Before you file for Social Security, you need to do your homework. Why? Because you only get one chance to get your filing decision right. If you make a mistake, it could cost you – and the loved ones you leave behind – thousands of dollars in missed benefits. GOOD NEWS! IT’S NOT THAT HARD. After spending the last several years studying, speaking and writing on Social Security, I’ve learned that most questions can be answered within one of the Social Security basics.
Social Security Basics
Hello everyone. This is Devin Carroll. As a financial advisor, I’ve been helping people with retirement planning for well over a decade so this may not be a surprise but I think the decision about how to solve for social security is really important. In fact, I think it could be one of the most important decisions you make. Unfortunately, it’s also pretty complicated. The employees at the Social Security Administration don’t really like to give that much advice. In fact, they will generally just point you to their website, which has 110,000 pages. That’s right, 110,000 pages, so, yes, social security is a little complicated but it can be understood. You know, over the last several years, I’ve done a lot of speaking and writing and studying social security and one thing that I have found in all of this and in all of the questions that I receive from my readers is that most answers to social security questions can be found in a good knowledge of the basis. I think you’re going to find a lot of value in this but, before I get started, Social Security Intelligence does not provide legal or tax advice and I don’t want you to construe anything that we say here as such. Please, discuss this all with your personal financial, legal, and tax advisors to make sure it makes sense for your own personal situation. All right, got that over with. Let’s jump in.
Social Security Benefit Eligibility
Okay, so the first basic that is really important to get is how do you become eligible for benefits? What do you have to do to qualify for an eventual social security check? Well, that’s pretty simple. You just need 40 credits of work history. Now, credits are earned by, in 2016, $1260 in earnings gets you one credit, $5040 in one year will get you four credits. Now, you don’t have to work those in calendar quarters or anything like that. As long as you have $5040 in 2016, you’re going to get the full four credits. Now, it hasn’t always been that high. For example, in 1985, it was only $410 to earn one credit, so 40 credits of covered work, that’s work where you pay social security tax, and you are eligible for benefits.
Social Security Benefit Calculation
The next thing is the benefit calculation. There’s some confusion on this because there’s lots of pensions out there that are calculated based on an average of the highest five, an average of the highest three, but that’s not the case with social security. They base their pension on the average of the highest 35 years of covered earnings or those earnings where you paid social security tax. They will use 35 years in their calculations whether you have 35 years of earnings or not. Let’s say that you worked 20 years and that was all that you had. For example, if you have 20 years of work history, they’ll still use 35, but in those other 15 years, they’ll simply put in zeroes, which, of course, will bring the average down so, if possible, and you’re working and you’re close to that 35 years, it may make sense to go ahead and finish it out and get the full 35 years of earnings. Then, we have the full retirement age. Now, this is really important to get because the full retirement age is the age at which you qualify for your full retirement benefit. Over the last few years that retirement age has changed a little bit so some people are unclear on when their full retirement age actually is. If you were born between 1943 and 1954, your full retirement age is 66 years of age. Between 1954 and 1959, it increases by two months per year and, at 1960, your full retirement age is 67. At least that’s the way it’s set for now. That may change in the future, though, but for now, for everyone born up after 1960, it’s 67.
Social Security Earnings Limit
Next, we have the earnings limitation. You know, I still remember a lady at one of the speaking engagements I was giving who came up to me and said, “Devin, I didn’t know anything about the earnings limitation but I found out the hard way.” In her bridge club, all of the ladies that were there simply told her at 62, you need to go file and so she did, but she was still working, they were not, and so when she filed for benefits, it didn’t take long for the Social Security Administration to catch up to her and cut those benefits off but here was the problem. She left the social security office the day she filed and she drove down to the Toyota dealer and bought herself a car. She figured that with the extra social security payment, she could afford a brand new car payment. Well, that didn’t exactly work out. Social Security Administration called up and they cut her benefit off until she was full retirement age. Here’s the way it works. If you are under full retirement age, you cannot make more than $15,720 in wages or net earnings from self-employment before the Social Security Administration starts to withhold $1 for every $2 that you’ve gone over the limit. Now, the good news is, at full retirement age, there is no limit on the amount you can earn so what I often tell people is that even Warren Buffett is getting his social security check. The one caveat is that band right in the middle. In the year you obtain full retirement age, so let’s say that your full retirement age is 66 and you turn 66 on July 1. Starting January 1 of that year, the amount that you can earn increases to $41,880 and then the amount that they’ll withhold is different as well so it’s really important not to get caught by surprise with the social security earnings limitation.
Social Security Spousal Benefit
Next, we have spousal benefit and then we’re going to cover survivor benefits. These two are closely related and, in my opinion, some of the most generous benefits that the Social Security Administration gives us so I’m going to cover spousal benefit and survivor benefit and then I want to look at a case study that’s going to tie it all together and, hopefully, make it make sense so you’ll know exactly what you can expect as a spouse or a survivor.
As a spousal benefit, the lower earning spouse is entitled to the greater of the benefit base on his/her own work record or 50% of the higher earning spouse’s full retirement benefit adjusted for claiming age. Now, just to give you a real quick example of that, if my benefit is $2000, my wife’s benefit is $800, she is entitled the greater of her benefit or one-half of mine, assuming were both full retirement age, and so, in that case, her own benefit would be less than half of mine so she would be entitled to one-half of mine.
Social Security Survivor Benefit
Then, we have survivor benefits. For survivor benefits, at the death of the first spouse, the surviving spouse receives the greatest of his/or own benefits or the benefit of the deceased. Now, this is, at least for filing age, it’s important to understand that and we’re going to cover that in a moment as well, and then the lower benefit does drop off. If my benefit is $2000, my wife’s benefit is $800, and let’s say that she’s getting the $1000 for the spousal benefit so she’s getting a total of $1000 in benefits, I’m getting $2000 and I die, her new benefit becomes $2000 and her $1000 simply drops off. Again, that’s making the assumption that we are both full retirement age.
Example: Spousal Benefits and Survivor Benefits
So let’s look at an example that’s very much like the situation I just told you. Let’s take Tom and Beverly here and let’s loo9k at their benefit at full retirement age. Tom, he’s 66 currently, his benefit at full retirement age is $2000. Beverly’s benefit is, surprise, $800. The question is how much is she entitled to, at least spousal benefit. If she gets $1000, you’re absolutely right because, remember, it’s the greater of her own benefit or one-half of his benefit. What about as a survivor benefit if he passes away? If you guessed, $2000, right again, because it’s the greater of the two benefits but, hold up. Remember, I said that was reduced for filling age so it’s important to know that if you file before your full retirement age, your benefit amount will be reduced and here’s how it will be reduced. You’ve probably noticed on your social security statement that there’s generally three numbers represented. One shows what your benefit would be at full retirement age. The next directly under that shows what your benefit would be if you waited until age 70 and directly under that would be if you filed at earliest eligibility, age 62. Now, you’ll notice that all of these numbers are different so let’s take a look at each class of benefits to see how each would be reduced or increased by your filing age.
You’ll notice that we’ve gone through here and we’ve named 67 as the full retirement age. If your full retirement age is 66, it may be slightly different for you but not materially different. Let’s get started and let’s look first at your own benefit. You’ll notice at 60 and 61, there’s a not applicable in there. That’s because you cannot file for your own benefit until you are 62 years of age. If we skip all the way down the page to the orange numbers at 67, that’s where you are eligible for 100% of your full retirement age benefit. If you back up a year, you’ll see that there’s a reduction down to 93.33% and the year beyond that 86.67% and it goes all the way to age 62 at the earliest age of eligibility and you’d only get 70% of your full retirement age benefit. If we go beyond age 67, you’ll notice that it goes up. At 68, you get 108%. At 69, you get 116%. At 70, you’d get 124% of your full retirement age benefit. Now, it’s very important to note that your own benefit is the only benefit that will increase in that manner. Spousal benefit and survivor benefits do not have what they refer to as delayed retirement credits so there’s generally no need to wait until after your full retirement age if a spousal benefit or a survivor benefit is going to be the highest benefit that you are eligible for. Then, we come to the spousal benefit. Now, you’ll see that filing for spousal benefit, the reduction is a little sharper. At 62, it’s 65% of the full amount you would be entitled to instead of the 70% like it is with your own benefit. At 66, it goes up to 91.66% and then, of course, at 67, it’s at 100% of the full amount that you’re entitled to as a spouse. You will also notice that, as I stated before, it doesn’t go up from that point. Then, we have the survivor benefit. Now, the most notable things about survivor benefits, one, you can file for survivor benefits as early as age 60. At that point, you’re entitled to 71.5% of the amount that you would be entitled to at age 100. Now, there are also some filing strategies that you can use when you’re filing for survivor benefits, such as filing for survivor benefit and then not filing for your own benefit until you’re 70. It doesn’t make sense for everyone but if you can get that 24% increase that could make a lot of sense.
Social Security Length of Marriage Rules
Now, for the last social security basic, the length of marriage rules. Now, this has caused more confusion for people than I think any of them have. Here’s the way they work. For survivor benefits, you must have been married nine months. For a spousal benefit, the marriage had to have lasted 12 months. For either of those benefits, either survivor benefit or spousal benefit from a divorced spouse, the marriage had to have lasted 10 years. Let me make one quick note on the divorce spouse category. I’ve now talked to two clients who were married for nine years and 11 months. Their ex-husbands were both deceased, which means that they could have gone back, had they been married one more year, and filed for a survivor benefit and, for both of these ladies, it would have driven their own social security benefit up by several hundred dollars per month. An understanding of these length of marriage rules is really, really important.
I hope you’ve enjoyed this short video course. If you have any further questions or want to discuss your personal situation with me, there’s a link at the bottom of the screen where you can click, access my schedule, and we can talk on the phone. I hope you have a wonderful day.