The last post written by Jen talked about the taxability of Social Security. I want to discuss collecting Social Security benefits. We hear a lot of questions, and hopefully, I can clear up some of the confusion.
How much do I get? The easiest way to look at this is to get a copy of your Social Security report from SSA.gov. You will need to enter your Social Security number, answer some questions to verify your identity and a report will become available. This report will show you your benefit amount at age 62, at full retirement age (FRA) which will be somewhere between ages 65 and 66 and at age 70.
There is an assumption that you will continue working at the current level of income until the age of collection in the benefit amount provided in the report. For example, consider if in 2019, your Social Security wages were $65,000. The benefits you see in your report assume that you will have the same earnings until the age of 62, until your FRA or until the age 70 benefit amount.
If you stop working at age 59, you may find that your benefit amount is lower than what the report says. This is because you did not continue with that level of earnings until the reported age.
How are benefits calculated? The calculation looks at your highest 35 years of earnings, averages them together, and determines your benefit amount. If you do not have 35 years of earnings, there is a zero included for the remaining years. For example, if you only worked 27 years, there will be 8 zeros included in your average earnings. The calculation is different if you are collecting Social Security disability or collecting because of the death of a spouse or as a minor child.
What is full retirement age (FRA)? This is the age at which you collect your full amount. If you collect earlier, you will take a permanent reduction in the amount of benefits received. If you delay until later, you will see a permanent increase. Everyone born before 1938 has an FRA of 65. For those born in 1938 or later, the FRA has been gradually increasing to age 67. If you were born in 1955 or 1956, your full retirement age would be age 66. For those born after 1961, the full retirement age is 67. In-between those born in 1938 and 1962, there is a gradual increase in the age, two months at a time. If you are not sure what your FRA is, your Social Security report will tell you what that age is.
To retire, I have to collect Social Security, right? No, you do not. People retire all the time and delay collecting Social Security. If you have other sources of funds – 401(k), pension, IRAs, and general savings that are enough for you to live on you can delay collecting Social Security.
Consider – if you have money invested in a 401(k) or an IRA that you are conservatively investing, are you earning a rate of return that is at least equivalent to the penalty that you would be taking for collecting before your FRA? It might make sense to delay Social Security and use funds from your 401(k).
From full retirement age until age 70, your benefits will increase 8% annually. Can you get a guaranteed rate of return of 8% by leaving your investments alone and taking Social Security? Or – does it make sense to use the retirement funds and delay collecting until age 70 while the Social Security amount increases 8% annually.
Some believe your benefit amount will decrease because you do not start collecting as soon as you retire. Not true. Go back to the beginning of this post and the explanation of how Social Security is collected. It is calculated using the 35 years of highest earnings. If you retire at 59 and do not collect Social Security until age 70, those 35 years of earnings do not change. If you retire at 59 and collect Social Security at 62, those 35 years of earnings do not change. If you retire at 59, decide to work part-time and you delay collecting Social Security until full retirement age, you will not reduce your Social Security amount. The amount may actually increase if your part-time work earnings replace a lower-income year within those 35 years.
Do I pay Social Security tax if I start collecting and continue to work? Yes, you will have Social Security taxes withheld from your paycheck. Each year your earnings will be reported to the Social Security Administration. If the earnings are high enough to replace one of your 35 years of earnings, you will see an adjustment in your Social Security amount. If the earnings do not replace one of those 35 years, you will not see a change in your benefit amount.
If I collect early, how much is my Social Security reduced? The reduction amount depends on how many months it is between the time you choose to collect and your FRA. The reduction is 5/9 of 1% per month for the first 36 months and 5/12 of 1% for each additional month. For example, consider if your FRA is age 66 and you choose to collect at age 62. You are collecting 48 months early which means a 25% reduction if you decide to collect at 62. If your FRA is 67, there would be 60 months if you choose to collect at age 62. This means your benefits would be reduced by 30%.
Caution – this is a permanent reduction. When you turn age 66 or turn age 67, your benefits do not go back to the 100%. If you later are eligible to collect spousal benefits, they will also be reduced because you chose to take your benefits early.
Can I lose benefits if I collect Social Security and also work? It depends. If you are between age 62 and FRA, you can earn a certain amount before losing benefits. In 2020 the amount is $18,240. For every $2 you earn over that amount, you will lose a $1 of your Social Security benefits.
If you know ahead of time and notify the Social Security Administration that you will earn over the allowable amount, Social Security will determine the amount of the reduction and reduce each monthly benefit by that amount.
If you do not notify the Administration ahead of time and they discovered you earned over the limit when W2s are filed at year-end, the Administration will first determine how much your reduction should have been. They will then withhold 100% of your Social Security benefits until the amount is paid back. This may mean that you go two, three or maybe even six or seven months without receiving a deposit depending on how much you exceeded the earnings limit.
Once you reach your FRA, you can earn whatever you want without losing any Social Security benefits.
When do I need to apply? The recommendation comes from the Social Security Administration to apply 3 months before you want to collect. Many individuals are eligible to apply online. If you are looking to apply based on someone else’s earnings, you probably want to schedule an appointment and go into the local Social Security office. Are you eligible for spousal benefits that may be higher? Are you eligible for an ex-spouse’s benefits because of a former marriage that lasted for at least 10 years? Are you eligible for a deceased spouse’s benefits? If you are looking to apply for benefits on someone else’s earnings, we would recommend that you go into the Social Security office to have an in-person conversation.
There are many other nuances related to collecting Social Security to maximize family benefits. Coordinating benefits between spouses and having one collect their benefits early while the spouse delays may be a good strategy. If you are eligible to receive Social Security and still have minor children, they may qualify for a benefit. This may be a reason for you to collect earlier rather than later. There is a family maximum amount that you need to be concerned with if there are multiple individuals collecting on one person’s earnings record. Have you worked enough quarters to be able to receive benefits? And – so many more questions.
When to you collect Social Security is a very personal decision. Financial considerations are only part of it. Health issues and longevity may need to be considered in determining when to collect. You may not have other funds available to be able to consider delaying Social Security. Many individuals are concerned about whether or not Social Security will be available or going to go away. Lots of moving pieces come into play in deciding when to collect Social Security.