TIPS FOR GETTING THE MOST OUT OF SOCIAL SECURITY RETIREMENT BENEFITS
By MARY LYNNE DAHL, CFP®
June 08, 2015
Social Security is so complex that making a list of benefits by category is impossible. Each category has exceptions that create new categories. Each benefit has rules with results that are based on unknowns, such as how long you will live, or whether or not you will remarry after being widowed. I see now why so many people can make poor decisions about when to begin taking their benefits, and how some are missing out on getting all that they are entitled to receive from Social Security. This article will attempt to simplify the subject, but there won’t be any lists. Read on, please.
What are your benefits?
Social Security provides retirement benefits to individuals and to the married, widowed, children and divorced spouses of individuals. Benefits are available as early as age 60 in certain cases but are reduced from full benefit amounts at age 66 or 67. In addition, benefits started at age 70 receive a bonus amount not paid if started at earlier ages. Benefits can be suspended and started at a later age or, in some cases, started at a lower amount and switched to a higher amount at a later age. Benefits taken while you are still working are subject to a reduction if you earn more than a certain amount of wages, and benefits taken at any age may be subject to federal income taxes, depending on your total taxable income. How’s that for being complicated? What is right for you? It is not always easy to know what to do, considering the bewildering maze of rules that go along with Social Security benefits. We will attempt to simplify some of this maze in this article.
How do you become eligible for benefits?
First, to receive a retirement benefit, you will need to have earned 40 quarters of coverage. One quarter is equal to 3 months of work, or 4 quarters in one year; thus 40 quarters is 10 years. This means that you will need to have worked for 10 years in a job that was subject to Social Security taxes. Those 40 quarters do not have to be continuous; they can and often do include breaks in employment, such as when children are young and one parent stays home to raise them, then goes back to work as they get older.
How do you pay for your Social Security benefits?
You pay for your benefits by paying taxes from your wages or self-employment income all the years that you work. The Social Security tax rate is currently 15.3%, and is split equally between the employer and employee. It is made up of a retirement tax of 10.45% + a disability tax of 1.8% + a Medicare tax of 2.9%. Self-employed workers must pay the entire amount, since they are both the employer and the employee. Most jobs are subject to this tax, but there are a few that are not. If you are unsure, simply look at your paycheck; if Social Security taxes are not deducted, you r employment is not “covered” and does not apply towards the 40 quarters of employment. There is a ceiling on the amount of earned income that is taxable; currently (2015) that ceiling is $118,500. Wages or self-employment earnings above that amount are not subject to the retirement tax but they are subject to the Medicare tax.
What is your retirement benefit amount?
Your retirement benefit amount is based on your earnings and your age when you begin taking the benefit. Today (2015), the average retirement benefit is $15,936 per year. This benefit amount would be higher except that 38% of men and 43% of women take their retirement benefit early, at age 62 (as of 2012 government data) rather than waiting to start at age 66, 67 or 70. Benefits begin in the first month following the month in which you reach and claim for early, full or delayed benefits. For example, if an individual reaches age 66 on January 15th of 2016 and files for full benefits at age 66, her first check will be paid to her in February of 2016. We recommend applying a couple of months prior to your planned start date, just in case there is any problem with your application for benefits. You can apply online or in person at a Social Security office.
How is your benefit amount calculated?
The formula for calculating your benefit amount goes up with increased wages, but does not reflect any credit for earnings above the taxable ceiling of $118,500 (2015). Social Security uses a formula that indexes the total wages of the worker over all of the years of working, which tends to favor the lower and middle wage earners over the higher wage earners, because the higher benefit paid to the higher wage earners is not proportionate to his or her higher, indexed wages. Nevertheless, if you earned more income during your working years, your benefit will be higher than someone who earned less because you will have paid more in taxes for those benefits. Social Security now reports to every worker over age 60 who is accruing benefits with an estimate of their retirement benefits, so the way to know what your retirement benefits will be is to read the report sent to you, or go to the Social Security website at socialsecurity.gov or ssa.gov and get an estimate of your benefits at any age.
How can you get the most benefits from Social Security?
Generally, the way to get the most benefits is not to start taking those benefits early, at age 62 if you are single or married. Waiting until full retirement age, which is 66 or 67 (currently), will increase your monthly check by 25%. Even better, waiting until age 70 will increase your benefit from age 66 by an additional 32%. In other words, if you take your benefit early, at age 62, it will be 57% less than if you waited until age 70! Therefore, if your benefit at age 62 would be $16,000 per year, waiting until age 70 would increase it to over $25,000. For most people, that is worth waiting for.
What other benefits are there in waiting until a later age to begin taking benefits?
Good question! A major reason to wait, in addition to your own financial security, is to provide a greater benefit to your heirs. Survivor benefits are based on the amount being paid to the owner of the benefits. So, if you retire early and take Social Security at age 62, with a reduced benefit of only 75% of the full amount, and about 50% of the age 70 amount, your heirs will get a reduced benefit as well in the event of your death.
What are spousal benefits and who is entitled to get them?
Spousal benefits are benefits paid to a spouse of someone who is entitled to retirement benefits. If you are married and have earned Social Security benefits, your spouse has the choice of taking his or her own benefits or choosing instead to take a spousal benefit, which is an amount equal to 50% of your own benefit. So, if your spouse has not earned as much income over the years as you have earned, or has a benefit that amounts to less than 50% of your benefit, he or she can opt to take a larger spousal benefit instead. For example, if your benefit at age 66 is $2,900 per month and your spouse’s benefit from his or her own employment is $1,100 per month, he or she can opt for a spousal benefit of 50% of yours, which would be $1,450 per month. Your spouse is allowed only one benefit, but can choose whichever is higher. Your spouse is subject to the same rules as you are; he or she must be full retirement age (66 or 67) to get the full benefit. Taking his or her spousal benefit early, at age 62, will reduce it by 25%, so the key to maximizing the benefit and getting the most income available is to wait at least until full retirement age. Waiting until age 70 is even better.
Married couples should consider strategies that will produce the most income to them. Being married gives you the choices of several ways to optimize your retirement benefits from Social Security.
One is called the “62-70 strategy”. One spouse begins taking benefits early at age 62 and the other spouse waits until age 70 to get the highest amount possible. If the other spouse has not yet filed for a benefit, the amount paid to the spouse filing at age 62 will be based on his or her own earnings. If the other spouse has already filed for benefits, the spouse filing early will receive benefits based on whichever is greater, his or her own benefit or the 50% spousal benefit.
Another strategy is called “file and suspend”. Using this method, one spouse files for benefits at full retirement age, 66 or 67, and the other spouse files but immediately “suspends” taking his or her benefit until age 70 but this person can begin taking spousal benefits from the person who has begun collecting benefits at age 66 or 67. The spouse who suspends can switch to his or her own higher benefit at age 70, thus getting a bonus while he or she waited. Doing this is more complicated and should be done carefully. We recommend it be done in writing, but according to Social Security, this is not strictly necessary. However, given the fact that Social Security workers may make mistakes, we believe that to “file and suspend” in writing is the best course of action for this strategy.
Divorced spouses may have benefits that they do not know they can get.
If you were married to someone for at least 10 years, you are entitled to a spousal benefit when that person becomes eligible for his or her own benefits. For example, say that you were married for 15 years to your ex-spouse, who is age 66, just retired and is now getting full Social Security benefits of $2,500 per month. Let’s say that you are not remarried and are age 64, planning on retiring in 2 more years with your own Social Security benefit of $911 per month. You are entitled to a spousal benefit from your ex, which in this example would be $1,250 per month. Obviously, if you know this, you will opt for the greater spousal benefit, right? Of course. Taking the spousal benefit early, at your own age 62, will reduce it by 25% just like any other benefit taken early, so again, it pays to be patient and wait until at least full retirement age.
Widowed spouses also are entitled to benefits. What are they?
A widow or widower who is at least age 60 is entitled to between 7.51% and 100% of their deceased spouse’s benefit, depending on the age of their deceased spouse at death and whether the deceased had or had not already begun taking Social Security retirement benefits. In addition, if the deceased had already begun taking retirement benefits, his or her age at beginning those benefits will affect the amount that a widowed spouse will receive at his or her age of at least 60. This includes divorced spouses of deceased persons, assuming that they were married at least 10 years to the deceased and have not remarried.
Can you change your mind?
With many of the retirement benefits that are available, you are allowed to change your mind, but not all of them. It pays to ask first and if possible, get your answer in writing before making a change. Social Security rules do not always “make sense”, meaning that just because you are able to change your mind in one instance does not always mean you can do so in every instance. Ask first.
What about taxes on your Social Security retirement benefits?
Good question! Social security income may be taxable, depending on your total taxable income from all sources. Between 50% and 85% of your Social Security benefits will be taxable if your adjusted gross income is between $25,000 and $34,000 for single taxpayers and between $32,000 and $44,000 for married taxpayers (2014).
In addition to being taxable, if you are still working and less than full retirement age while receiving Social Security benefits, your benefits will be reduced by $1 for every $2 that you earn over $15,480. Then, in the month that you reach full retirement age, your benefits are reduced by $1 for every $3 that you earn above $41,400. After full retirement age, your Social Security benefits are not reduced by any amount, regardless of how much you do or do not earn in wages.
These are only the basic facts about Social Security retirement income. There are a lot of detailed rules that apply in many situations. If your situation has not been described here, chances are that it is one of the more complex ones, and deserves the attention of a Social Security case worker to look at it more closely. This means that you will want to make a personal appointment with Social Security and carefully research the rules for your own particular situation.
Taking the penalties into consideration and considering that your Social Security benefits may be taxable, it makes more sense to wait until full retirement age, or age 70, to begin taking your benefits. Obviously, if you cannot do so because you have no money at all, you may simply not have a choice. Or, if you have a very serious illness that may result in death, you may also decide to take your benefits now rather than wait and possibly not live long enough to receive anything at all. There are some reasons to not wait, but in general, waiting is the best course of action for most people. Today, a lot of retirees are opting to take Social Security early, and in so many cases, this is not wise. Over time, inflation will take a huge toll on the value of those monthly checks, and if people live longer than expected, which many of us will do, they will discover that they made a big mistake by taking early benefits from Social Security retirement.
©2013 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2014