As a program to help everyone save for retirement, Social Security ought to be simple, but it is surprisingly complicated in the number of choices it provides. The appropriate actions for maximizing benefits are by no means obvious, and can become even more complex when there are choices regarding spousal benefits or continuing to work.
The good thing is that you don’t need to deal with it alone.
A client advisor, such as those at Arvest Wealth Management, can:
- Help gather the facts and determine the optimum time to begin your benefits.
- Help you understand how continuing to work might affect benefits.
- Assess how your Social Security benefits will interact with your spouse’s benefits.
You can start to understand your situation by getting a sense of how much you’ll be receiving and, if you plan to work part-time after retirement, the impact of your earnings on your benefits.
Check your current record
To check your benefits, go to www.ssa.gov, click on “My Social Security” and then Create an Account.
You’ll see a record of your earnings, as well as estimates of your Social Security benefits for early retirement, full retirement and retirement at age 70. You’ll also find estimates of the amount of benefits paid to your spouse and other eligible family members as a result of your retirement, disability or death.
Interesting note – to prevent fraud, signing up isn’t easy. You’ll need access to more than just your social security number. Some security questions might be obscure. For example, they might ask about what your last car payment was, or which streets you’ve lived on.
What is your “full” or “normal” retirement age?
The Social Security Administration’s language regarding “full” or “normal” retirement age can be confusing. This does not refer to an average retirement age, or those that are fully retired and not working at all. Rather it is the age when full benefits can be received. Starting benefits before this age reduces the annual benefit, and after this age increases the annual benefit.
For persons born from 1943 through 1954, the full retirement age is 66. Those born in 1960 and later years have a full retirement age of 67. The higher retirement age is phased in for those born in 1955 through 1959.
Receiving benefits early
You can begin receiving Social Security benefits as early as age 62, regardless of your full retirement age. If you do begin receiving benefits early, they will be reduced permanently, based upon the number of months that you receive checks before you reach full retirement age.
For example, if your full retirement age is 66, and you retire at age 62, there is about a 25% reduction in your benefits. In an actuarial sense, early retirement gives people about the same total Social Security benefits over their lifetimes as retirement at the normal age, but in smaller amounts so as to take into account the longer period during which they will receive them. In a personal sense, it all depends upon how long you live. It will take about 12 years of full benefits to recoup the foregone early benefits, so the break-even age is about 78.
Starting benefits after normal retirement age – A few years can may make a big difference.
Social Security benefits are increased by a certain percentage if you choose to delay receiving them. These increases will be added in automatically from the time that you reach your full retirement age until you start taking your benefits, or until you reach age 70. The percentage varies depending on your year of birth, but is 8% per year for those whose full retirement age is 66. If you decide to delay your retirement, the Social Security Administration strongly urges you to sign up for Medicare at age 65.
Working while collecting benefits
You may continue to work and still receive retirement benefits. However, exceeding certain limits for earned income before you reach normal retirement age can reduce benefits. Your earnings in or after the month that you reach your full retirement age will not affect your Social Security benefits. IMPORTANT: Only wages or self-employment income are “earned income.” Interest payments, dividends, and capital gains are not counted at all.
Example: In 2021, if you’re under full retirement age, $1 in benefits will be deducted for each $2 in earnings that you have above the annual limit of $18,960. In the year that you reach your full retirement age, your benefits will be reduced $1 for every $3 that you earn over a different annual limit, $50,520 in 2021, until the month that you reach full retirement age. Then your earnings will no longer reduce the amount of your monthly benefits, no matter how much you earn. The annual limits increase each year as nationwide average wages increase.
Special considerations for married couples
When a husband and wife each have paid social security taxes, the choices are more complicated and more important to understand. Each partner has a basic benefit plus a spousal benefit, but may only collect the larger benefit. They don’t have to claim at the same time. For example, one spouse might begin benefits early, while the other waits until age 66 or later to begin.
Spousal benefits are based upon the work record of a living spouse or ex-spouse. They are generally 50% of the worker’s benefit. Survivor benefits, based upon the work record of a deceased spouse or ex-spouse, are 100% of the deceased worker’s last benefit. There are a number of other differences to keep in mind:
- The earliest age for spousal benefits is 62, and the earliest age for survivor’s benefits is 60. The spousal benefit at 62 is 35% of the worker’s benefit, and the survivor’s benefit taken at age 60 is 71.5% of the worker’s benefit.
- Persons born in 1944 or 1955 will have a different full retirement age for their spousal and survivor benefits. Full retirement age is 66 for spousal benefits for those born between 1943 and 1954, but for survivor benefits the window is 1945 to 1956.
- Spousal benefits do not get the benefit of delayed retirement credits, but survivor benefits do.
- Survivor benefits become available after nine months of marriage, but 12 months are required for spousal benefits.
It’s only part of the picture
Social Security is generally intended only as a supplement to other retirement income, but it can still play a major role in affecting how other assets are utilized. A client advisor, such as those at Arvest Wealth Management, can help you to consider a holistic view of your retirement plans by integrating your benefits with other retirement resources, such as insurance, 401(k)s and IRAs. Let us know if you’re considering retirement and would like a second opinion on whether you’re financially ready to take the leap.
This information is not written or intended as tax or legal advice, and it may not be relied on for the purpose of determining your Social Security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed to be accurate.
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