7 Social Security Rules

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The earlier you claim your Social Security retirement benefits, the more you — and perhaps also your spouse — stand to lose. 

For many Americans, Social Security represents the largest share of their retirement income. Some people believe in starting to collect Social Security as early as possible, which is generally at age 62 because they’re afraid they won’t get their share, but doing so means that you won’t get the full monthly benefit amount, even once you reach full retirement age. But there’s really no “right” time.

You should plan to need about 70% of your pre-retirement earnings to maintain your standard of living. And if you have average earnings, your Social Security benefits will replace only about 40%.

Additionally, The Wall Street Journal reports that a rapid increase in retirement-age Americans along with a decrease in working-age adults contributing into the system is putting pressure on Social Security and the promise of lifetime income.

In fact, the system’s board of trustees reports that the fund can only pay full benefits until 2034. State pension funds are also stretched—a $1.4 trillion shortage was reported in 2016.

Those who have plans to depend on these shaky resources could experience financial consequences if they don’t find an alternate income source. However, 40% nearing retirement have no formal retirement income plan, and 20% have no plan.

According to the Social Security Administration (SSA), the average woman reaching the age of 65 today will live until 86.5. The average man who is 65 today can expect to live until 84.

The longer you wait to start collecting Social Security, up to age 70, the larger your monthly check could be. Experts recommend that you wait to start claiming benefits as long as you can to maximize your payout for the rest of your life.

Your “full retirement age” falls somewhere between ages 66 and 67, depending on the year you were born. Retiring at your full retirement age will get you 100% of your monthly Social Security benefit.

If you can hold off on taking your benefits until after your full retirement age, your benefit increases by 8% each year you wait, up to age 70. After that, there’s no additional benefit to waiting — in fact if you don’t start collecting by age 70, you’re leaving money on the table.

To ensure you don’t run out of money is to postpone claiming your Social Security retirement benefits. There are advantages to waiting as late as 70 years old. The following are some reasons to wait until full benefit allowance before benefits:

1. Your social security benefit is based on your 35 highest-earning years

Social Security calculates your monthly checks with a formula that uses your 35 best-earning years — that is, the 35 years during which your income was highest. If your earnings record doesn’t include 35 years, missing years are replaced with zeros, lowering your potential benefit.

So, it’s worth staying in the workforce at least 35 years if you can. The more peak-earning years in your formula, the bigger your monthly benefit checks can be.

It is recommended that you check your earnings record once yearly to confirm that the Social Security Administration has recorded your earnings correctly

2. Your benefit might be taxed

You will be surprised to learn that your Social Security income may be taxed? About half of retirees pay federal taxes on their income from the program and up to 85% of your benefits could be considered taxable income by Uncle Sam.

Many states also tax at least some residents’ Social Security income. There are 26 states that do not tax benefits.  Choosing to delay collecting Social Security benefits until your full retirement age — or even beyond — might be the simplest way to avoid paying taxes on your Social Security benefits, at least for a while.

The extent to which your benefits are taxable is based on what the SSA calls your “combined income.” It includes taxable income, such as withdrawals from tax-deferred retirement accounts like traditional 401(k) plans and traditional individual retirement accounts (IRAs).

Depending on the amount of your combined income, up to 85% of your Social Security benefit could be taxed.

One way to dodge such a tax torpedo is to withdraw less money from your tax-deferred retirement account each year. And delaying claiming Social Security can help you do that because you’ll get a bigger monthly benefit.

3. You can claim benefits as early as 62

The earliest age at which you can start receiving Social Security benefits is 62 for most people, and 60 for those who claim survivor’s benefits.

The largest share of Americans — about 35% of men and nearly 40% of women — choose to claim at age 62.

If that’s your plan, understand that claiming early carries a penalty, one you’ll pay by receiving smaller monthly checks for the rest of your life. Check your online Social Security account to compare what you’d receive in monthly checks at age 62 with what you’d get from waiting until you are older.

Despite all that, there are circumstances when you have few choices — you need the money to live, for instance, or you don’t expect a long life — and claiming early makes sense.

4. Your full benefit amount is tied to your full retirement age

“Full retirement age,” or FRA, is a technical term in the context of Social Security. It refers to the age at which you are eligible to receive the full amount of your monthly benefit — meaning without any penalty applied for claiming early, or any bonus applied for delaying claiming.

In other words, claiming benefits before reaching full retirement age means your monthly benefit will be reduced — by as much as 30%. Claiming after you reach FRA means your monthly benefit will be increased by as much as 8% for each year you wait past FRA to claim, up until age 70.

So, what exactly is your full retirement age? That depends on the year you were born, but for most people it’s between age 66 and 67.

5. Your spouse’s work history can help you, too

Understanding your options can really pay off with Social Security. For example, if your spouse or ex-spouse earned more money than you, it may be better for you to claim spousal benefits — which are based on your spouse’s or ex’s earnings record — instead of claiming based on your own work history.

If you’ve been a stay-at-home spouse, or earned low wages or didn’t work for very many years, you may be able to receive up to half the amount of your spouse’s or ex-spouse’s monthly benefit. (In the case of an ex, you generally must have been married to the person for at least 10 years, as well as meet other conditions, to claim spousal benefits based on that person’s earnings record.)

It’s one more case where doing research and planning your Social Security claiming strategy is an investment in your future.

6. When you claim won’t affect your total payment

Some people think that taking Social Security at age 62 means more money overall.  But, starting benefits at age 62 makes your monthly checks smaller than if you’d waited until FRA. But whether you start early (and get smaller checks) or later (with bigger checks), you should receive about the same total payout over the course of your retirement.

The Social Security system was designed for you should get the same total amount of benefits over the course of your retirement regardless of the age at which you first claim benefits.

That doesn’t mean there isn’t a powerful reason to wait — ideally, even to age 70 if you can. If Social Security is going to be a big part of your retirement income, the bigger checks you’ll get from waiting will be valuable to your quality of life in old age.

Your monthly benefit will be reduced if you claim before reaching what the SSA calls your “full retirement age,” an age set by the SSA that depends on the year you were born. For example, full retirement age for a person born in 1955 is 66 years and 2 months, while full retirement age for anyone born in 1960 or later is 67.

7. You may be able to collect survivor’s benefits even after remarrying

The rules for remarriage and survivor’s benefits sometimes throw people off, probably because your age when you remarry is a big part of the equation.

Survivor’s benefits let a widow or widower collect up to 100% of the late spouse’s Social Security benefit amount. You generally can claim this type of benefit as early as age 60, but the benefit will be reduced if you claim it before reaching your full retirement age. (Social Security’s pamphlet “Survivors Benefits” has details).

But what if you remarry? Again, that depends on the age at which you remarry. The Social Security Administration explains:

“Usually, you can’t get widow’s or widower’s benefits if you remarry before age 60 (or age 50 if you’re disabled). But remarriage after age 60 (or age 50 if you’re disabled) won’t prevent you from getting benefit payments based on your former spouse’s work. And at age 62 or older, you can get benefits on your new spouse’s work, if those benefits would be higher.”

References:

  1. https://www.msn.com/en-us/money/retirement/7-social-security-rules-everyone-should-know-by-now/ss-BB1dPmG5?ocid=uxbndlbing#image=1
  2. https://www.moneytalksnews.com/5-ways-to-avoid-paying-taxes-on-your-social-security-benefits/
  3. https://www.moneytalksnews.com/why-its-dumb-to-claim-social-security-early/
  4. https://www.jackson.com/content/dam/dash/pdf/cmc20888/CMC20888%20-%20bridging%20the%20retirement%20gap.pdf
  1. Social Security Administration, ssa.gov, Benefits Planner: Retirement—Learn about Social Security Programs, 2018.
  2. Adamy, J., Overberg, P., Wall Street Journal, “Growth in Retiring Baby Boomers Strains U.S. Welfare Programs,” June 21, 2018.
  3. Social Security Administration, ssa.gov, “Summary: Actuarial Status of the Social Security Trust Funds,” June 2018.
  4. Reuters, “U.S. State Pension Funding Gap Rises to $1.4 Trillion in 2016: Pew,” April 12, 2018.
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