Your Guide to Social Security
By Ben Harvey
Claiming your Social Security benefits is not a one-size-fits-all process. It’s likely you don’t need us to tell you how complicated it is to navigate the maze that is the Social Security system, but we’re here to make it a little less overwhelming. And if you are nearing retirement in the next decade, along with 73 million other retirees, it’s more important than ever to understand how your benefits work and how to maximize the money you receive when you cross the retirement finish line. (1) Here are the answers to five common questions that will help you make the best Social Security claiming decision for your situation.
How Are Social Security Benefits Calculated?
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, then 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). We’ll discuss FRA in further detail below.
The actual benefit that you receive may not be your PIA. Your PIA will be increased or decreased depending on when you choose to begin receiving 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.
Decisions regarding spousal benefits can get complicated and there are many other factors to consider when deciding how to claim spousal benefits or determining if you are eligible. Be sure to speak with a professional who understands your unique situation and can help you make an informed choice.
When Can You Claim Social Security Benefits?
You can claim your Social Security benefits anytime between age 62 and age 70. (2) 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%.
Full Retirement Age
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. (3) 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.
When Is the Best Time to Claim Social Security Benefits?
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.
Social Security Statement
An important document that you will reference during the decision-making process is your Social Security statement. The Social Security Administration mails statements to workers age 60 and over who aren’t receiving Social Security benefits and do not yet have a my Social Security account. These statements will be mailed out three months prior to your birthday, but you can also access the same information by setting up an account on their website.
The statement will tell you your:
Estimated benefit if taken at age 62
Estimated benefit if taken at FRA
Estimated benefit if taken at age 70
Estimated disability benefit
Estimated family and survivor benefits
All benefit amounts listed are estimates and subject to change. They are calculated based on your date of birth and future estimated taxable earnings.
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.
Deciding When to Claim Benefits
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. The best time for you to claim your benefits depends on your personal situation and health.
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.
How Can Married Couples Maximize Benefits?
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. (4) 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.
Filing a restricted application is still an option for widows and widowers. This can be a nice perk in the right circumstances.
How Does Working Affect Benefits?
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 $18,960. In the year that you reach FRA, your benefit is reduced by $1 for every $3 you earn over $50,520. (5) 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.
Changes for 2022
In 2022 the COLA is 5.9%, the highest increase in almost 40 years. There is also an increase to the Social Security tax cap. The cap is increased by $4,200 to $147,000. (6) So, if you are still working and earn more than $147,000, then Social Security taxes will not be deducted on earnings higher than $147,000 in 2022.
Work With an Experienced Professional
How you claim Social Security is one of the biggest retirement decisions you will make, and we want you to feel confident that you are making the right choices for your future. Not only can we assess your financial situation to help you narrow down your claiming options, but we also help you take into account how Social Security fits into your overall retirement plan and goals. Our team at Pathway Financial Planning would love to partner with you as you journey to retirement. To get started, call us at 765-698-5121, email email@example.com, or schedule an introductory discovery meeting online.
Ben Harvey is president and senior financial planner at Pathway Financial Planning, Inc., an independent, comprehensive financial planning firm that prioritizes the client, each and every time. He is recognized as a Retirement Income Certified Professional (RICP®) by The American College of Financial Services.
Ben spends his days staying on top of what’s going on in his clients lives, coordinating the financial planning process, helping people identify their goals, and evaluating whether they are on track. He designs and implements customized strategies all as part of the proprietary process, The Path to Purpose FORMula™. Ben has 15 years of experience in the financial industry, including years as a loan officer, trust officer, and financial advisor. His experience in business management, retail lending, estate and trust administration and planning, comprehensive financial planning, and wealth management is unique.
Outside of work, Ben enjoys spending time with his wife, Mandy, and their children, Cooper and Claire. They are active in their church, and especially love traveling, hosting friends and family, going to amateur sporting events (especially high school basketball and swimming), and experiencing different cultures. On occasion, you can find Ben playing golf, sometimes in amateur tournaments, which he credits for teaching him patience. He will also tackle the occasional home improvement project, read non-fiction, and watch documentaries. Through experience and “honey-do lists,” Ben has learned to never start a project he’s not ready to finish. To learn more about Ben, connect with him on LinkedIn. You can also register for his recent webinar, Retire with Purpose: An Easy Strategy to Simplify Your Distributions.
Benjamin Harvey & Pathway Financial Planning are not affiliated with or endorsed by the Social Security Administration.
(1) https://www.census.gov/library/stories/2019/12/by-2030-all-baby-boomers-will-be-age-65-or-older.html (2) https://faq.ssa.gov/en-US/Topic/article/KA-02011