When and how to claim Social Security benefits is probably the biggest financial decision most Americans will ever make. For the average retiree, it accounts for about 40% of their retirement income. This means that it is extremely important to claim correctly with a long term perspective, and to integrate Social Security benefits with all your other assets.
As we discussed in last month’s article, there are 2,728 core rules and there are over 20,000 pages of rules within the Program Operating Manual that the SSA uses to determine eligibility and benefits.
Here’s a high-level overview of the basics of Social Security:
- Basic Eligibility – a person needs to work for at least 10 years (40 quarters or credits). In 2016 one must earn $5,040 to earn 4 credits.
- Once one meets basic eligibility, SSA takes the highest 35 years of earnings (which are indexed to inflation) to determine one’s benefits.
- Benefits are based upon your FRA (Full Retirement Age). For anyone born between 1943 – 1954 your FRA is 66. If you were born in 1955 , this is 66 & 2 mos, 1956 is 66 & 4 mos, etc. For anyone born in 1960 or later, the FRA is 67.
- There is a separate calculation/formula for each year, which determines the maximum Social Security benefit. For anyone born in 1954 (62 this year) the maximum benefit at age 66 (Full Retirement Age) is $2,787.84 per month. It can be less than that, but not more.
- You can claim benefits as early as age 62, but you will incur a 25% lifetime penalty. So if you were born in 1954 and have maxed out your benefits (see above) your check will be $2,090. If your FRA is 67 and you claim at 62, your penalty will be 30% forever.
- If you are working at age 62 when you claim, you are also subject to the Earnings Test. This means that for every $2 you make, they will subtract $1 in benefits for every dollar you earn in excess of $15,720.
- Example: If you claim benefits but continue to work, and you make $50,000 per year you are $34,280 above the earnings limit. Thus your benefits would be reduced by $17,140. In this case, it would not make sense to claim if you are still working.
- In the year that you reach your FRA, the Earnings Test changes so that you lose $1 for every $3 you earn up to $41,880. If your birthday is in May, you would need to keep your YTD earning below $41,880 up to your birthday.
- Once you reach your FRA, the Earnings Test no longer applies. You can work and make as much as you want.
- If benefits are withheld you don’t lose the benefits. They will be added back to your record when you reach your FRA
- Should you decide to postpone claiming from your FRA to age 70, there is an 8% per year guaranteed increase in your benefits (Delayed Credits). So if your check is $2,787 at 66, the minimum guaranteed check at 70 would be $3,680 + any Cost of Living Adjustments. If you or your spouse are healthy and longevity runs in the family, it might prove extremely prudent to delay claiming your benefits until age 70.
- Spousal Benefits – there are multiple options and strategies involved here that I will discuss in later columns, but here are the basics:
- If you’ve been married for 1 year, your spouse can collect 50% of your 66 check when they reach FRA, or they can claim own benefits (whichever is greater).
- Upon the death of either spouse, the surviving spouse inherits the greater of the two benefits.
- With the recent law changes (Bipartisan Budget Act of 2015) a number of options and strategies have changed, all based upon the ages of the spouses. We will explore in next month’s article.
- If either spouse worked at a job where Social Security taxes were not withheld and they qualify for a TRS or Civil Servant Pension, Social Security benefits will be subject to either the WEP (Windfall Elimination Provision) or the GPO (Government Pension Offset).
- Divorce Benefits – If one was married for 10 years to the same spouse and has not remarried, they might be eligible to receive spousal benefits. Once again, the options available have changed due to the recent law change.
- Survivorship Benefits – there are a number of different options available that we will discuss at a later date.
As you can see, these are just the basic foundational rules that pertain to claiming Social Security. Knowing when and how to structure all these different options and strategies could possibly increase one’s benefits by over $500,000 over a joint lifetime. This is why it is extremely important to know what your options are before making any rash or uninformed decisions.