Social Security is probably the most popular federal program there is, yet most people know very little about it.
There’s a reason for that: Complex rules and benefit formulas make it extremely difficult to understand exactly how this important income source actually works.
The “Social Security Handbook (opens in new tab),” the document the Social Security Administration (SSA) produces and updates each year, contains nearly 3,000 rules that describe all the provisions for drawing benefits.
Then there’s the “Program Operations Manual System (opens in new tab),” which contains even more rules — thousands of them — to explain the rules in the handbook. At last count, there were 567 different sets of calculations to determine how and when to apply for benefits. And for married couples who want to make the most of what they have coming, there are 81 age combinations to consider.
You would think with all those moving parts, you could go down to your local SSA office and ask for a little guidance. Unfortunately, SSA employees can help you with filing claims but they are not able to offer claiming advice.
So, how should someone go about planning for their Social Security benefits?
Start with the Basics
If you haven’t already, you can create an account and get your Social Security statement online.
Your statement will tell you how much you can expect to receive in benefits depending on if you file at 62, wait for your full retirement age (somewhere between 66 and 67, based on your birth date), or delay until you’re 70. Your statement shows how much you’ve paid into the program over the years, and how much your employers have contributed. You also can look at your past earnings — all the way back to that first job at the local grocery store. If something seems off, you can contact the SSA to make it right.
To be eligible for retirement benefits from Social Security, you’ll need a total of 40 credits.
Workers receive a maximum of four credits per year (opens in new tab) based on how much they earn. Most workers get their 40 credits in 10 years, but it can take longer for those with lower wages.
Social Security retirement benefits are based on your highest 35 years of earnings.
When I ask guests at our firm’s Social Security workshops how benefits are calculated, I rarely get a correct answer. Most people say the top five years of earnings, the top 20 years of earnings, or the last 10 years of earnings. None of these answers is correct. The SSA uses your highest 35 years of “indexed” earnings, which means the numbers are adjusted for inflation. (You might not be able to tell what your highest 35 years are by looking at your statement.) The good news is, if you have zeros for some years (perhaps because you took time off to raise your children), you still can bump up your benefit by working a bit longer.
The longer you wait to file, the more you’ll receive.
You can file for benefits at age 62, and many people do. But keep in mind that your benefits could be permanently reduced by up to 30%, depending on your full retirement age. If you delay your benefits beyond full retirement age, you’ll receive a delayed retirement credit of 8% per year (or two-thirds of 1% each month). Your benefits won’t continue to grow, though, once you turn 70.
You must apply to receive benefits.
Your benefits don’t turn on automatically — even if you wait until you’re past 70. I once had a 71-year-old woman in my office who had not received a dollar of Social Security income because she’d never filed her application. Thankfully, she was able to receive six months back pay.
You can keep working after you take your benefits, but you may be subject to an annual earnings test.
If you take your benefits before you reach full retirement age, the SSA will deduct $1 from your payments for every $2 you earn above a designated annual limit. The limit for 2020 is $18,240 (opens in new tab). There are no earnings limits once you reach your full retirement age, and your benefit amount will be recalculated to give you credit for any months in which benefits were reduced because of excess earnings.
Your marital status will be a major factor in determining when you should file.
Coordinating your benefits can help you and your spouse get the most from your Social Security payments. There are multiple strategies to consider, depending on your ages and incomes.
Put Together a Plan
- Be proactive. Even if you don’t expect to retire until after your full retirement age, you should still begin planning years in advance. That way you can be sure you won’t miss out on any strategy that could boost your benefits.
- Be realistic about longevity and calculate your break-even point. While it isn’t a perfect science, looking at family history may help you make decisions about when to draw benefits. When I review benefit estimates with clients, we always talk about whether it makes sense to take a smaller benefit amount for more years or a larger benefit amount for fewer years.
- Don’t forget about taxes. It’s important to understand how much, if any, of your Social Security benefits could be taxed each year. Depending on your overall income, this could have a significant impact on your retirement plan. I always recommend working with an adviser who is experienced in both Social Security and tax strategies. After all, it isn’t what you earn but what you keep that really counts.
As with any confusing topic, the first step in understanding how Social Security works is to do your homework. You’ll find some good information on this website and at www.ssa.gov (opens in new tab). For more help, look for workshops in your area, or contact a financial adviser who is experienced and knowledgeable about Social Security claiming strategies.
Investment Advisory Services offered through Retirement Wealth Advisors Inc. (RWA) a Registered Investment Advisor. Securities offered through World Equity Group, Inc., Member FINRA and SIPC. Stonebridge Insurance and Wealth Management and Retirement Wealth Advisors are unrelated entities and are not owned or controlled by World Equity Group, Inc. Our firm is not affiliated with the US government or any governmental agency.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Kim Franke-Folstad contributed to this article.
Tim Kulhanek is a Chartered Retirement Plans Specialist (CRPS) and President of Advisory Services at Stonebridge Insurance Wealth Management (www.stonebridgeiwm.com (opens in new tab)), where he specializes in designing income-producing investment plans.