In this podcast I will answer the question: How can I maximize my Social Security benefit?
Social Security can be an important part in a persons retirement plan. Social Security (also known as the Old-Age, Survivors, and Disability Insurance (OASDI) program) benefits are paid from the 6.2% tax on each employee’s wages (matched by employers) and the 12.4% tax on self-employment earnings.
Over 90% of U.S. workers are covered by Social Security and are eligible to receive both retirement and disability benefits.
Eligibility for Social Security benefits is determined based on a credit system. To earn one credit, a worker must earn $1,220 (2015) in wages or self-employment income. A worker can earn a maximum of 4 credits per year. To be eligible for Social Security retirement benefits a worker needs to have earned 40 credits (10 years of work). Earnings not subject to self-employment or FICA withholding do not count towards credits.
Monthly benefits received depends on: the level of earnings during a client’s working life, age the benefits start, and assumptions regarding inflation and average wage increases.
The worker’s average indexed monthly earnings is calculated based on the earnings for all of the years the worker was subject to FICA. The highest 35 years of earnings are indexed for inflation and averaged. The maximum to be considered for any given year is $106,800 (2009). The average is then multiplied by a reduced percentage to determine the benefit or Primary Insurance Amount (PIA)
If a worker retires at the normal (or full) retirement age, (s)he will receive the full PIA. The PIA is adjusted each year for changes in the Consumer Price Index. Normal retirement was 65 for years but is increasing. Currently, normal retirement age for those born after 1960 is 67 years old (but there is pressure to increase this age). For those before 1937, the full retirement age is 65. For those born between 1937 and 1960, the full retirement age born is between 65 and 67 years old.
Retirement benefits can begin as early as age 62, no matter what a worker’s normal retirement age. Benefits are reduced by 5/9 of one percent for every month that a worker begins receiving benefits before full retirement age for the first 36 months. The benefits are reduced by 5/12 of one percent for every month (after the first 36 months) that a worker begins receiving benefits.
So a worker whose full retirement age is 65 who elects to begin benefits at age
62, will receive 80% of their PIA (36 x 5/9 = 20%) for the first 36 months and 85% of their PIA after the first 36 months (5/12 x 36 = 15%).
Delaying retirement past a worker’s full retirement age will increase the benefit. For workers born in 1943 and after the increase is 8% per year. For workers born before 1943 the increase is less per year (6% if born in 1935 and 1936, 7% if born in 1939 and 1940).
Social Security provides workers (with at least 40 credits) with long-term disability coverage, although the definition of disability is narrow. Benefits are only available if the worker is unable to do work of any kind for wish (s)he is suited and the disability will last more than one year.
A spouse who is age 62 or older may receive 50% of the retirement benefit of the employee who is covered by Social Security (whether or not the spouse had any Social Security earnings). The benefit is reduced by 25/36 of 1% for the first 36 months and 5/12 of 1% for each additional month by which the spouse receives benefits before the normal retirement age.
Beginning at age 62, a divorced spouse is entitled to 50% of a worker’s PIA when the marriage lasted for at least 10 years and the divorced spouse has not remarried.
Widows of Social Security participants may begin at age 60. The widow may switch to benefits calculated on their own earnings at full retirement age.
Children under 18 or who are disabled are entitled to half of the benefit paid to the covered parent. There is a maximum family benefit which is usually between 1.4 and 1.8 times the PIA.
Working After Retirement
For those who have reached full retirement age, no amount of earned income will reduce the Social Security benefit.
For workers under full retirement age, benefits will be reduced by $1 for every $2 by which earned income exceeds $15,720 (in 2015).
If a worker reaches full retirement age during the year, benefits will be reduced by $1 for every $3 that earnings exceed $37,680 for the months before full retirement age.
Taxation of Social Security Benefit
Currently, up to 85% of the benefits received under Social Security are subject to tax, depending on the other sources of income available to the worker.
File and Suspend
If you are at your full retirement age (FRA), you can continue to work and suspend your benefit so your current spouse can collect a spouse’s benefit and you and earn delayed retirement credits (DRCs) which increase your Social Security benefit. The voluntary suspension is only for the months beginning after the month the request is made. A current spouse cannot claim a benefit on the worker’s record until the worker has applied.
Claim Spouse’s Benefit Now and Worker’s Benefit Later
If you are married and attained FRA, you can claim a spouse’s benefit and then switch to a benefit based on your own work record at a later date. This allows a person to collect a spouse’s benefit noise while earning DRCs up to age 70 on their own work record. People that are younger than FRA are not allowed to do this.
For example, a husband and wife are both at FRA, age 66, and have covered Social Security earnings. The husband’s monthly benefit is $1,400 and the wife’s monthly benefit is $1,000. The husband files for benefits. The wife can now claim a spouse’s benefit of $700 (50% of her husband’s benefit) and continue working and contributing towards her own Social Security benefit. At age 70 she files for her own retirement benefit that has earned DRCs and is $1,320 a month. Her spouse’s benefit stops and her higher retirement benefit amount starts.
If you are already receiving Social Security retirement benefits, you can start your benefit over within 12 months of the first month of entitlement and limited to one withdrawal. This allows you to receive a higher monthly benefit. You can file a “Request for Withdrawal of Application,” or Social Security Form 521, and your benefits stop immediately when you file. The SSA will tell you how much you are required to pay back including any family members that received benefits based on your work record. After repayment, you can reapply for benefits. The advantage of doing this is that your monthly benefit amount will be higher based on your current age and the SSA does not charge interest on the repayment.
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