Need To Know: SOCIAL SECURITY
By Todd Holden, Financial Advisor
There are basic facts about Social Security that we all need to know. Here they are:
1) Your Full Retirement Age (FRA)
This is the age you can claim your Primary Insurance Amount (see below) without incurring a reduction in benefits. It is also the age at which your work status will not result in a loss of benefit.
While you can claim benefits as early as age 62, you may not want to — especially if you’re still working. If you claim prior to FRA, your benefit will be permanently reduced and if you earn more than a certain amount your benefits will be clawed back. For 2021, this amount is $18,960.
Your Full Retirement Age is based on the year you were born:
1943-54 > 66
1955 > 66 + 2 months
1956 > 66 + 4 months
1957 > 66 + 6 months
1958 > 66 + 8 months
1959 > 66 + 10 months
1960 & Later > 67
2) Your Primary Insurance Amount (PIA)
This is the benefit you’ve earned at your full retirement age. Any reductions or additions for delayed credits are based on this number.Social Security uses a complicated formula based on your wage history and inflation to calculate your PIA. Most people no longer receive Social Security estimates so the best way to estimate your PIA is on the Social Security website at SSA.gov. This will show your PIA, reduced benefits at 62 and delayed credits for claiming your benefit at age 70.
3) You Can Earn Delayed Credits By Waiting To Claim Benefits Beyond Your FRA
Just like claiming benefits prior to FRA will permanently reduce your benefit, waiting to claim beyond your FRA will result in a permanently increased benefit. Each year you wait between your FRA and age 70, your benefit will increase by 8%.
You stop earning delayed benefits at age 70. Thus, there is no reason to wait beyond 70 to claim your benefits.
4) Widowed And Divorced Spouses Have Extra Options
These options get more complex, but if you are widowed you may have options that others do not. The same applies to divorced individuals whose marriages lasted for 10 years, and, whose former spouses have passed away. In these cases, a divorced person is treated as a surviving spouse.
If these situations apply to you, contact your financial advisor to help sort through your options and learn how they may effect your retirement plan.
5) Social Security Is Tax Preferenced Income
Taxation of your Social Security benefits is based on your income. Most people reading this will pay tax on their Social Security retirement benefit. Under current law, up to 85% of your Social Security retirement income will be subject to income tax. This means that 15% is tax free. Of course, this may change the next time Congress “fixes” Social Security.
6) Social Security Is Not An All Or Nothing Thing
Quite often advisors hear comments such as “I’m not counting on Social Security because it won’t be there for me.” It is difficult to imagine that this benefit will be taken away entirely. Too many people depend on it for the vast majority of their retirement income. However, it is easy to imagine that taxation of Social Security will change or that only a percentage of the benefit promised will be paid. This is why many advisors like to build a financial plan around a reduced benefit.
If your retirement income plan is based on receiving all the Social Security benefits you’ve earned, why not test your plan by reducing your Social Security benefit by 20 or 25% and seeing if your plan will provide the lifestyle you want?
7) Deciding When To Claim Your Benefits Is An Important Decision
Many people want to claim as early as possible which if often not in their best interest. Drawing too early may not provide sufficient income down the road.
Some sources support waiting until full retirement age or later, especially if longevity is on your side. This often makes sense from a purely numbers perspective (i.e. drawing the most amount of money out Social Security). But, if one retires at age 65, they may not have a sufficient level of investments to support themselves for five years until they’re planning to claim benefits at 70.
Key takeaway: Advisors prefer to incorporate Social Security benefits into an overall retirement plan and utilize software to run various options so that our recommendation and your decision to claim Social Security benefits in particular are based on having a successful retirement. Running out of breath before we run out of money seems to be a universal goal.