Since its beginning in 1935, Social Security has become synonymous with retirement income. But as with any government program, Social Security is a behemoth with a lengthy list of rules and hidden intricacies that can make a huge difference in the amount you receive.
Collectively, Americans lose trillions of Social Security dollars because they don’t understand the system. It’s not enough to just file for Social Security and wait for your money. You need a strategy to maximize your situation and get every dollar you should. This guide is intended to de-mystify Social Security and provide information to help you make informed decisions.
To receive a Social Security benefit, you must have 40 credits. That means during your lifetime you must have worked 40 calendar quarters, or 10 years. If you stop working before you have enough credits to qualify for benefits, the credits will remain on your Social Security record. If you return to work later, you can add more credits to qualify. Social Security will not pay any retirement benefits until you have the required number of credits. There are exceptions, discussed later, such as a non-working spouse.
Age and Social Security
There are three ages to keep in mind when considering your Social Security benefit:
- Age 62-This is the earliest you can begin receiving Social Security. If you take Social Security any time before your Full Retirement Age (FRA) you will receive a reduced benefit for the rest of your life.
- Full Retirement Age (FRA)-This is when you receive your full Social Security benefit. Full Retirement Age (FRA) can be between 66 and 67 years. You can find your Full Retirement Age at https://www.ssa.gov/planners/retire/agereduction.html
- Age 70-This is when increases from delayed credits stop. There is no advantage to waiting past 70 to begin receiving your Social Security benefit.
When Should I Begin Taking Social Security?
The answer is, there is not a “best age” for everyone. There are lots of considerations when answering that question and your decision should be based on your individual and family circumstances. Questions to ask are:
- Are you still working?
- Will you continue to work after you begin receiving Social Security?
- Does your family have a history of living a long time?
- How is your health?
- Will you still have health insurance?
- Are you eligible for benefits on someone else’s work record?
- Do you have other income to support you if you decide to delay taking benefits?
- Will other family members qualify for benefits on your record?
According to the American College of Financial Services, 35% of men and 40% of women claim Social Security benefits at age 62 for a variety of reasons. But claiming at 62 is not always the best strategy. Claiming before Full Retirement Age (FRA) means you will receive a reduced benefit for the rest of your life.
Here’s how it works if your Full Retirement Age is 67. If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30%. The reduction for starting benefits at age
- 63 is about 25%
- 64 is about 20%
- 65 is about 13.3%
- 66 is about 6.7%
There is a misconception among some that if you take a reduced benefit before FRA that you will get an automatic increase to the full amount when you reach Full Retirement Age. NOT TRUE! If you begin your benefit any time before Full Retirement Age (FRA) your benefit is permanently reduced for the rest of your life. The only way your benefit increases once you begin receiving it is through cost-of-living adjustments and if you continue working while getting Social Security. More on that later.
Here are a few things to consider as you decide when to begin taking Social Security.
- Life expectancy—Many Americans are living longer. More than one in three 65-year-olds today will live to age 90, and more than one in seven will live to age 95. Go into a greeting card store and you can buy cards wishing someone a happy 100th Financial planners, who used to use ages of 83-86 in creating a plan are today using 95-100. You want to choose a retirement age based on your circumstances and family longevity history.
- Do you plan to continue working after you first become eligible for Social Security at age 62? If so, you’ll be subject to the Social Security Earnings Test. If you work and take Social Security before FRA and earn more than the Social Security allowed limit, Social Security will take back one dollar for every two dollars you earn above the limit until you reach Full Retirement Age.
- Health—Are you healthy? Are you active? Or does your current health prohibit you from working much longer?
- Will someone else in your family, such as a spouse, collect benefits based on your work history? If so, delaying benefits may be an advantage for the family member whose Social Security benefit is tied directly to yours.
- Do you want a larger Social Security benefit? The longer you wait to take your benefit up to age 70 means more money in your pocket because of delayed retirement credits. It equals approximately 8% per year between your Full Retirement Age and age 70.
How much will I receive?
Here’s the way the Social Security Administration (SSA) determines how much your Social Security benefit will be.
The first step is determining your average indexed monthly earnings, or AIME. To calculate AIME, the Social Security Administration (SSA) takes each year of earnings throughout your working lifetime, up to the Social Security taxable maximum. Then, each year’s earnings are adjusted for inflation, or “indexed.”
The formula uses your 35 highest years of earnings to determine AIME. The calculation is done by adding all 35 years of indexed earnings together, dividing by 35 to find your annual average, and dividing this result by 12 to determine your lifetime monthly average. (Side note-If you choose to work past FRA, each extra year you work adds another year of earnings to your Social Security record. Higher lifetime earnings can mean higher benefits when you retire. Also, any year you work past FRA and earn more income than in a lower-income year, the lower-income year is replaced in the 35-year calculation, increasing your average indexed monthly earnings.)
Next, your average indexed monthly earnings are used to determine your basic Social Security retirement benefit, officially known as the Primary Insurance Amount, or PIA. This is the amount you receive if you apply for Social Security at your Full Retirement Age. It is NOT the amount you receive if you elect to take Social Security BEFORE Full Retirement Age.
Determining your PIA is a 2-3 step process depending on the amount of your average indexed monthly earnings (AIME). The numbers used in the formula change each year. The most current numbers can be found at https://www.ssa.gov/oact/COLA/piaformula.html.
A simpler way of determining how much Social Security you will receive is by setting up a free, personal my Social Security Account online. You can receive personalized estimates of future benefits based on your real earnings, see your latest Social Security statement, and review your earnings history. Additionally, once you’ve set up the account, no one else can set up an account using your social security number, so there is some protection of your information once you’ve set up the account.
Delayed Retirement Credits Mean a Larger Benefit
To receive your full Social Security benefit you must reach your Full Retirement Age. However, if you choose not to begin taking Social Security at your FRA the amount you receive later will be larger because of delayed retirement credits. For every full year you delay taking Social Security past FRA, the SSA adds 8 percent to your benefit. The benefit increase no longer applies when you reach age 70, even if you continue to delay taking benefits, so it doesn’t make sense to postpone receiving benefits beyond that point.
Spousal Social Security Benefit vs Survivor Social Security Benefit
There are two Social Security benefits for spouses that are often confused—spousal and survivor. Not knowing the difference can mean less money from Social Security than you’re entitled to.
According to the Social Security Administration, “When a worker files for retirement benefits, the worker’s spouse may be eligible for a benefit based on the worker’s earnings… the spouse must be at least age 62… The spousal benefit can be as much as half of the worker’s “primary insurance amount,” depending on the spouse’s age at retirement. If the spouse begins receiving benefits before ‘normal (or full) retirement age,’ the spouse will receive a reduced benefit.
Example. At John’s full retirement age his Social Security benefit is $2000 a month. Mary has been a homemaker all their married life, and except for some jobs during high school and college, she contributed very little to Social Security. If she chooses to file for the spousal benefit when she reaches her Full Retirement Age, she will receive $1,000 a month or 50% of John’s Social Security. Mary’s benefit, based on her own work history is $400 a month, so the spousal benefit is the best option. If Mary chooses to receive the spousal benefit between her age 62 and her FRA, she will receive a permanently reduced spousal benefit.
If Mary started receiving the spouse’s benefit at age 62, her monthly benefit amount would be reduced to about 32.5 percent of the amount John would receive at his Full Retirement Age. (The reduction is about 67.5 percent.) The reduction for starting benefits as a spouse at age
63 is about 65 percent;
64 is about 62.5 percent;
65 is about 58.3 percent;
66 is about 54.2 percent; and
67 is 50 percent (the maximum benefit amount).
But here’s an important fact to keep in mind. The working spouse must claim their Social Security benefit before the nonworking spouse can claim the spousal benefit. Continuing to use the example of John and Mary:
- If John has not filed for his Social Security benefit, Mary cannot claim the spousal benefit, however;
- If John decides to delay claiming his own benefit up to age 70, Mary can claim and receive a Social Security benefit based on her own limited work history. Between her age 62 and her FRA Mary will receive a reduced benefit. Claiming at Full Retirement Age or higher she will receive her full benefit.
- When John files for his own Social Security benefit, Mary can switch to the larger spousal benefit—half of John’s Full Retirement Age benefit amount, not half of his age 70 amount.
A survivor benefit is receiving a Social Security payment based on what a deceased spouse was eligible for at the time of their death. If you wait until YOUR Full Retirement Age to collect the survivor benefit, you’ll receive 100% of that amount. You can receive benefits as early as age 60, but you’ll get less money.
Example. If John dies, Mary is eligible to file for the survivor’s benefit. If John was receiving $2000 a month at the time of his death, and Mary is Full Retirement Age or older, she will receive $2000 a month. If Mary had been receiving the 50% spousal benefit when John dies, the bigger benefit continues and the smaller benefit goes away.
You can never receive Spousal Benefits and Survivor benefits at the same time but you may be able to collect on both at different times. Here are some potential strategies that may help maximize your Social Security retirement income:
- If a widow or widower has not collected any Social Security benefits at the time of their spouse’s death, the survivor can wait until he or she reaches their Full Retirement Age to claim the maximum survivor benefit. If that person is also entitled to their own retirement benefit, they may be able to collect one benefit first and then switch to the other benefit later if switching would result in a larger benefit.
- For example, a person entitled to a substantial retirement benefit on their own earnings record as well as a survivor benefit, may want to collect the full survivor benefit at their Full Retirement Age, allow their own retirement benefit to grow by 8% each year between FRA and age 70 because of delayed credits, and then switch to their own benefit if it’s larger.
- Rather than waiting to Full Retirement Age to collect the full survivor benefit, you may choose to take a reduced survivor benefit, since you can collect it as early as age 60, or 50 if disabled, let your own retirement benefit grow to age 70, and then switch to the larger benefit. This leverages your total Social Security income as early as possible.
- But if the survivor benefit would be larger than their own retirement benefit at Full Retirement Age, the surviving spouse may want to file for their own retirement benefit before FRA, even though it would be a reduced payout, and then switch to the higher, full survivor benefit when they reach FRA. Even though the retirement benefit would be permanently reduced because it was taken before Full Retirement Age, it has absolutely no impact on the survivor benefit if the widow or widower waits until Full Retirement Age to collect it.
Full Retirement Age for survivor benefits may be different than the Full Retirement Age for retirement benefits. For example, someone who was born in 1955 has a Full Retirement Age of 66 and 2 months for retirement benefits but can still collect full survivor benefits at 66.
If a widow or widower is already collecting Social Security at the time of their spouse’s death, and some or all of the benefit is based on the spouse’s work history, the spousal benefit will automatically be converted to a survivor benefit at the time of the spouse’s death.
If a surviving spouse remarries after age 60 (or age 50 if disabled), the remarriage does not affect their survivor benefit. They could continue to collect survivor benefits even while married to someone else.
If a surviving spouse has been married more than once and the spouses from all marriages are deceased, the surviving spouse can file for survivor benefits on whichever late spouse had the bigger benefit.
Survivor benefits do not earn delayed retirement credits and therefore do not increase if collected after Full Retirement Age.
Remember, you can never receive spousal benefits and survivor benefits at the same time, but you may have the option to switch from one to the other. Always ask yourself, how can I maximize my income from Social Security?
Increasing the Survivor Benefit
Each year you wait to collect Social Security, from Full Retirement Age to age 70, your Social Security benefit increases by 8% per year because of delayed retirement credits. In other words, Social Security rewards you with a bigger check because you wait to claim your benefit. If you die and your spouse claims a survivor benefit, and that person has reached their Full Retirement Age, the survivor receives 100% of what you were receiving at the time of your death. They receive the benefit of the delayed credits you earned by working to age 70.
Divorced Spousal Benefit
If you’re divorced, and the spousal benefit based on your ex’s work history is more than your own, you can collect the Divorced Spouse’s Social Security benefit. Qualifications:
- You were married for 10 years or longer
- You’ve been divorced at least 2 years
- You are unmarried
- You are age 62 or older
- YOUR social security benefit is less than your ex’s
- Your ex is entitled to Social Security retirement or disability benefits.
If you qualify, your benefit as a divorced spouse is equal to one-half of your ex-spouse’s full retirement amount when you reach YOUR Full Retirement Age. What you receive does not include any delayed retirement credits your ex has earned, and it has no effect on the amount of benefits your ex or their current spouse may receive.
If you remarry, you generally cannot collect benefits on your ex’s record unless your later marriage ends by death, divorce, or annulment.
Even if your ex hasn’t applied for social security, but can qualify, you can receive benefits on their record. And don’t worry. You don’t have to talk to your ex about it. Everything can be done directly with the Social Security Administration.
Divorced Survivor Benefit
Eligible surviving divorced spouses who were married at least 10 years before their divorce are also entitled to Social Security survivor benefits. If they wait until age 60 or later to remarry, they do not lose their eligibility to the survivor benefit. However, they lose to right to collect spousal benefits on a living ex’s earnings record if they remarry at any age.
Just like the regular survivor benefit, eligible surviving ex-spouses can choose to collect their retirement and survivor benefits in whichever order they choose and switch to the larger benefit later, regardless of when they were born.
Continuing to Work & Receiving Social Security
You can work while you receive Social Security retirement (or survivors) benefits. When you do, it could mean a higher benefit for you in the future.
Each year, SSA reviews the records of all working Social Security recipients. If your earnings for the prior year are higher than one of the years used to compute your retirement benefit, SSA will recalculate your benefit amount. The increase is paid, retroactively to January, the year after you earned the money.
If you are younger than Full Retirement Age and make more than the yearly earnings limit, which changes each year, your earnings may reduce your benefit amount.
For example, if you are under Full Retirement Age for the entire year, SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit.
In the year you reach Full Retirement Age, SSA deducts $1 in benefits for every $3 you earn above a different limit. But only earnings before the month you reach Full Retirement Age are counted.
When you reach Full Retirement Age, your earnings no longer reduce your benefits, no matter how much you earn.
If you work outside the United States, the rules for receiving benefits while you are working are different. You can find more information at Work Outside the United States.
As long as you continue to work and receive benefits, SSA will check your record every year to see whether the additional earnings will increase your monthly benefit. If there is an increase, you’ll receive a letter telling you of your new benefit amount.
In addition, after you reach Full Retirement Age, SSA will recalculate your benefit amount to give you credit for any months in which you did not receive a benefit because of your earnings. You’ll receive a letter telling you about any increase in your benefit amount.
If you are eligible for retirement benefits this year and are still working, you can use the earnings test calculator to see how your earnings could affect your benefit payments.
Taxation of Social Security Benefits
Social Security recipients pay income taxes on 50%-85% of their benefits once combined income, defined as adjusted gross income plus one-half of Social Security benefits plus any tax-exempt interest income from municipal bonds, crosses certain thresholds. The thresholds are different for individuals and married couples. The threshold amounts change frequently.
Each January, you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year. You can use this Benefit Statement when you complete your federal income tax return to find out if your benefits are subject to tax.
If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits.
More information about taxation of benefits is in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
Suspending benefits is possible when you’re receiving your Social Security payment but decide you want to put it on hold in order to receive a larger benefit later.
If you began receiving payments before your Full Retirement Age, you can voluntarily suspend them once you reach FRA or anytime thereafter. You start the process by calling Social Security or sending a letter. The suspension begins the month after you notify Social Security. Your benefits will automatically start again at age 70 unless you tell SSA to start them before that.
In the meantime, your retirement benefits earn delayed credits which increases what you will receive later by 8 percent per year from the time you suspend up to age 70 or whenever you turn your benefits back on.
But there are some things to consider before you suspend your Social Security benefits.
- Other people who receive benefits on your work history, such as a spouse, a minor child, or a permanently disabled adult child, will not be able to receive benefits during the suspension.
- Also, YOU cannot receive benefits on someone else’s record, like your spouse, during the suspension.
- Suspending benefits can also affect your Medicare. Normally, Medicare Part B premiums are deducted directly from your monthly Social Security payment. If you suspend benefits, you’ll be billed for future Part B premiums by the Centers for Medicare and Medicaid Services. You’ll have to mail a check, or you have the option of having it drafted from your bank account.
There is one other way to suspend Social Security benefits, but it only applies to people who claimed benefits during the previous 12 months. You can withdraw your application by filing form 521 and then reapply in the future. However, you have to repay all the money you or any family members received on your earnings record since you began receiving a Social Security payment. And, you can only withdraw your application for Social Security benefits once during your lifetime.
Applying for Social Security
You’ve weighed all the information; made all your decisions. Now, how do you apply for Social Security? SSA offers an online retirement application you can fill out and submit electronically. In most cases, once the application is submitted, you’re done. But if SSA has questions, they’ll contact you by telephone or by regular mail.
You can apply online for retirement benefits or benefits as a spouse if you:
- are at least 61 years and 8 months old;
- are not currently receiving benefits on your own Social Security record
- have not already applied for retirement benefits
- want your benefits to start no more than 4 months in the future.
Also, you still have the option of scheduling an appointment with a representative at your local
Social Security office if you’re more comfortable with a face-to-face meeting.