For most Americans, Social Security will play an important role in their retirement income plan. Approximately 90% of retirees over 65 collect some form of Social Security benefit. As financial planners we are often asked how Social Security works, how it is calculated and the type of claiming strategy we recommend. In an effort to better educate future and current retirees, we will be discussing the basics of Social Security with this article and following up with more detailed claiming strategies next month.
If you have not received a Social Security benefits statement in the mail you should register online with My Social Security. (Currently, a Social Security statement will only be mailed to individuals who are at least 60 years old and have not yet filed for benefits or established an online account.)
Determining Eligibility & Benefit Amount
You become eligible for benefits upon earning 40 Social Security "credits"; one credit is equal to $1,300 in wages or self-employment income for 2017 and you can earn up to 4 credits a year. When calculating the benefit amount Social Security will consider an individual’s entire earnings record, more specifically the 35 highest earning years. Social Security then applies your average earnings to a formula to determine the benefit estimate. The equation used to determine the basic benefit amount is very complex and only an estimate. The closer one is to filing the more accurate the estimate becomes.
Once an individual reaches their full retirement age they become eligible for their basic benefit amount. For people born between 1943-1954, full retirement age is 66 years old. Anyone born after 1960, the full retirement age becomes 67 and gradually increases from there. Knowing your full retirement age is important because your basic benefit amount will be adjusted depending on if you claim before or after this age.
If you are looking at your Social Security statement, page 2 will provide estimates of your actual future benefits at various ages. (Any earnings received after age 62 will not be included in your estimate, but after filing a claim, a recalculation will be made to account for all years of earned income.)
Claiming Your Benefit
Social Security can be claimed as early as 62 or as late as age 70. Upon reaching full retirement age, you are eligible to receive the basic benefit amount. However, the timing of when you file will determine if you receive more or less than the basic benefit amount. Delaying to file after the full retirement age will increase the benefit amount by 8% a year up until age 70. Filing before full retirement age will result in an amount that is lower than the basic benefit. Many individuals have trouble deciding when is the optimum time to file. As financial planners, we have the tools available to help individuals optimize their Social Security.
Claims for Social Security can be made online, by phone or in person at the local Social Security office. Applications can be filed as early as four months before the date benefits are expected to start.
Other Types of Social Security Benefits:
Oftentimes someone will qualify for more than one type of Social Security benefit at a time, but they can collect just one. For example, an individual might be entitled to benefits based on their own retirement as well as a retired spouse. Whichever benefit is higher can be collected, but not both. The other types of benefits you may be eligible for include survivor, spousal, disability and supplemental security income benefits.
Do you have a better understanding of what your benefit estimate means? Contact us today to discuss your retirement income plan and learn more about how Social Security will impact you.