By Barbara C. Attardo, CFP®, AEP®, CDFA®
Are you a baby boomer? Are you thinking of retiring sometime in the not too distant future? If so, your friends are probably starting to talk about Social Security benefits. Do you understand the conversation? This article attempts to explain some of the basics. For such an important topic, it’s best to have accurate information rather than risk picking up incorrect information based on a friend’s mistake. You may even be able to impress your friends with your newfound knowledge.
There are three types of social security benefits: retirement, disability, and survivor benefits. This article will address retirement benefits only. There are many nuances, so make sure you have considered all of them before you make a final decision.
For starters, it’s important to note one is entitled to start collecting lifelong social security retirement benefits as early as age 62 and as late as age 70. As you can imagine, the longer you wait to collect, the higher your benefit will be. (Why? Because you will be collecting benefits for a shorter period of time.) All the calculations are intended to be statistically equivalent for a particular individual based on a myriad of assumptions and over a person’s average life expectancy. However, you should factor in your own situation and attempt to make an informed decision on when to start collecting benefits. For example, it may make sense to start collecting early if you are in poor health or to delay your benefit if you are in great health and have longevity in your family. Additional considerations are your other sources of income and your cash flow needs.
There is an 8% increase per year (delayed credits) in your benefit for delaying beyond Full Retirement Age (FRA) to age 70 or anywhere in between.
Your Full Retirement Age (FRA) is the age which the Social Security Administration deems you are eligible for 100% of your monthly benefit and is determined by your birth year. See the table below to find your FRA and the percentage of your benefit you would receive if you take it at age 62, 65, FRA, or age 70.
Know that if you decide to take your social security benefit before your Full Retirement Age (FRA), earnings above the limit (of $16,920 in 2017) will impact your calculated benefit. One dollar in benefits will be withheld for every $2 in earnings above the limit. It is probably not worth it to take your benefit until your earnings are below $16,920 or you are over FRA. Once you are over FRA, there is no limit to the amount of income you can earn without reducing your social security benefit.
To be eligible to collect social security retirement benefits based on your own work history, you must have 40 Social Security credits (or 10 years of work where you paid into social security). You may also be able to collect a spousal benefit. Everyone is entitled to the greater of their own benefit or 50% of their spouse’s FRA benefit at their own FRA. (A spouse does not get 50% of any delayed credits. They are only entitled to 50% of the worker’s FRA benefit.) However, if a worker predeceases their spouse, the spouse steps into the worker’s shoes and receives the higher benefit, with delayed credits, as a survivor benefit.
A spouse that never worked is entitled to 50% of their spouse’s FRA benefit once they reach FRA. A non-working or low wage earning spouse should start to collect as soon as they reach FRA, as long as their spouse is FRA or older and collecting. A spouse has to wait until the worker is collecting in order to receive spousal benefits. The previously available “File and Suspend” strategy is no longer available. Note: If you were born before January 2, 1954 and reach full retirement age, you can choose to receive only the spousal benefit and delay receiving your own retirement benefit until a later date while it continues to grow 8% per year.
A divorced spouse is also eligible to receive a spousal benefit on their ex-spouse’s work history as long as they are 62 or older, were married 10 years or more, and have not remarried. This in no way impacts the benefit of the ex-spouse. Also, multiple ex-spouses can collect off the same person without any impact, as long as each marriage lasted 10 years or more. Unlike currently married spouses, a divorced spouse can collect a spousal benefit even if the ex-spouse is not collecting yet, as long as they have been divorced for at least 2 years. Note: If you were born before January 2, 1954 and reach full retirement age, you can choose to receive only the divorced spousal benefit and delay receiving your own retirement benefit until a later date while it continues to grow 8% per year.
As mentioned earlier, benefits increase 8% per year when postponed beyond FRA to age 70. However, benefits max out at age 70, so don’t delay beyond age 70.
Go to www.ssa.gov to view your Social Security Statement, plan your retirement, or apply for benefits. You may also call 1-800-772-1213 for information or go to your local social security office.
It’s never a bad idea to consult with your trusted financial planner when making decisions about social security. After paying into the system for many years, you owe it to yourself to maximize your benefits.
Print version: What You Don’t Know About Social Security Could Hurt You