benefit as well as his PIA.

While Brent could receive a greater benefit by waiting until age seventy to apply for Social Security, Mary’s spousal benefit would not increase. Spousal benefits do not accrue delayed credits, so waiting past full retirement age for Mary to apply for the spousal benefit will not increase her benefit. Although spousal benefits do not receive delayed credits for waiting beyond FRA, they will be reduced if applied for prior to FRA, so waiting until full retirement age to apply for spousal benefits is generally the best option. If Mary applied for her spousal benefit prior to full retirement age, her spousal benefit is permanently reduced.

The rules for spousal benefits are diverse and complicated. I have tried to simplify them, to give the reader a general idea of what spousal benefits are and how they can be enhanced. It is best to schedule an appointment with a retirement income planner so various maximization scenarios can be investigated. A customized analysis needs to be run for every couple in order to maximize Social Security benefits.

7. How do divorced spouse benefits work?

Like spousal benefits for married couples, you can claim a spousal benefit on a former spouse’s earning record if the benefit would be higher than your own benefit. In order to qualify, an ex-spouse claiming the benefit must meet general eligibility requirements and have been married to the ex-spouse for at least ten years. If there are multiple exes, the divorced spouse will receive the highest benefit from among those spouses as long as the marriages lasted ten years. By the same token, a spouse with multiple ex-spouses may end up with all of them claiming benefits on his record; however, this will not affect his own benefit. The ex-husband is not notified that a former spouse has requested a benefit based on his earnings record, nor does it affect his own benefit. Unlike with spousal benefits, the divorced husband does not need to have applied for his own benefit before an ex-wife can claim a divorced spouse benefit, but he does need to meet general eligibility requirements for Social Security.

Let’s look at an example. Gloria is a single retiree who was married to her ex-husband for over 20 years. She did not spend a full 35 years in the workforce; therefore, she didn’t have a full earnings record upon which to base her Social Security benefit. At age sixty-six she filed for her own Social Security benefits, receiving only $955 per month. Her ex-husband had been a well paid professional and had a very respectable earnings history, earning well over $100,000 annually. It turned out that her divorced spouse benefit, 50% of his benefit, amounted to $1,345 monthly. Gloria is now receiving this higher benefit and her retirement is more comfortable.

To qualify to receive a divorced spouse benefit, the applying ex-spouse must either be currently unmarried or has waited until after age sixty to re-marry. If remarried prior to age sixty, divorced spouse benefits are not an option. Only a spousal benefit on the current husband’s record is available. If an individual remarried after age sixty and already receives divorced spouse benefits, that benefit will not be affected. She can switch to a spousal benefit on her current husband’s record if it is higher, or she can continue receiving her divorced spouse benefit.

8. What happens to Social Security benefits when the working spouse dies?

When deciding the best time to apply for Social Security, the idea of making decisions based on maximizing survivor benefits is usually overlooked. Many people don’t realize that survivor benefits are built into the Social Security system. Even though survivor benefits are not widely known about, they are becoming an increasingly important benefit as medical advances extend life expectancies. The majority of the time, husbands die first, due to shorter life expectancies. Women tend to live five to six years longer than men.

Survivor benefits, unlike spousal benefits, are not based on the worker’s PIA, but rather the survivor benefit ends up being whatever the deceased spouse’s retirement benefit was prior to their death, provided that it is larger than the survivor’s Social Security benefit. Another way of saying this is the surviving spouse ends up only getting one payment from Social Security versus the two payments the family received prior to the death. But the survivor benefit is the larger of the two payments received when both spouses were alive. Meaning that, if the husband receives $2,100 each month and his wife receives $1,250 each month, when he dies, his wife will start receiving the higher $2,100 in place of her previous $1,250 monthly benefit. 

One of the main reasons the highest-earning spouse should delay receiving Social Security until age seventy is that the survivor benefit is based on the actual benefit being paid to the retiree, not the PIA. Remember, the only way to create a larger benefit than your PIA is to earn delayed credits by deferring the application for Social a Security past FRA. So, if the husband's PIA at full retirement age (sixty-six) is $2,100, his benefit would grow to $2,772 if he deferred applying for his retirement benefit until age seventy. As long as he waits to apply until age seventy, his wife will be left with a $2,772 survivor benefit at his death for the rest of her life.

Let's look at an example, Mark and Judy were a wealthy couple who earned their wealth by turning their orchards into subdivisions. Despite this wealth, Mark started taking his Social Security at age sixty-two with the thought to “get as much back from the system as possible” besides, he had declining health. The extra monthly Social Security income of $1,828 was not necessary for Mark and Judy at age sixty-two, but it would be important for Judy when Mark dies. Judy was six years younger than Mark and in excellent health.

I explained to them that Mark’s Social Security survivor benefit at age sixty-two would be the $1,828 monthly benefit that Mark was currently receiving. But if Mark had waited to take his Social Security at age seventy, his monthly retirement benefit and Judy’s survivor benefit would be $3,795.

After recognizing the mistake they had made filing for benefits at age sixty-two, Mark was able to unwind the decision he had made at the Social Security office. Unfortunately, Mark died when he was 72. Judy’s survivor benefit is $3,217 versus the $1,828 it would have been had Mark not reversed his decision to apply for Social Security retirement benefits at age sixty-two.

If Judy were to live to be ninety, Mark’s decision to delay taking Social Security means an additional $274,760 in survivorship income over Judy’s lifetime (not including COLAs). Assuming just a 2.6% COLA, the difference in lifetime income would be $594,705. This story represents a significant sum of money saved/earned, simply by knowing the rules of Social Security and making prudent choices.

Survivor benefits are also subject to the reduced monthly benefit rule if collected before full retirement age by the survivor, but unlike spousal benefits, that reduction does not affect the survivor’s own earned benefit. This means that the wife could collect her survivor benefit as early as age sixty, but she wouldn’t receive the full benefit because she elected to start the benefit prior to her FRA. She could, however, receive a survivor benefit and, if she had a work history of her own, allow her own benefit to accrue deferred credits, and then switch to her own benefit at age seventy if it were higher than the survivor benefit. The reverse is also true. Margaret can take her own benefit early and switch to her survivor benefit at 66. Just as with spousal benefits, survivor benefits do not grow beyond age sixty-six, so there is no point in delaying them.

It is important to note that survivor benefits can also be claimed on a deceased ex-husband’s or ex-wife’s earnings record. The rules are the same for divorced survivor benefits as they are for survivor benefits of claimants married to the working spouse at the time of death, as long as the divorced person’s benefit is being paid based on the working history of the deceased.

Furthermore, the highest-earning spouse should almost always delay collecting benefits until age seventy, regardless of health status, because the highest benefit is the one that will prevail as the survivor benefit, regardless of which spouse passes away first.

9. Can I receive Social Security benefits while I am employed?

Prior to a retiree’s full retirement age, Social Security income is subject to an earnings test. The point of an earnings test is to keep the pre-FRA retiree from collecting a Social Security benefit at the same time they are receiving wages from their employment. For every $2 earned, $1 is withheld in Social Security benefits to make up for the fact that benefits are being taken when 1) they aren’t necessarily needed, and 2) credits are still being accrued through working and therefore are being added to future Social Security benefit payments. If wages are high enough, all Social Security benefits will be withheld. Pre-FRA employees can earn up to around $16,920 annually before the earnings test kicks in. The exact amount of earnings test exemption changes from year to year because it is indexed to inflation. But there really is no point in collecting Social Security benefits if you are employed and younger than FRA.  Social Security benefits are reduced due to the earnings test and benefits are further reduced because the recipient elected to start receiving payments prior to FRA.

Of course, there is an exception to every rule, and the exception, in this case, is that in the year the recipient attains FRA, they can earn up to $44,880 before withholdings begin at the rate of $1 for every $3 until the month they reach their full retirement age. Once their full retirement age is reached, no more Social Security will be withheld, regardless of earnings.

Because of these earning maximums, anyone who plans to continue working in a high-paying position should delay collecting benefits until at least age sixty-six to avoid having benefits withheld. These benefits will eventually be paid back when the worker reaches FRA when benefits will be increased to account for the period of time those benefits were withheld. However, it is important to remember that despite getting the withheld benefits back, the reduction in benefits from applying for benefits early can never be recovered; therefore, it is best to wait to apply for Social Security until after working years are over, especially if working in a job that will add earnings credits and boost future Social Security benefits.

10. How are Social Security benefits taxed?

If you have sources of income other than Social Security such as income from investments, real estate, pensions, or retirement account distributions, it is possible that a portion of your Social Security benefits will be included in your taxable income. Social Security benefits are taxed on a sliding scale depending on your level of income. The Social Security Administration uses a unique definition of income called provisional income to determine how much of your benefits will be subject to taxation. 

To calculate your provisional income, first take your adjusted gross income (line 7 on your tax form 1040). From this, subtract any Social Security that was included in this figure if you are already receiving benefits. Next, add in any tax-free interest you received (interest from municipal bonds). And finally, add in 50% of your Social Security benefit. This will give you your provisional income. You can use the table below to quickly see, based on your provisional income and tax filing status, how much of your benefit will be subject to taxation. 

TAX ON SOCIAL SECURITY BENEFITS
Filing Status Provisional Income* Amount of Social Security subject to tax
Married Filing jointly Under $32,000 0
$32,000 - $44,000 up to 50%
Over $44,000 up to 85%
Single, head of household, qualifying widow(er), married filing separately and living apart from spouse Under $25,000 0
$25,000 - $34,000 up to 50%
Over $34,000 up to 85%
Married filing separately and living with spouse Over 0 up to 85%

*Provisional income = adjusted gross income (not including Social Security) + tax-exempt interest + 50% of Social Security benefit

It is important to note that under no circumstances will more than 85% of your Social Security benefit be subject to taxation. In other words, even for higher income retirees, 15% of your Social Security benefit will always be tax free! As a side note, taxes that are collected from Social Security income are paid back into the Social Security Trust Fund to help strengthen the long-term solvency of the program.

 

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