Understanding Your Social Security Benefits

Understanding Your Social Security Benefits – Part 2

By James R. Cook, CFP®

Last month’s article on Social Security Benefits focused on the benefits that are available for you through Social Security that are not related to retirement income. This month’s article will focus on understanding Social Security retirement benefits.

The information in this article is provided as a general overview of Social Security benefits. For a complete explanation of benefits and to register for online access to your Social Security benefits, see the official Social Security website at www.ssa.gov .

Am I eligible for Social Security?

Most people spend their working years watching taxes being taken automatically out of every paycheck for FICA, or for many clergy, paying SECA taxes every quarter. That likely means that you are eligible for Social Security retirement benefits. But to be clear, you must be age 62 or older, and have 40 quarters of credits for paying into Social Security to begin receiving retirement benefits. If you have attained the minimum age, but do not have sufficient quarters but are married (or divorced after 10 years of marriage) you may be able to claim benefits based on your spouse’s record.

When can I begin drawing Social Security Retirement
Eligible persons may begin drawing retirement benefits as early as age 62 and as late as age 70. Your benefits are calculated based on what the Social Security Administration calls your FRA, or Full Retirement Age. This is the age at which it is determined that you receive your full retirement benefit. Your actual FRA is dependent upon when you were born, and can range from age 65 up to age 67. The adjacent chart lists the Full Retirement Ages by birth year.

What is important to understand about your benefits and your FRA, is that if you choose to begin benefits prior to attaining your FRA, your monthly benefits will be reduced. If you choose to delay taking your benefits until sometime after you reach your FRA, your future benefit payments will increase, up to age 70. Regardless of when you choose to retire, payments are based upon your life expectancy, and designed to pay out approximately the same total amount regardless of what age you begin, of course this assumes that you live exactly to your predicted life expectancy. This also means that if you retire early, your monthly benefits are smaller because they must be paid out over a longer period. Delaying retirement leads to larger monthly payments because it is assumed—based on life expectancy—that they must be paid out over a shorter period. The Social Security Administration currently estimates that for individuals born 1943 and later, there is an 8% credit for each year that you delay claiming benefits after you reach your FRA.

How are my benefits calculated?

Your retirement benefits are calculated using a formula applied to up to your last 35 years of indexed earnings. The formula and calculation process are rather complex, but you may find a detailed description of the process on the Social Security website .

What are benefits if I am married?

As was previously noted, if you (or your spouse) has not earned enough working quarters to be eligible for benefits, you may be eligible to claim a spousal benefit. Additionally, spouses that have earned their own benefit may be able to claim an additional spousal benefit that increases their retirement payment. The spousal benefit in both cases may be up to one half of the amount your spouse is eligible to receive at their Full Retirement Age.

An example:

You qualify for a monthly retirement benefit of $650 at your full retirement age. Your spouse’s benefit at their full retirement age is $1,800. You are eligible for the greater of your own benefit, or an amount equal to one-half of your spouse’s benefit. In this case, the greater benefit is one-half of your spouse’s benefit, or $900. Your actual monthly benefit would consist of two parts, the $650 that is your own benefit, and an additional $250 as the spousal benefit. If you had not earned enough credits to have any benefit of your own, you would be eligible for the full $900 as a spousal benefit.

For couples, regardless of whether one partner is claiming a spousal benefit, it is important to understand what happens at the point that one of you dies. If the spouse with the lesser benefit dies first, their benefits cease, and the survivor simply retains their current benefits. If the spouse with the greater benefit dies first, the survivor retains their benefit and receives an additional spousal benefit bringing the total benefit equal to the deceased spouse’s benefit.

An example:

Mary is receiving a monthly benefit of $1,200 and her husband Bill has a monthly benefit of $1,000. If Mary dies, Bill will continue to receive his benefit of $1000 a month, plus he will begin receiving an additional $200 a month as a widower, bringing his total benefit to $1,200, equal to the amount that Mary was receiving as the spouse with the greater benefit.

How do I decide when to start Social Security?

There is no right answer to this question, because it depends on several variables along with a host of personal preferences. But we can focus on several key areas you may want to consider.

  • If you are married, you may want to consider having the spouse with the highest benefit delay claiming benefits if possible, up to age 70. The reason for this is not just because of the credits for delay, but because this benefit amount is going to be the amount that will be paid to the eventual survivor when one of you dies. You are essentially putting off some income in the short term, to provide greater security for an eventual survivor.
  • Because of the guaranteed 8% a year credit for delaying claiming after your FRA, it may be financially wise to delay claiming Social Security and live off other assets. Doing so amounts to earning a guaranteed 8% return.
  • The first two answers are about what the numbers tell us might be the right thing to do. But all our decisions in financial planning do not have to be about maximizing the dollars. Sometimes it is about maximizing our level of comfort. If you feel more comfortable starting benefits early because you like the security of a guaranteed stable income, that could be the right decision for you. If that choice, along with your other financial choices appears to lead toward a successful long-term retirement income plan, it is a personal choice and one you may be willing to make.
  • How and when to claim your benefits needs to be done in the broader context of your other assets, retirement plans and resources that are available to provide your retirement income.

What can I do now?

Regardless of your age you should monitor your Social Security benefits on an annual basis. The easiest way to do that is to create a secure account at www.ssa.gov .You will be able to access your earning history and current benefit projections at any time. Pay attention to your earning history and promptly report any errors that you see.

If you are close to retirement, now is an excellent time to seek the services of one of MMBB’s Certified Financial Planner™ professionals. We can help you understand your Social Security benefits and options for claiming benefits, and help you to create a plan that integrates them with your other resources. Give MMBB a call at 800.986.6222 and ask to speak to one of our Financial Planners. We’re here to help!