Cheat Sheet: 10 Social Security Facts Every Advisor and Client Should Know

Considering that Social Security will be a large percentage of retirement income for many people, advisors need to be conversant in some basic facts about the benefits.

They don’t need to be Social Security experts, but should be able to highlight important facts once clients reach the age when they can collect their benefits. Further, they should give them direction on who or where to go for more details.

Here’s a cheat sheet for advisors to address when clients near Social Security claiming age. But this is only a beginning. Social Security is a complicated topic, with many layers and nuances that can affect clients.

For now, here are 10 areas that should at least be discussed with clients. We’ve linked to more in-depth articles by experts in the area. More information also can be found at ssa.gov.

1. Full (or normal) retirement age is 66 to 67.

For anyone born in 1943 or later, the FRA is 66 plus an additional number of months depending on birth date. For those born in 1960 and later, FRA is 67.

That said, anyone can retire and receive Social Security benefits at age 62. Clients must be warned, however, that their monthly benefit amount will be permanently reduced as much as 30% from their primary insurance amount — the amount they would receive if they claimed at FRA.

2. Waiting to receive Social Security beyond FRA results in a benefit increase of 8% per year.

That means if a client would receive around $36,000 a year at FRA, starting benefits at age 70 would get them roughly $49,000 a year, a 36% increase. In today’s markets, an automatic 8% increase in return is difficult at best.

3. Lower-earning spouses can claim on their spouse’s Social Security record.

The lower earner must be at least 62. The higher earner must already be receiving benefits and they must have been married for at least a year.

But this area has several contingencies. For example, the lower earner with their own credits must claim all available benefits at once (called “deemed filing”). Their own benefit is paid first. If it is less than half of the higher earner’s primary insurance amount, the lower earner gets a “spousal top-up.” The combined total amount is up to 50% of the higher earner’s PIA. If the lower-earning spouse has a PIA greater than 50% of the higher earner’s PIA, there is no additional spousal benefit.

4. Divorced spouses can claim on their ex-spouse’s Social Security.

This is allowed if they were married more than 10 years and the divorce has been final for two years. It won’t affect their ex’s benefits, and it doesn’t matter if the ex has remarried. But if the receiving spouse has remarried, they can’t claim the ex’s benefits. Also, if both current and ex-spouses have died, the survivor can claim the benefit that is higher.

The most the client can receive is 50% of the former spouse’s PIA.

Also, make sure you ask if your client is divorced, because even if it was 30 years ago and they’ve lost track of their ex, they can collect on the ex’s earnings record.

5. Social Security benefits are taxed over a certain level.

Although Congress placed an annual cost-of-living adjustment on Social Security benefits, the level at which Social Security income is taxed is not adjusted for inflation.

Therefore, Social Security income of more than $25,000 (or $32,000 if married filing jointly) is taxable (as it was in 1983). Further, benefits are taxed at the ordinary income tax rate. The actual amount depends on combined income, which can be determined through an IRS worksheet.

6. Twelve U.S. states still tax Social Security benefits.

The income level and tax rate varies, but the states that still have some sort of tax on Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.

7. Social Security will continue even if the trust fund goes bust.

Many a future retiree worries whether Social Security will be around after the Old-Age and Survivors Trust Fund is depleted — which will happen in 2033 if Congress doesn’t act. But even if that does happen (and most experts believe Congress will step up eventually), the program will continue to pay about 75% of scheduled benefits.

8. A widow (or widower) will automatically receive a dead spouse’s full benefits if they are higher than their own.

This happens once the death certificate is filed, typically by the funeral home. But make sure the client realizes they cannot claim survivor’s benefits until they are 60. Also, a spouse receiving benefits will only continue to receive their own benefit or that of their deceased spouse — not both, which can be a surprise when they learn this and their household income drops.

9. Waiting until 70 to collect benefits is great, but don’t wait longer.

Age 70 is the last year Social Security “bonuses” will be applied. Even if a client keeps working, it’s a big financial mistake to wait until after 70 as they are leaving money on the table. Once a retiree reaches FRA, Social Security will pay six months’ back pay at the retiree’s request — and that’s it. So if someone waits to claim at 72, they’ll have missed a year and a half of benefit payments.

10. Gender doesn’t matter with married spouses and Social Security claiming.

The agency sees couples as either legally married or not.