Social Security Matters
Dear Rusty - I have a question regarding my SS benefits. I turned 68 this month and work part time. I earned $28,000 last year but will probably gross $36,000 to $38,000 this year. My husband collects his SS, and he earned $25,000 last year. I was told by a financial planner that I should apply for my benefits now, instead of waiting until I'm 70. I would collect $1,700/month at 68 and $1,944/month if I wait. Which is the smarter move?
Seeking Answers
Dear Seeking - I'm sure your financial advisor would agree that your decision on when to claim your Social Security comes down to just a few basic things - 1) how badly you need the money, 2) your life expectancy, and 3) whether you will receive a spousal boost from your husband when you claim.
Because you have already passed your full retirement age (FRA) of 66 years and 4 months, your work earnings won't negatively affect your monthly SS benefit amount. If you claim now, however, your work earnings will affect how much of your SS benefits will be subject to income tax. Assuming you file your income tax as "married/filing jointly," up to 85% of the Social Security benefits you receive during the tax year will become part of your income taxable by the IRS. If you do not urgently need the extra money that your SS will provide, then waiting longer to claim will also postpone paying income tax on your received benefits, and that may be a consideration.
Your life expectancy is key in making your decision on when to claim. You already know that your benefit will be $244 per month more if you wait until you are 70 to claim. If you claim at 68 (e.g., this month), you will collect about $40,800 by the time you reach 70. If you, instead, wait until age 70 to get that extra $244/month benefit, it will take you about 14 years collecting at the higher rate to offset the $40,800 you would have received had you claimed now (in other words, you would break even moneywise at about age 84). If your life expectancy is longer, then waiting to claim may be the better choice. Of course, no one knows how long they will live but, for general guidance, average life expectancy for a woman your current age is about 87. Family history and your current health are obviously influencing factors as well. If you wish to get a more personal estimate of your life expectancy, I suggest using this tool:
In the end, if you believe you will attain at least average life expectancy and you don't urgently need the money now, waiting longer will not only give you a higher monthly benefit in your later years, but also the most in cumulative lifetime benefits. If, however, you have reason to suspect you won't achieve at least average life expectancy, or you need the SS money sooner, claiming before age 70 is likely the better move.
One other thing to consider: If your benefit as your husband's spouse will be more than your own earned maximum SS retirement benefit, then you should claim your SS benefit now. Your maximum benefit as a spouse would be 50% of your husband's full retirement age entitlement and, if that is more than your own benefit will be at age 70, then claiming now to get your maximum spousal benefit would be your best choice. To get a spousal benefit from your husband, your personal FRA entitlement (not your age 68 amount) would need to be less than half of his FRA entitlement. If that isn't the case, then you should make your decision based only on your own Social Security entitlement, as described above.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation's staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at ssadvisor@amacfoundation.org.
Ask Rusty - How is my Social Security benefit calculated?
Dear Rusty - I appreciate your recent article dispelling the myth that politicians have stolen Social Security money. As a CPA, I dispel this myth repeatedly to clients who falsely claim SS funds have been raided. But another thing I deal with often is how SS benefits are calculated. I know the formula for determining each person's benefit amount is complex, but I have had to explain numerous times that those who put the most into Social Security get the lowest rate of return and those who put the least in get the highest return based on the way the benefit formula is structured. I get tired of people complaining that monthly Social Security payments are higher for retired doctors and other highly paid individuals. Can you please explain how Social Security is weighted in favor of lower income workers?
Tired of the Misunderstandings
Dear Tired - Please don't be frustrated. Because of the program's complexity, Social Security is prone to misunderstanding, and educating the misinformed is an important professional duty we share. Here's how each person's SS benefit is determined:
The first thing to know is that each person's SS retirement benefit is not based on their financial contributions to the program. Social Security's purpose is to provide a benefit which replaces a portion of the person's pre-retirement income, so the SS benefit is based on actual lifetime earnings, not on the payroll taxes withheld from those earnings.
Social Security has your lifetime earnings record (obtained annually from the IRS) and that record determines your "primary insurance amount" or "PIA." Your "PIA" is initially determined in your eligibility year (usually age 62) and is the amount you will get if you claim for benefits to start exactly at your full retirement age (FRA).
To develop your PIA, Social Security first adjusts (indexes) each year of your lifetime earnings (up to the annual payroll tax cap) to account for inflation. They then select the 35 inflation-adjusted years in which you earned the most, from which they compute your average monthly earnings over your lifetime (this is called your Average Indexed Monthly Earnings, or "AIME"). They then break your AIME into three segments, the first of which includes a majority of - and possibly all of - your AIME. They then take a percentage of each segment and total those three amounts to determine your PIA. The first segment is the largest and 90% of that first segment contributes most of your PIA. Smaller percentages of the other two segments (32% and 15% respectively if your AIME is higher), are then added to the first computation to arrive at your full PIA - the amount you get if you start benefits in the month you reach your FRA. Note that since most of the PIA comes from the first large segment of each person's AIME, lower income workers get a higher percentage of their lifetime average monthly amount.
Since benefits are based on earnings, those with lower lifetime earnings do, indeed, get a smaller benefit than those with higher average lifetime earnings, but the percentage of pre-retirement replacement income lower income workers receive is higher than for those with higher monthly average lifetime earnings. The Social Security benefit for lower income workers is typically about 40% of their pre-retirement average monthly income, while those with higher lifetime average earnings may get a benefit as little as 20% of their average monthly pre-retirement earnings. In that sense, the Social Security benefit formula is progressive and weighted in favor of lower income workers. Nevertheless, albeit a smaller replacement percentage, higher income workers receive a higher monthly SS benefit because of their higher lifetime earnings. Even so, those higher earners did, indeed, contribute more payroll taxes from their higher earnings.
So, each person's SS retirement benefit amount is a percentage of their pre-retirement income. Coincidently, those with higher pre-retirement income also contributed more to the Social Security program than did those with lower earnings. But their higher SS benefit amount is based on their higher pre-retirement earnings, not on payroll taxes paid from those higher earnings.
About AMAC
The 2.4 million member Association of Mature American Citizens, www.amac.us, is a senior advocacy organization that takes its marching orders from its members. AMAC Action is a non-profit, non-partisan organization representing the membership in our nation's capital and in local Congressional Districts throughout the country. And the AMAC Foundation (www.AmacFoundation.org) is the Association's non-profit organization, dedicated to supporting and educating America's Seniors. Together, we act and speak on the Association members' behalf, protecting their interests and offering a practical insight on how to best solve the problems they face today. Live long and make a difference by joining us today at www.amac.us/join-amac.