Social Security benefits are designed to replace 40 percent of your wages. To be eligible for benefits, you must have worked and paid into the Social Security system for at least 10 years (40 quarters). Your personal benefits are calculated using your top 35 years of earned income. Up to $118,500 of employee taxable wages are subject to the OASDI/Social Security tax (2015 & 2016). Currently, the maximum monthly Social Security benefit for individuals at full retirement age is $2,600. Benefit increases are based on the CPI (Consumer Price Index). And if you haven’t already heard, Social Security recipients will not see an increase in 2016.
Reduction in Benefits and Taxation
If you start taking Social Security benefits while continuing to work, your benefit amount will be reduced by $1 for every $2 earned above $15,720 during the year. Once you reach the year of your full retirement age (FRA) (age 66 for those born in years 1943-1954), the benefit reduction is $1 for every $3 earned above $41,880. When you reach the month of your FRA birthday, the reduction ceases, no matter how much income you earn. (Keep in mind that during your FRA year benefits are only reduced if your earned income exceeds $41,880 during the months prior to your birthday. Those who have birthdays earlier in the year have an advantage here.)
Up to 85 percent of your annual Social Security benefit is subject to taxation if your modified adjusted gross income exceeds these amounts: married, filing jointly – $32,000 (50-percent taxable) or $44,000 (85-percent taxable). For single tax filers those amounts are: $25,000 (50-percent taxable) or $34,000 (85-percent taxable).
How Starting Age Impacts Monthly Benefits
The earliest you can start taking Social Security is age 62. If you take your benefits early, they will permanently be reduced from the maximum benefit amount at FRA (a reduction of about 25 percent if taken at age 62 versus FRA of age 66). The reduction narrows each year you get closer to your FRA.
If you postpone taking Social Security until after your FRA, you are eligible for delayed retirement credits, providing an 8-percent annual benefit increase each year that you wait until age 70. Your maximum benefit amount is achieved at age 70 and will not increase any further, even if you don’t start taking benefits.
Your spouse can file for spousal benefits as early as age 62 as long as you are receiving benefits. If, however, your spouse takes benefits prior to FRA, his or her amount will be permanently reduced. If your spouse waits until FRA to start spousal benefits, he or she would be eligible for 50 percent of your full benefit amount, no matter when you started taking benefits. (The maximum spousal benefit is 50 percent of your benefit at your FRA.)
Changes to Spousal-Claiming Strategies at FRA
If both you and your spouse postpone benefits until FRA, there are some aggressive claiming strategies available that will allow you to maximize your benefits—but hurry, they won’t be around for long!
- Restricted application.With this strategy you file for your spousal benefit while deferring benefits on your own record, then switch to your benefits at age 70. (Only one spouse can do this, not both.)
- The Bipartisan Budget Act of 2015 (signed November 2nd) eliminates the ability to switch to one’s own record after claiming a spousal benefit for those who have not attained age 62 by the end of 2015.
- File and suspend.With this strategy you open your record for your spouse to receive spousal benefits, and to protect your right to file for retroactive benefits.
- This strategy will not be available after April 30, 2016 (180 days after the above Act becomes law)
- If you will be age 66 or older as of May 1, 2016 and you haven’t yet started Social Security benefits, you might want to consider filing and suspending your benefits before May 1. If you don’t, you would have to start taking benefits in order to open your record for your spouse (losing the ability to defer until age 70).
Claiming Benefits on an Ex-Spouse Record
If you and your “ex” were married for at least 10 years, divorced for two years or more and you are age 62 or older, you can claim benefits on your ex-spouse’s record. Once you remarry, however, you can no longer claim benefits as an ex-spouse.
Surviving spouses are eligible for 100 percent of the deceased spouse’s benefit. If the deceased spouse was not yet drawing Social Security, the survivor would receive 100 percent of the deceased spouse’s FRA benefit.
The survivor can switch from one record to another without having attained full retirement age (i.e., survivors take their own benefit at age 62, then switch to the deceased’s benefit at FRA). Any surviving, unmarried children are also eligible for benefits until age 18 (19 if attending elementary or secondary school full time). A spouse who is caring for children under the age of 16 is eligible for benefits as well. (There’s a maximum family benefit amount based on the deceased’s work record.)
As you can see, there’s a plethora of information to wrap your mind around when determining your best claiming strategy. It’s also important to factor your financial resources and health into the equation. I suggest you do some research on the Social Security website, run some scenarios on the Retirement Estimator, then talk to your financial advisor for input. You can file for benefits online or by appointment at your nearest SSA office. Just make sure you first call the Social Security office to schedule an appointment!
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