When should you file for Social Security? How much will you receive? What can you do to increase your monthly payment?
While Social Security is complex, knowing the basics, and making good decisions on the key aspects of the program, can mean more money in your pocket each month.
Here are 11 Social Security basics that every recipient (current and future) should know.
1. It's critical to pinpoint your Full Retirement Age
Your full retirement age (FRA) is the age at which you are eligible to receive your full Social Security retirement benefit amount.
If you were born between 1943 and 1954, your FRA is 66. Those people born between 1955 and 1959 have an FRA that gradually increases (by months) until it lands somewhere between the ages of 66 and 67. (This retirement age calculator from the Social Security Administration is a helpful tool.)
For people born in 1960, or later, the current FRA is 67.
If you claim Social Security before your FRA (you can start at age 62), depending on how early you claim, your monthly benefit will be proportionately (and permanently) reduced. Conversely, if you claim it after your FRA, your monthly benefit, up until age 70, will increase by 8% per year.
2. Your 35 highest-paid years are what matter
The Social Security Administration (SSA) calculates your benefit amount based on the 35 calendar years that you earned the most income.
Let’s say you worked 30 years, but you also took 15 years off to raise your children. To reach 35 years, the SSA will need to average in five years of zero earnings to the 30 years in which you had income.
Those five zero income years will likely substantially reduce your monthly benefit.
Simply put, any income in a year is better than zero.
If your 35 highest earning years include 30 years of income, and five years of no income, you can still increase your monthly Social Security payout by continuing to work (even part time) during retirement. The goal is to replace as many of those zero income years with years with at least some income.
3. There's a monthly cap
If you reach your FRA in 2021 and retire, the maximum monthly benefit amount you can earn is $3,113. For someone who hits age 70 in 2021 and retires, the maximum payout is $3,895 per month.
4. The longer you wait to file, the larger your payment will be
The earliest age (in most cases) at which you can claim Social Security is 62. The age at which your benefit amount caps is 70. As mentioned earlier, your full retirement age (FRA) depends on when you were born. Taking Social Security at age 62 could lower your monthly payment by up to 30%. Conversely, after you reach your FRA, waiting until age 70 to claim could increase your benefit amount by an additional 8% per year.
Besides a larger payment, another big advantage of waiting until age 70 to claim is that if your spouse didn’t earn a lot of money over their career, their “survivors benefit” will be higher should you die before your spouse.
5. Your benefit can increase (sometimes)
Does your benefit ever go up? The simple answer is yes (but not necessarily every year).
Cost-of-living adjustments, often referred to as COLAs, is the Social Security Administration’s hedge against inflation.
Based on the consumer price index, the amount of the COLA is determined by the federal government to help your monthly payout keep up with an increase in consumer goods and prices. (These increases are not automatic, nor are they static. While there were no increases in 2010, 2011, or 2016, 2008’s increase was 5.8%, and 2021’s COLA increase is 1.3%.)
6. You might have to pay taxes on your benefits
Depending on your income, a percentage of your Social Security could be taxed.
Way back in 1984, the government began taxing Social Security benefits once a person’s (or couple’s) income reached a certain threshold. It varies, but couples can be assessed a tax on anywhere from 50% of their Social Security benefit, all the way up to 85%. (This is another reason you want to work with an advisor and an accountant to develop a forward-thinking income and investment tax strategy years in advance.)
7. Spouses can claim off their partner's record
A spousal benefit allows a lower-career-earnings spouse to receive a maximum of 50% of the higher-career-earning spouse’s Social Security benefit amount. In marriages where one spouse worked and earned a high income while the other spouse didn’t work (or didn’t earn a great deal of money), applying for the spousal benefit can substantially increase the lower-earning spouse’s monthly payment.
Key aspects of the spousal benefit include that the higher-income-earning spouse must apply for benefits first, and that, just like any filer, the earlier that benefits are claimed, the less the monthly payments are likely to be.
8. Your kids might be eligible for Social Security
If a parent is disabled, retired or deceased, children up to age 19 (and also potentially stepchildren, grandchildren, etc.), who haven’t graduated from high school, along with disabled children who aren’t able to work (if the disability occurred before age 22), could be eligible for Social Security benefits based on the work/income record of the parent.
9. Widows (and widowers) can receive a 'survivors' benefit
Benefits are potentially available for spouses who have not applied for Social Security and whose partner pre-deceases them. If the surviving spouse has reached full retirement age, the survivors benefit amount could be worth 100% of the amount their spouse was entitled to, so long as they (the spouse) had yet to apply for benefits.
A few caveats include, first, the earlier the surviving spouse claims the benefit (starting at age 60), the smaller the monthly payment will be. Second, survivors benefit amounts are generally not available if the surviving spouse remarries before age 60, yet they are potentially available if the surviving spouse remarries after age 60.
10. Divorced? You still have options
People who were married for at least 10 years, are 62 years of age or older, and remain single can receive a benefit amount of up to 50% of their ex-spouse’s full retirement amount, based on their ex-spouse’s work history (the ex-spousal benefit also needs to be less than what the recipient would earn off their own work record).
For some people, the good news is that not only will your ex-spouse never know you’ve applied for benefits via their work history, your doing so doesn’t in any way impact their benefit. Additionally, if you’ve been divorced for at least two years, you don’t even have to wait until your ex applies for Social Security to start receiving benefits.
11. There's a window for Social Security do-overs
While you’ll need to officially withdraw your application and pay back any money you’ve received, there are instances in which you might want to change your Social Security approach and stop receiving payments. If your advisor recommends this (mistakes are costly), you potentially have 12 months from your initial filing date to withdraw your application and repay any amount you’ve received.
In closing, you’ve likely heard warnings that changes are coming to Social Security. The reasons are numerous, but one is that, as the average age of Americans has steadily crept higher, the number of people paying into the system has proportionately declined.
Some experts claim Social Security will run out of money within 10 years.
As always, it’s best to plan and prepare. Sudden, drastic changes to the program, such as the government applying taxes to 100% of benefits, or even “means testing” (wealthier recipients having their benefit amounts slashed or eliminated) are certainly within the realm of possibility.
And as with all things related to your finances and retirement, the best course of action is to work with a fiduciary professional who can help you make the best decisions for your unique situation.