9 Questions about Social Security
What you need to know
Most working Americans know that the government takes money out of our paychecks with plans to return it to us when we retire. However, if that is all you know about Social Security then you might miss out on opportunities to maximize your benefits which may have an adverse impact on your golden years. Your claiming strategy, including when you claim and how you claim your Social Security benefits from Uncle Sam, can make a big difference in what you receive in your monthly checks over your lifetime.
While Social Security as a whole includes retirement benefits, disability benefits, survivor benefits, and Medicare, the focus of the Q&A below is on the retirement benefits component. We encourage you to consult with your financial advisor to ensure your Social Security claiming strategy complements your overall retirement plan. Click the questions below to view answers.
The size of your monthly Social Security check when you retire depends on how much you earned during your highest-earning 35 years prior to age 62 and how much you paid in Social Security tax during your working years. Your previous earnings are restated in terms of today’s wages to adjust for inflation, and the earnings for the highest 35 years are averaged. If you don’t have 35 years of earnings, zeros are averaged in for the years you didn’t pay into Social Security.
To be eligible for Social Security benefits, you must earn at least 40 credits. You earn Social Security credits when you work in a job and pay Social Security taxes. In 2014, you receive one credit for each $1,200 you earn, up to four credits per year.
If you do not qualify for benefits by working and earning at least 40 credits, you may be able to claim benefits under the record of your spouse or ex-spouse.
Currently, in 2014 the maximum amount that an individual can qualify to receive per month if he/she retires at full retirement age in 2014 is $2,642. However, your actual benefits may vary depending on several factors.
- Your earnings: The biggest contributor in determining your benefits is how much you earned during your highest-earning 35 years before age 62, adjusted for cost of living increases.
- Your age: The age at which you start taking benefits also affects how much you receive per month once you start. The longer you wait to start taking benefits, up to age 70, the higher your monthly benefits will be once you start taking benefits. If you start taking benefits early, between 62-66 years old, your benefits will be reduced.
- Other income: If you earn income in the same year you receive benefits, your Social Security benefits may be reduced.
- Pensions: A pension from a job in which you did not pay Social Security taxes, such as a government job, will reduce your benefit.
We advise married couples to make decisions about their Social Security claiming strategy as an economic unit, considering what is in the best combined interest of both spouses to maximize their total lifetime benefit.
You can claim your Social Security retirement benefits as early as age 62 or survivor benefits as early as age 60. If you were born between 1943 and 1954, your normal retirement age for full retirement benefits is 66; that age rises if you were born later.
The financial analysis behind which claiming strategy is right for you can be complex. The primary questions one should consider include the following:
- Is your spouse older or younger?
- Does your spouse qualify for Social Security credits?
- Which spouse is earning more?
- Are you in good health?
- Is your spouse in good health?
- Do you intend to continue working past age 62? Past age 66?
- Does your spouse intend to continue working?
- How much income do you have from other sources?
The questions above only partially address all of the personal circumstances that may influence which claiming strategy may be right for you. As such, we advise individuals to speak with an advisor who can help identify and compare your options to help ensure you make the most of your benefits.
If you are married:
Claim Spousal benefit: If your Social Security retirement benefit is less than your spouse’s, you can claim either a benefit on your own record or claim a spousal benefit. The spousal benefit may be higher than the benefit you could receive on your own record.
Delay to increase survivor benefit: If there is a big age difference between spouses where the higher earner is older, the younger spouse may have a higher survivor benefit if the older, higher-earning spouse delays claiming his/her Social Security retirement benefit.
File and suspend: The higher earner may “file and suspend” upon reaching full retirement age in order to trigger a spousal benefit for a lower-earning or non-working spouse. The higher earner suspends his/her benefit and continues to accrue delayed retirement credits until age 70 while his/her spouse receives a spousal benefit. This has the effect of increasing the survivor benefit for the spouse if the higher earner dies first. A full survivor benefit may be equal to 100% of what the higher-earning spouse received as long as the surviving spouse has reached at least normal retirement age.
Combo strategy: One spouse employs the file-and-suspend strategy, while the other files a restricted application. This way, one spouse can get a spousal benefit for several years, while both earn delayed retirement credits. Both spouses must be full retirement age to employ this strategy.
Pay for school: If you have claimed Social Security retirement benefits and have dependent children who are 18 or younger, they too are entitled to Social Security benefits, worth up to half the amount you collect. You can sock that money away in a 529 college-savings plan and potentially cover a big chunk of future tuition. If you continue to work, your kids may collect while you delay cashing in on your own benefit until it’s worth more later. If you are at least 66, you can file for retirement benefits, enabling your dependents to collect theirs, and then immediately suspend your own benefits until as late as age 70 to collect the maximum amount.
If you are single:
Delay to increase benefit: For a single person with an average life expectancy and a full retirement benefit of $1,500, the present value of his/her lifetime benefits would be $318,321 if he/she claims at 62, assuming a 0% interest rate. That compares with $376,990 if she delayed until 70 – for an 18% boost.
If you are divorced:
Collect benefits based on ex-spouse’s work history: You can collect retirement benefits based on your ex-spouse’s work history if you are at least 62 years old, were married at least ten years, have been divorced at least two years, and have not remarried (or if you did, that subsequent trip to the altar ended in divorce, death or annulment). Unlike married beneficiaries, the ex-spouse doesn’t need to have applied for benefits, but the ex-spouse must be eligible for benefits, which means he or she must be at least age 62. If you collect benefits before your normal retirement age, early retirement reductions and earnings limitations apply.
Earn delayed retirement credits and collect on your ex-spouse’s work history: If you wait until your normal retirement age, you can claim spousal benefits worth up to half of your ex-husband’s or ex-wife’s benefit – while your own benefit continues to grow at 8% a year until you reach age 70. At that point, you can switch to your own benefit, which will be worth 132% of what it would have been at your normal retirement age due to delayed retirement credits.
If you choose to collect your retirement benefits as early as age 62, they will be reduced by 25% (and cut by 30% if you were born in 1960 or later). If you collect any type of Social Security benefit before your full retirement age and continue to work, you will forfeit some or all of your Social Security benefits if your earnings exceed specified limits. In 2014, if you continue to work while collecting benefits prior to the year you reach 66, you will lose $1 in benefits for every $2 you earn over $15,480. Once you reach your normal retirement age, you can earn any amount without affecting your benefits.
If you wait until your full retirement age to claim benefits, you have more options. Not only do the earnings cap restrictions disappear, but you can use one of many creative claiming strategies to maximize your benefits. Furthermore, by waiting to collect your benefit, the amount you receive will be higher. You get a delayed retirement credit of 8% for each year you wait to claim past your full retirement age until 70. If you are due $2,000 at your full retirement age of 66, but you claim at 62, then you will get $1,500. If you wait until age 70, and your benefit would increase to $2,640 — 76% more than the take-it-early benefit. (And that doesn’t include the cost-of-living increases that add to the benefit while you wait.)