As many financial advisors know, the devil is in the details when it comes to Social Security. There are many rules to follow—and changes to those rules—in order to maximize benefits. With that in mind, here are some fundamental points that advisors should know, courtesy of a webinar with former Social Security Administration Director Kurt Czarnowski, presented by the Retirement Experts Network.
1. Check the wage history on the Social Security statement
Social Security payments are based on a person’s work history, specifically on the average wage over the 35 highest earning years, adjusted for inflation. A person needs to work 10 years in order to accumulate the necessary 40 Social Security credits for that person or his or her spouse to collect Social Security benefits.
Information about one’s wage history can be found on their Social Security statement, which until two years ago was mailed to most adults annually. Not anymore. Mailings are done only once every five years for those under 60, so clients should set up an account at www.socialsecurity.gov/myaccount where they can view their statement at any time.
Wage errors can be corrected anytime so long as proper proof is provided, but correcting self-employment income errors is another story. There’s a statute of limitations. Errors need to be corrected no later than three years, three months and 15 days after end of the year in which the self-employment income was earned.
2. Know the full retirement age
Despite conventional references to 65 as the age of retirement, most people who are not yet collecting Social Security today won't be able to collect full retirement benefits until age 66 or later.
As a result of amendments passed in 1983, the full retirement age (FRA) for those born between 1943 and 1954 is 66; for those born in 1960 or later, it’s 67. The FRA is 66 plus two months for every year from 1955 to 1959.
Clients can, of course, collect Social Security as early as age 62, receiving 75% of their full retirement benefit, or as late as age 70, collecting 32% more than their full retirement benefit, or at some age in between.
“If you live until the average life expectancy you’re better off waiting to collect Social Security,” said Czarnowski. In the U.S., the average life expectancy is 84.3 years for a 65-year-old man and 86.6 years for a 65-year-old woman. In addition, said Czarnowski, one in three 65-year-olds today will live to be 90 and one in seven will live to be 95. “Good things come for those who wait.”
(Related on ThinkAdvisor: Best Age to Start Claiming Social Security? It's Really a Gamble)
He suggested using the Retirement Estimator to calculate expected Social Security payments, keeping in mind that the program was only intended to replace about 41% of one’s pre-retirement income.
The average Social Security benefit paid this year is $1,341 per month and the maximum paid is $2,639, said Czarnowski.
3. The benefits and costs of working in retirement
Almost 20% of Americans 65 and older are working, according to the latest data from the U.S. Bureau of Labor Statistics, and a recent Bankrate.com survey found 70% of non-retired Americans plan to work as long as possible during retirement.
But doing so can affect Social Security payments for those who are not yet at their full retirement age. If they earn more than $15,720 this year, every $2 above that threshold will reduce benefits by $1. There is no reduction in benefits for those who have already reached their full retirement age.
Earnings, however, are subject to regular FICA taxes, which finance Social Security and income taxes. But if those annual earnings are higher than the lowest earning years included in the 35-year wage history for Social Security purposes, they will be used instead in that calculation. That could potentially increase benefits.
Another benefit of working longer: it could help delay collecting Social Security until age 70, when benefits are 32% higher than they are at full retirement age.
“Good things come to those who work,” said Czarnowski.
4. Taxing Social Security benefits
Social Security benefits are subject to income taxes for individuals whose modified adjusted gross income (MAGI) tops $25,000 and for couples with MAGI above $32,000. More specifically, up to 85% of benefits can be taxed as ordinary income.
About half of those collecting Social Security pay income taxes on their benefits, said Czarnowski.
5. Spousal Benefits
A nonworking or even working spouse can collect spousal Social Security benefits so long as that person is 62 years old and his or her spouse, who’s likely the higher earner, has applied for Social Security.
If he or she has reached full retirement age, the benefit will be 50% of the higher earner’s benefits. At 62 years, he or she would collect about 35% of those benefits. In either case, the person collecting spousal benefits cannot also collect benefits of his or her own.
Spouses no longer have the ability to collect benefits from the husband or wife who has filed and then suspended his or her own benefits due to a change in the law last year, but there is still a grandfather provision to consider. Anyone born before Jan. 1, 1954 and at full retirement age can file what’s known as a restricted application to collect their spousal benefit while waiting until 70 to collect a more remunerative benefit of their own, but their spouse must also be collecting his or her own benefits.
6. Survivor benefits
Survivor benefits, unlike spousal benefits, are 100% of what a spouse was collecting when he or she died. The surviving spouse can collect those benefits or collect his or her own benefits, whichever is greatest. They can potentially maximize benefits by first collecting their survivor benefits and then deferring their own until age 70.
7. Divorced spousal benefits
Even divorced spouses can collect spousal benefits so long as the marriage lasted at least 10 years, the divorce was finalized at least two years earlier and the collecting spouse is 62 or older and has not remarried. The benefit is 50% for a divorced spouse and 100% for a divorced widowed spouse.
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