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The Basics of Social Security

While most people approaching retirement are familiar with Social Security, many don’t fully understand the ins and outs of this important retirement benefit. Like any governmental program there are many complexities. Riverbend Wealth Management of Myrtle Beach has put together this guide to help you understand the benefits offered and many aspects of the program.

Social Security is more formally known as Old Age, Survivors and Disability Insurance (OASDI). There are programs within Social Security that cover all of these areas. Our focus in this will be on the retirement and related aspects of the program.

Eligibility for Social Security 

Generally you are eligible for Social Security retirement benefits if you are aged 62 or older. You need to be a U.S. citizen or a legally eligible alien. If you have questions as to your eligibility it’s best to contact Social Security prior to when you are considering claiming your benefit.

Eligibility and your benefit amount will be determined by your work history and the amount paid into Social Security over the course of your working career. 

Work history and the calculation of your benefit 

Social Security benefits are calculated based upon “average indexed monthly earnings” which is based upon the top 35 years of earnings compiled by a worker over their career. If a person doesn’t have a full 35 years of earnings, the missing years are factored into the calculation as zero for those years.

These earnings are used to calculate a recipient’s primary insurance amount of PIA. This is used to calculate the benefit they would receive at their full retirement age. Additional years of working can serve to negate any missing years or can replace lower wage years if they are higher than other years in their work history. This can increase their benefit amount. 

Social Security and Divorce 

If you are divorced, you may be able to claim benefits based upon your ex-spouse’s earnings record. The rules to claim a benefit based upon their earnings record include:

·       You must have been married to your ex-spouse for at least ten years.

·       You are not remarried.

·       You are at least age 62.

·       The benefit that you would receive based on your ex-spouse’s record is greater than the benefit that you would be eligible for based on your own earnings record.

·       Your ex-spouse is entitled to receive Social Security retirement or disability benefits.

·       You must be divorced from your ex-spouse for at least two continuous years.

It doesn’t matter whether or not your ex-spouse has claimed their own benefit yet. Your claiming a benefit based upon their earnings record will not impact their benefit.

For those who are divorced and were born prior to January 2, 1954, you have the option of claiming a benefit based on your ex-spouse’s earnings record and then filing for your own benefit later if it is higher. For those born on or after this date, this option doesn’t exist. Once you file for a benefit either under your spouse’s earning record or your own that filing is deemed to be final.

If you later remarry, then your ability to collect a benefit based on your ex-spouse’s earnings record ceases.

Social Security survivor’s benefits 

As a widow or widower you may be eligible for a survivor’s benefit based upon your deceased spouse’s earnings record. A few things to know:

They can file for a reduced benefit as early as age 60. If their own benefit would be higher, they can switch as early as age 62. A full survivor’s benefit is available when they reach their full retirement age.

Benefits can be collected as early as age 50 if the survivor is disabled and that disability started prior to the death of their spouse or within seven years of their death.

If the survivor is caring for a child of the deceased spouse who is under 16 or who is disabled at any age, they can collect a survivor’s benefit.

Remarriage after age 60, or after age 50 if the survivor is disabled, will not impact their ability to collect a survivor’s benefit. 

Full Retirement Age (FRA) 

Full retirement age (FRA) is an important concept to understand in connection with Social Security. FRA is the age at which you earn 100% of your benefit. For those who have reached their FRA, there is no benefit reduction if they earn too much from working.

Claiming your benefits prior to reaching your FRA will result in a permanently reduced benefit. Claiming it after your FRA will result in an increased benefit level, with the maximum benefit for those who wait until age 70 to initially claim their benefit.

Here’s how to calculate your full retirement age:

Birth year Full retirement age (FRA)
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Source: https://www.ssa.gov

Implications of filing prior to your FRA 

You are eligible to file for retirement benefits as early as age 62. This will, however, result in a reduced benefit. For example, here are the reduced amounts for someone claiming a benefit at age 62 versus waiting until their FRA to claim.

Birth year Full retirement age (FRA) Percent reduction in initial benefit amount
1943-1954 66 25.00%
1955 66 and 2 months 25.83%
1956 66 and 4 months 26.67%
1957 66 and 6 months 27.50%
1958 66 and 8 months 28.33%
1959 66 and 10 months 29.17%
1960 or later 67 30.00%

Source: https://www.ssa.gov

Using this chart as an example, this means that if someone who was born in 1959 would receive a $3,000 monthly benefit at their full retirement age, this benefit would be reduced to $2,124 per if they filed at age 62.

There are commensurate percentage reductions for those who file later than age 62, but earlier than their FRA.

It’s important to understand that these are permanent benefit reductions. Any cost of living increases will always be based on this lower benefit amount.

If you do claim your benefit earlier than your FRA, your benefit will be reduced accordingly. Using someone who was born in 1958 and whose FRA is 66 and 8 months as an example:

Age benefits are claimed Percent reduction in initial benefit amount
62 28.4%
63 23.4%
63 17.8%
65 11.2%
FRA 0%

Source: https://www.ssa.gov

Waiting until age 70 to claim benefits 

You can also wait to claim you benefits past reaching your full retirement age. Your benefit reaches its maximum level at age 70. Claiming your initial benefit past age 70 makes no sense in terms of any economic benefit to you.

Waiting past your FRA to claim your benefit can increase the amount you receive each month. Delayed retirement credits accrue past your full retirement age up until age 70. For those born after 1943, the annualized increase is 8% for waiting past your FRA, the amount is prorated based on when you actually apply, for example age 68 and 4 months. This increase is over and above the full amount of your benefit that becomes available when you reach your FRA.

Working and Social Security 

If you work prior to reaching your full retirement age your Social Security benefits may be reduced based upon the level of your earned income if you claim benefits prior to reaching your FRA. Earned income includes income from employment and from self-employment.

The thresholds change most years, but for 2020 if your earned income exceeds $18,240 then your benefit is reduced by $1 for every $2 of earned income over that amount. In the year in which you reach your FRA, the reduction is $1 for every $3 of earned income over $48,600 for 2020. After reaching your FRA you can earn an unlimited amount of income and it will have no impact upon your benefits.

Many people work into their 60s and this should be a consideration in deciding when to claim your benefits.

If your benefits are reduced due to earned income over the threshold, those lost benefits will be recouped in the form of  higher benefit when you reach your FRA. However, your base benefit will still be lower by having filed prior to your FRA.

If you know that you are going to be working into your 60s and earning at a level that will substantially reduce your benefit, it might make sense to delay claiming your benefit.

In some cases, people retire but then go back to work for any number of reasons. In those cases, there is a once per lifetime do over on your benefits which we will explain in the next section.

Social Security benefit withdrawals 

Everyone can have one “do over” on their Social Security retirement benefit in a process which is called a withdrawal of your benefit application. This can be done within the first 12 months after commencing your benefit and cannot be done once you have reached your full retirement age.

This might be a good solution for someone who had retired and claimed their benefits prior to their FRA, but then decided to return to work, or who started their own business, and who will be earning an amount well over the limits discussed in the prior section.

Withdrawing your benefit application entails paying back any benefits received, including:

·       You are required to pay back any benefits received, including any benefits paid directly to you or that were received by dependents based upon your earnings record.

·       Money that was withheld from your benefit checks to cover Medicare premiums or any tax withholdings.

You can then reapply for your retirement benefits at a later date when you’ve either reached your FRA or your earned income will be below the earnings thresholds. Your initial benefit will be based upon your age at the time you reapply.

Taxation of Social Security benefits 

In some cases your Social Security benefits may be subject to taxes. This is based on income levels with no age limitations.

Up to 85% of your benefit could be subject to taxes, based on these rules.

For single filers:

·       If your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefit could be subject to taxes.

·       If your combined income is greater than $34,000, up to 85% of your Social Security benefit could be subject to taxes.

For those who are married and who file jointly:

·       If your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefit could be subject to taxes.

·       If your combined income is greater than $44,000, up to 85% of your Social Security benefit could be subject to taxes.

Combined income is defined as:

Adjusted gross income + ½ of your Social Security Benefits + non-taxable interest (such as from muni bonds)

From a planning standpoint, if you know that your income will be high at various times during your 60s, it might pay to delay your benefits as long as possible.

Some, but not all states tax Social Security benefits at this time. Currently there are 13 states that will tax your benefit. Each state that does has different rules so it’s wise to check with a tax professional familiar with your state’s rules.

Planning issues when deciding when to claim your benefit

Deciding when to claim Social Security benefits is an important planning issue as you near retirement. There are a number of planning issues to consider, here are a few that we’ve helped clients with over the years.

Couples filing 

Filing as a couple can have a number of moving parts to consider. Is there a significant age difference between the spouses? Did one spouse earn significantly more during their career?

A key consideration is often filing to maximize any potential survivor’s benefit, especially if one spouse’s benefit will be greater than the others. This might entail having one spouse wait as long as possible to file to ensure the maximum survivor’s benefit if they die first.

Health issues 

A person’s health issues can come into play. If there are health concerns that either cause a need for the money or raise concerns about their longevity, it may make sense to file earlier than they might otherwise.

We often calculate a break-even point to illustrate the age to which they would need to live in order to earn a higher level of lifetime benefits by waiting to file versus filing at an earlier age.

Someone in good health and who doesn’t need the benefit right away might be a good candidate for waiting.

Working 

As was discussed above, if someone is working it may pay to defer on filing for their benefits. Besides, continuing to work might result in higher lifetime earnings and a higher benefit when they do file.

Summary

While Social Security shouldn’t be someone’s sole source of retirement income, it is still an important piece for most retirees. Understanding this benefit and managing it to your greatest advantage is key to a financially successful retirement for most people.

Give Riverbend Wealth Management a call at 843.970.1043, we can help you analyze your situation and put together a full retirement financial plan, including how to best manage your Social Security benefits.

This content is developed from sources believed to be providing accurate information, and provided by Riverbend  Wealth Management. Riverbend  Wealth Management and its advisors are not legal or tax advisors. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

This content is developed from sources believed to be providing accurate information, and provided by Riverbend  Wealth Management. Riverbend  Wealth Management and its advisors are not legal or tax advisors. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

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