September 4, 2021
The years before retirement can be an exciting time. Maybe you’re looking forward to spending your days out on the golf course, devoting more energy to your art, or spending more time with family. Making sure you have enough income to fund your dream retirement is crucial, and an important component of retirement income for many is Social Security.
But with record numbers of retirees expected as the baby boomer generation collectively reaches age 65, it’s more important than ever to fully understand how your benefits work—and how they can be maximized. With this comprehensive guide, we hope you can feel more confident and prepared to make the most of your Social Security benefits as you enter the next stage of your lives.
Your Social Security benefits are calculated based on lifetime earnings. The Social Security Administration (SSA) calculates your benefit based on your 35 highest earning years, with a minimum of 10 years of work required to be eligible for benefits. If you have worked less than 35 years, your earnings will be calculated with zeros for the years you have not worked. All past wages are indexed to today’s wages in order to accurately reflect wage growth.
Once your average monthly earnings for your top 35 years are calculated, a special formula is applied, and the result is your primary insurance amount (PIA). The PIA is the benefit you are eligible to receive when you reach full retirement age (FRA).
The actual benefit you receive may not be your PIA. Your PIA will be increased or decreased depending on when you choose to receive benefits. Taking benefits before FRA will reduce your benefit and waiting until after FRA will increase your monthly benefit. Also, starting at age 62, your eligible benefits will receive regular cost-of-living adjustments (COLA).
Married people are eligible for benefits based on their spouse’s work history. The spousal benefit is 50% of the working spouse’s earned benefit. In order to receive these benefits, the working spouse must be at least 62 and have already filed for benefits.
If you are divorced, you may also be eligible to receive spousal benefits based on your ex-spouse’s work history. Your marriage needs to have lasted at least 10 years, you must be divorced for at least two years, and you must still be single. In addition, you need to be at least 62 and not eligible for higher benefits based on your own work record. Unlike spousal benefits for married people, your ex-spouse does not need to have filed for benefits in order for you to claim them.
You can claim your Social Security benefits anytime between age 62 and age 70. If you continue to delay taking benefits after you reach age 70, there is no additional benefit increase. However, the age at which you choose to collect benefits before 70 will impact the amount of benefit you receive.
You can start receiving benefits as early as 62, but your monthly benefit will be lower than if you waited longer. Your basic benefit is reduced a fraction of a percent for each month you begin receiving benefits prior to full retirement age. Retiring early can permanently reduce your benefit by up to 30%.
Your full retirement age (FRA) changes based on the year you were born. FRA is 66 for those born between 1943 and 1954 and increases by two months for every year after that you were born until it settles at age 67 for those born in 1960 or later. If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive the full PIA that you have earned.
If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year that you delay, with a maximum possible increase of 32%. You cannot delay and increase your benefit indefinitely, though. Once you reach age 70, the amount of benefits you receive will not increase any further.
While you are working, you can increase your future Social Security benefits by earning higher wages. Once you stop working, though, the only influence you have over your benefit is when you begin to take it. Your timing has a great impact on the amount of the benefit you will receive and should be carefully considered.
It is important for you to review your earnings history and check for accuracy. Your benefit is calculated based on those numbers, so any mistakes can affect your benefits. You should correct any errors as soon as possible.
Your Social Security benefits are calculated using complex actuarial equations based on life expectancy and estimated rates of return. They are not designed to encourage early or late retirement. If you live as long as anticipated, the total amount you receive over your lifetime should be about the same whether you claim it at age 62, age 70, or sometime in between. You will either receive the money as a smaller monthly payment over a longer period of time or a larger monthly payment over a shorter period of time.
The best time for you to claim your benefits depends on your personal situation and health. If you expect to live longer than average, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid-80s, you would likely receive a greater lifetime benefit by taking it sooner, even though it would be a smaller monthly payment.
Once you decide when you want to start receiving benefits, remember to complete your application three months before the month in which you want your retirement benefits to begin.
Because married people have the ability to receive their own benefit or a spousal benefit, they have more to consider when filing for benefits. With the right strategy, married couples can maximize their benefits.
In the majority of cases, the lower-earning spouse may want to begin collecting benefits early while the higher-earning spouse waits as long as possible. That way, you can access the lesser benefit while maximizing the higher benefit.
Often, it is the husband with the higher benefit and the wife with the lower one. Women also tend to live longer than men. By following this strategy of waiting as long as possible to claim the higher benefit, you not only maximize the husband’s retirement benefit for use while he is alive, but it also maximizes the wife’s survivor benefit when he passes away.
While it used to be a popular claiming strategy, the Restricted Application is now only available to those born before January 2, 1954. By restricting your application, you can receive a spousal benefit if your spouse is already collecting benefits while allowing your own benefit to continue to grow until age 70. That way, you can begin to receive spousal benefits while maximizing your own benefit.
Working does not affect your benefits once you reach FRA, but it does before that. Only earned income, such as wages and self-employment earnings, affects your Social Security benefits. Income from investments, pensions, and annuities do not affect Social Security benefits.
When you are under FRA for the whole year, your Social Security benefit is reduced by $1 for every $2 you earn over $19,560. In the year that you reach FRA, your benefit is reduced by $1 for every $3 you earn over $51,960. Once you reach FRA, your benefit is no longer reduced no matter how much you earn. These dollar amounts adjust each year, so your benefit may change in following years.
In 2022 the COLA is 5.9%, which is the biggest increase in 40 years. Individuals can expect benefits to rise by an average of $92 per month, while married couples will see a $154 benefit increase. There is also an increase to the Social Security tax cap. The cap is increased by $4,200 to $147,000, meaning Social Security taxes will not be withheld from income earned above that amount.
According to the 2021 Social Security Trustees report, if the current laws do not change, the Social Security trust fund will be exhausted by 2034. At that point, the law dictates that the benefits being paid at that time will be automatically cut by 22%. This would bring the amount of money coming in equal to the benefits being paid out. So, the answer to the question “Will Social Security be around?” is yes, but it may not look the same.
Congress has some work to do to continue the feasibility of the program. They could increase the current 6.2% Federal Insurance Contributions Act (FICA) tax (12.4% for self-employed) to a more reasonable amount. They could increase the income limits subject to Social Security ($147,000 in 2022) or they could increase the FRA for some (or all) beneficiaries going forward. It will most likely be a combination of the options mentioned above or something else we haven’t even thought of yet. The one thing we do know for sure is that Congress has their work cut out for them, and we know how good they are at coming up with a solution.
Depending on how much you have in savings, when and how you claim your Social Security benefits could very well be the most important retirement decision you make. Because of the significance and complexity of this decision, it’s a good idea to consult with a financial professional before beginning the process.
We at Coign Capital Advisors can help you navigate the Social Security process, allowing you to feel confident and prepared for the next chapter of your life. If you are nearing retirement and have questions about what role Social Security will play in your overall plan, we would love to hear from you. Reach out to us at email@example.com or call 801-676-4582 to get started today.
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