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Getting the Most Out of Your Social Security Benefits

Nancy B. Crowley, CPA

Social Security continues to serve as one of the most important retirement income sources for millions of Americans.  There are many factors to consider when making decisions regarding your benefits.  Below are answers to some of the most common Social Security questions:

How does it work and how much will I receive?

In order to be fully insured under the Social Security system, you need to have 40 credits and then you are insured for life.  You can earn a maximum of 4 credits per year. To earn one credit in 2019, you need to have earned $1,360.  You would need to earn at least $5,440 each year for ten years in order to satisfy the 40-credit requirement.

If you have not worked or do not have enough Social Security credits to qualify for your own social Security benefits, you may be able to receive spousal benefits.  The maximum amount you may receive is one-half of your spouse’s full retirement benefit. 

To determine whether you have met the requirements, you can electronically create an account at the Social Security website. To create an account, you need to have a valid email address; a Social Security Number; and have a U.S. mailing address. Once you have created an account, you will be provided with an estimate of your benefits at 62, also referred to as early retirement age; full retirement age, the age, depending on year of birth, at which a person may first become entitled to full or unreduced retirement benefits; and age 70, the latest age to claim Social Security benefits.  You will also have access to a full summary of your earnings record. 

If you do not want to set up an on-line account or you require assistance, you may contact Social Security by phone at 1-800-772-1213 from 7 AM to 7 PM Monday through Friday, or by visiting your local office.

When should I sign up?

Determining when to sign up may be the most difficult decision you will have to make.   You can get lower monthly payments for a longer period of time or larger monthly payments for a shorter period of time.

Regardless of when you were born, you may start to receive Social Security at age 62.  However, the amount you receive will be discounted so that you are receiving anywhere from 75% to 70% of your full retirement benefit based on the year you were born.  A similar reduction also applies for spouses who begin receiving benefits between ages 62 and full retirement age.

Full retirement age depends on the year you were born.  Below is a summary of full retirement ages, as well as the percentage of your full retirement payment that you would receive should you choose to start receiving Social Security at age 62.

Year of Birth Full Retirement Age   Payment at Age 62
1943-1954 66 75%
1955 66 + 2 months 74.2%
1956 66 + 4 months 73.3%
1957 66 + 6 months 72.5%
1958 66 + 8 months 71.7%
1959 66 + 10 months 70.8%
1960 and after 67 70%

Age 70 is the latest you may wait to start receiving Social Security.  Just as there is a penalty for early retirement, there is a benefit for delaying retirement benefits to after your full retirement age.  For each year delayed, your benefits increase by 8% per year for a potential maximum increase of 32% and that is without taking into consideration any cost of living adjustments.

Mathematically, if you decide to receive your benefits at age 62, you will be ahead of the person who waits for full retirement by approximately 15 years.  In other words, the breakeven point is somewhere between 77 and 78 years of age.  It is estimated that the person who started Social Security at age 70 versus the one who started at age 66, will be ahead somewhere between ages 82 and 83.

The factors you should consider in determining when to start your benefits include:

  1. Are you in good health?
  2. How is your family longevity?
  3. Do you plan on working?
  4. Do you need the funds?
  5. Do you have other retirement sources?
  6. How does your spouse’s Social Security impact your decision?

The Social Security site has several calculators including one that provides a rough estimate of how long you or your spouse may live.  The Social Security Life Expectancy Calculator may provide you with an idea of how long your benefits may need to last.  

How do I sign up?

If you want to sign up for Social Security, the earliest that you may do so is when you are 61 years and 8 months old.  Otherwise, you should apply for Social Security four months before you want your benefits to start.

You can apply for Social Security online, by phone, or by making an appointment to visit your local Social Security office.   Social Security recommends applying online which takes 10 to 30 minutes. Social Security will contact you by telephone or by mail if any further information is required. You will be able to check the status of your application online.

Your payments will then be made electronically to your bank account.

How does continuing to work impact my Social Security benefits?

If you are younger than full retirement age and receiving Social Security in 2019, you may earn up to $17,640.  Once that amount is exceeded, your benefits will be reduced by $1 for every $2 you earn above the limit.  If you reach full retirement age in 2019, the benefits are reduced by $1 for every $3 you earn above $46,920 until the date you reach full retirement age.  You will need to inform Social Security of your anticipated earnings from work during any of your pre-full retirement years.  In turn, Social Security will reduce your monthly benefits payment based on your work earnings that exceed $17,640.  Social Security is available to help you with this calculation.  It is important to note that the reduction in benefits is not lost. Your benefits will be increased at your full retirement age to account for the benefits that were withheld due to the work income you earned during your pre-full retirement years.

Once you reach full retirement age, you can earn any amount with no impact on your Social Security benefits.  If you continue to work, Social Security will check your earnings record every year to see whether the additional earnings will increase your monthly benefit.  If there is any increase, Social Security will send you a letter reporting your new benefit amount.

How are Social Security benefits taxed?

Social Security benefits are taxed by first determining your “combined income”, which is your adjusted gross income (line 7 of your Form 1040), plus your tax exempt interest plus one-half of your Social Security benefits.  The following chart details the percentage of benefits that are then taxable based on the combined income thresholds:

  Threshold for Benefits Taxable at 50%   Threshold for Benefits Taxable at 85%
Single or Head of Household  Over $25,000 Over $34,000
Married Filing Jointly Over $32,000 Over $44,000

Each person must evaluate their own particular circumstances in determining when to start collecting Social Security.  If you have any questions or need help in evaluating your specific situation, please contact your RINET advisor.