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December 28 , 2019 — Social Security is the single most important source of retirement income for most people. So it is crucial that you understand how the rules apply to your situation. Here are three important things you need to understand about how Social Security works.
1. Know when to claim
The earliest you can claim is age 62. Your Full Retirement Age (FRA) is somewhere between 66 and 67, depending on your birth year (if born before 1954 it is 66 and increases one month per year after that up to 67). Your benefit maxes out at age 70; there is no advantage in waiting past that. if you file at age 62 you will only get 75% of what you would get if you wait to your FRA. If you claim between your FRA and 70 your benefit will increase by 8% a year. You can file for your benefits online or in person.
2. Know how your benefit is calculated
You must have had taxable earnings in at least 40 quarters to be eligible. Benefits are calculated on your 35 highest earning years, indexed to account for changes in average wages since the year the earnings were received. You can improve your earning record by continuing to work, if your new earnings replace a lower earning year. Likewise if you did not have earnings in all 35 years, new earnings could replace a zero in the calculation.
3. Know how your spouse is affected by your claiming decision
This is the area that is most misunderstood or neglected by retirees. The topic is a little simpler than it used to be because the last of two sophisticated claiming tactics, File and Suspend and Restricted Benefit, will end for new retirees as of Jan 2, 2020.
Spousal benefits. If you have filed for benefits, your spouse can claim a spousal benefit on your record. The earliest a spouse can normally claim is age 62 – but benefits will be reduced if not yet 66. Spousal benefits max out when the spouse reaches 66. However, the spouse can potentially get a much higher benefit (assuming they had a fairly long working and earnings career) by waiting up until age 70 to claim on their own earning record. You can use the Social Security Benefit Calculator to determine which course is better in your case.
Survivor benefits. The other critical area affecting your spouse is the survivor’s benefit. The following illustration applies to a couple who waits to claim the maximum benefit at age 70.
Assume that Dorothy is a high earner and claims her benefit at age 70. She qualifies for the maximum benefit available in 2020, $3790. If she had claimed at age 66 her monthly benefit would have been $3011 (difference of $779 per month). Bud, who is 3 years younger, claims a spousal benefit at 66 (and gets 50% of Dorothy’s Full Retirement Age benefit ($1505). His spousal benefit was about the same as he would have received on his own earning record.
Ten years from now Dorothy dies at age 80. At that point Bud’s spousal benefit stops, but now he receives 100% of Dorothy’s benefit ($3790 and adjusted every year for inflation). Bud lives to age 95, and for 18 years gets $779 more per month ($168,264 more in total) than he would have if Dorothy had claimed at age 66. The monthly difference would have been even more ($1525) if she had claimed at age 62. Bottom line: Dorothy got 10 years of higher benefits and came close to breakeven vs. claiming at age 66. Bud meanwhile was very sad to lose his wife, but at least benefited financially with 18 years of a higher benefit, because she waited to age 70 to claim.
What do you think are the most important things to know about taking your Social Security benefits? Are you happy with your decision on when you claimed?
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