If you’ve ever looked into your Social Security benefits you’ve probably discovered this: they’re simple in concept and confusing in execution. If you or your spouse work long enough, you’ll get a benefit that you can claim at some point. But, that’s when the questions start: how much do you get, how much will your spouse get, what if you’re divorced or widowed, when can you start getting benefits, when should you start your benefits?
Each time you start answering some of these questions more can pop up. Everyone’s situation is different which is why there are so many strategies when it comes time for people to claim their benefits. While it’s best to review your options with your advisor to determine the plan that works best for you and your family, there are some basic concepts that can help make the process a little easier to understand.
How Much Will My Benefit Be?
Social Security determines if you’re eligible for benefits and determines how much your benefits are using two different methods. To be eligible for Social Security benefits, you must have earned 40 “Quarters of Coverage”. You can earn four credits each year, which is why you might have also heard you need to have worked 10 years. The amount you need to earn to qualify for a quarter of coverage is indexed annually; for 2018 it’s $1,320. So if you earn at least $5,280 of income that is taxed by Social Security, you get all four quarters of coverage for 2018.
Your benefits, however, are based on your “Primary Insurance Amount”, or PIA, and can go up or down depending on what age you begin drawing Social Security. Your PIA is calculated using the average of your highest 35 years of earnings. So to be clear, if you only have 30 years of work, they calculate your PIA with five years of $0 earnings. They then take the annual amount, break it into a monthly amount, and run it through three threshold levels to come up with your monthly benefit.
If you want to see what your current estimated benefit amount is, go to www.ssa.gov and establish a “my Social Security” account. This will allow you to log in, make sure your information is correct, and request a benefits statement. Creating an online account can also be a security measure by making sure you’ve established your account before someone else tries to with your information.
If you or your spouse have a government pension, this could affect your social security benefits. Be sure to consult your advisor if you also qualify for a government pension.
How Much Will My Spouse’s Benefit Be?
Typically, you get the higher of your benefit or one-half of your spouse’s benefit. For example, say you have a benefit of $1,000 a month but your spouse has a benefits of $2,500 a month. Your spousal benefit will be $1,250, your $1,000 benefit plus the $250 that would get your benefit to half of your spouse’s benefit.
If your spouse has a higher benefit than you and dies before you, you “step-into” their benefit. In the example above, when your spouse passes your total monthly benefit increases to $2,500 each month.
When Can I Claim Social Security?
The earliest age that you can claim Social Security is at age 62, unless you’re a widow, in which case it’s age 60. However, there is a reduction of benefits if you take your Social Security before your “Full Retirement Age” (FRA). Your FRA depends on the year that you were born. For anyone not yet receiving benefits, your FRA is between the ages of 66 and 67.
If you delay Social Security beyond your FRA, you receive a benefit until you’re age 70. Your benefit will increase 8% per year for each year that you delay. The chart below lays out how much of your PIA you would receive at a given age assuming a FRA of age 66 and a monthly benefit amount of $1,000.
|Retirement Age||% of PIA||Monthly Benefit|
When Should I Claim Social Security?
There are a lot of factors that go into this decision, from how long you think you’ll live, how long you think your spouse will live, what other assets you have, and your personal feelings about the solvency of the Social Security system.
If you think that you will pass away early into your retirement, it may make sense to claim your benefits as soon as you can. However, the longer you think you will live, the more sense it makes to delay claiming your benefit to let it grow. The crossover point for when it is more beneficial to delay (you would get more benefit dollars overall) is typically if you live into your early-80s.
For women, these choices can be especially meaningful. Women tend to outlive men and are more likely to be alone at some point in retirement. Planning to give yourself or your spouse the largest benefit you can in retirement serves as an extra layer of protection against rising costs of health care and inflation. There are special filing rules for those who are widowed or divorced that should be considered if you qualify. Widows can claim a “Widows Benefit” before filing for retirement benefits and divorced spouses may qualify to claim benefits on their ex-spouse’s record.
Social Security is an important income stream that will last throughout retirement, is taxed advantaged, and is adjusted with inflation. These factors make it a valuable asset that should be planned for as a part of your overall goals. Keep in mind that while Social Security can tell you your benefit options, they cannot give advice or coordinate your benefits with your other assets. When you are ready to look at your retirement options, consult your tax and wealth advisor to help you consider all of your options and optimize your benefits.