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What You Think You Know about Social Security Could Hurt You – Part 1

Category: Financial and taxes in retirement

Note: This has become Module 8 of our Retirement 101 Online Retirement Course. We have written several other articles about Social Security you might also enjoy: “Social Security Quiz- A Learning Experience“, and “What Is Your Social Security Worst Claim Scenario”. Important changes to spousal claiming strategies occurred in 2016, these are referenced in our later articles.

April 24, 2012 — We were vain enough to consider ourselves experts on when and how to start collecting social security. That is, until we attended a talk last week in Old Saybrook, Connecticut by Kurt Czarnowski of Czarnowski Consulting. Boy, the things we didn’t know, and the others so misunderstood! This Module is Part 1 of a 3 Part Series. Here will give a brief background on Social Security and then dive into successful strategies for optimizing your return from this important safety net. Part 2 of this series concentrates on issues related to claiming strategies for couples, the rights of divorced spouses, and frequent misunderstandings/questions about Social Security. Part 3 explains “How to ‘Buy’ an annuity from Social Security”.

First, let’s start with a quote from Kurt Czarnowski: “The myths and misunderstandings about Social Security are staggering”. This from a man who spent 34 years within the Social Security Administration, the last of those as a Communications Director. Given all the misinformation, it is important that we all address this topic with an open mind. Note that this article was prepared from our notes of his talk as well as our observations. If there are any errors they undoubtedly stem from our misunderstanding and not as any reflection on Mr. Czarnowski.

Social Security – A Safety Net
This 76 year old program was designed as a safety net for seniors, widows, and the disabled. It was never meant to be the sole source of retirement income; rather it was meant to be the base to help supplement income from pensions, savings and investments, and other income.

To be eligible for a retirement benefit you first need to become “vested”, which means you have to have earned 40 credits from Social Security. In 2012 you get 1 credit for each $1130 you earn, with a maximum of 4 credits per year. Employees currently pay 4.2% on their earnings (up to a maximum of $110,100 in 2012). In addressing a question from the audience, Mr. Czarnowski commented that for an individual who has not earned their 40 credits, it might be worth while taking a job to do so, given the potential value of the payout over time (including some considerations about your Part B premiums).

How Social Security determines your benefit
It is worth knowing how the Social Security Administration calculates your retirement benefits, once you become eligible and decide to start collecting. These are the 3 steps in determining your benefit:

1. Adjust prior year earnings to current dollars. This neutralizes your early year earnings, which are unreasonably low in today’s dollars.
2. Take the average of your 35 highest earning years. Non-working years are counted as 0’s.
3. Adjust the benefit according to income. This progressive approach means is that lower earners get a higher percentage benefit (56%) relative to their earnings than do middle earners (41%). The highest earners get the smallest percentage (34%).

The average monthly Social Security retirement benefit paid in 2012 is $1,229, or $14,748 per year – hardly enough for a comfortable retirement by itself.

How much you collect depends on when you start collecting
The age you have attained when you start collecting has a major impact on the size of your monthly check. The program is designed to be neutral no matter when you start – assuming an average life expectancy.

For workers born between 1943 and 1954 (the baby boomers and a few years older):
Age 62       Benefit  is  75% of the Full Retirement Benefit
Age 66       Benefit  is  100% of the Full Retirement Benefit
Age 70       Benefit  is  132% of the Full Retirement Benefit

Your benefit increases the longer you wait to start collecting – up to age 70. Note that you can start collecting at anytime after age 62 (for example, 63 years and 2 months). Your benefit will be adjusted according to a formula. Between age 62 and your Full Retirement Age (FRA) – 66 for baby boomers – the benefit goes up .5% per month. Between FRA and age 70 the benefit increases .666% per month, or 8% per year.

Myth busters – working in retirement
How your benefit is affected by working is one of the most misunderstood aspects of Social Security. In general Mr.Czarnowski and other experts all agree that there is no reason not to work, even though your social security benefits might be reduced if you claim your benefits and work before you reach your FRA. The theory is that it is better to have more money, rather than less. Between the ages of 62 to 65 there will be a reduction of your benefits of $1 for every $2 you earn above $14,640. In the year you reach FRA your benefit will be reduced by $1 for every $3 you earn above $38,880. Once you attain your Full Retirement Age there is no reduction in your benefits, no matter how much you earn.

Taxation of Social Security
About one third of social security recipients pay income tax. If you earn more than $25,000 (individuals) or $32,000 (filing jointly) you are required to pay tax on up to 85% of benefits received. Additionally, there are several states that tax social security (although most do not).

Collection Strategies
Mr. Czarnowski gave us the clearest explanation of various collection strategies we have ever heard. Which is not surprising since he is in demand as a consultant with leading financial planners, assisting individuals in their social security planning. Here are some of the key strategies he discussed.

Delay taking your benefits?
Mr. Czarnowski stresses that the decision on when to take Social Security is yours, but you do need to know the facts before you decide. Social Security retirement benefits are structured to be neutral, regardless of when you start claiming, assuming that the average person lives to be 78. If you die before then, you were better off claiming early. If you claim later to get a higher monthly benefit and then live to be 100, you will have hit the Social Security jackpot, because your monthly benefit would have been so much higher for all of those extra years beyond 78.

Factors affecting your decision
There are 4 major factors you need to consider when deciding when to start claiming your social security:

Your health. If you have a serious health condition that might affect how long you will live, earlier collection is probably better.
Family life expectancy. Assuming you are healthy, how long did your parents live? How about siblings? If your genes point to living into your 80’s or beyond, delaying your claiming date might be wise.
Do you need the money. If you got laid off and your job prospects aren’t that good, you might need to claim early just to stay afloat. But if you can live using other savings, you still might consider delaying.
Are you still working. Since your benefit will be reduced if you earn more than a modest amount before your full retirement age, there is not much point in claiming before your FRA. Plus, if you are in your high earning years, there is even more reason to delay claiming your benefit. That’s because you might be able to drive up your 35 year earning average, which will increase your future monthly payments.

The effect on your surviving spouse also needs to be considered
When the first spouse dies the survivor has two options: he or she can keep their own benefit, or take over their spouse’s. For the couple with a higher earning spouse, the benefit of taking the delayed benefit is magnified. Not only does the higher earner get the higher benefit during his or her lifetime, but the surviving spouse will also benefit as long as he/she lives.

Next time – Issues related to couples and when to take Social Security
Married couples need to carefully consider their options before claiming Social Security in order to maximize their lifetime benefits. We will explore those options and different claiming strategies in more detail in Part 2, along with other issues such as the rights of divorced spouses.

About Czarnowski Consulting
Kurt Czarnowski is currently the principal in “Czarnowski Consulting,” a retirement planning company which provides “Expert Answers to Your Social Security Questions.” Czarnowski is the former Regional Communications Director for the Social Security Administration (SSA) in New England, a position he held from December 1991 until his retirement at the end of 2010.

About this conference
This conference was organized by the folks at the Oakley Wing Group at Morgan Stanley Smith Barney in Essex, CT, an asset management team who specializes in helping baby boomers coordinate and oversee their financial affairs leading up to and throughout retirement.  The team is available to help clients learn more about the preparations necessary to make a financially sound transition into retirement.  You can call or email 860-447-4847 or The event sponsor was Transparent Value, an asset management company within Guggenheim Partners, a private global financial services firm.  in Essex, CT.

For further reference:
Part 2: Marital Claiming Strategies, the Rights of Divorced Spouses, and Frequent Misconceptions
Part 3: How to “Buy” an Annuity from Social Security

Other Modules in the Online Retirement 101 Course
Exploding 5 Myths about Social Security (Jane Bryant Quinn for AARP)
It Pays to Work in Retirement
When Should You Start Taking Your Social Security Benefits
10 Things You Need to Know Before You Start Taking Social Security
Too Many Boomers Leave Money on the Social Security Table
Social Security Administration: Social Security Benefits Estimator
Online Social Security Calculators:
Social Security Solutions
Social Security Choices
Social Security Planner
AARP’s Social Security Calculator

Comments?  What are you thinking about your Social Security claiming strategies? Please share your thoughts in the Comments section below.

Posted by John Brady on April 24th, 2012


  1. One aspect of taking Social Security benefits early that no one ever discusses is the fact that much, if not all, of these benefits are not taxed depending on levels of other income sources. The point, which again no one ever discusses, is that it may be better for some folks to take Social Security early rather than dipping into IRA savings because the Social Security is not fully taxed while income from a traditional IRA is fully taxed. When I revised my planning model to account for this, it added years to the crossover point in favor to taking Social Security early. I have been retired for five years and have not yet started IRA distributions, and the untouched IRAs have grown quite nicely.
    In my case I would have needed to take a comparable amount from my IRAs if I had deferred taking Social Security, which would have both reduced the IRA’s earning power and be fully taxed. By taking Social Security early and deferring IRA distributions, I have had almost no income tax to pay, resulting in over three thousand dollars savings per year in taxes. I know that could mean more taxes down the road because the IRAs have grown faster, but to offset that situation, I have taken advantage of the current tax law to re-categorize some of my traditional IRA funds to Roth IRA accounts which continue to grow and should never be taxed. This may not work for everyone but should at least be assessed by everyone. It kind of bugs me that the “experts” never talk about this approach. They almost always say to wait as long as possible to take Social Security to get the additional 8% or so per year. But that is an incomplete strategy if a person has to take money out of savings to get by. Of course continuing to work and deferring Social Security benefits will produce the best financial results but that is not always possible.

    by Tom — April 25, 2012

  2. I heard that you could get your early retirement benefits, put it in an investment then when you hit your full retirement age you could pay back the money you earned for the last 6 years then restart your retirement at the higher rate. This way you could save the investment earnings. I’m not sure if you need to pay any interest on the earnings you pay back.

    If you don’t need the money until FRA, why not take it early, invest it, then pay it back for the higher rate. This is one strategy I would like to research further.

    @Julie from John Brady. This strategy used to be available, but has not been permitted for a while now. We did learn from Curt that you can change your mind about collecting, but you need to reverse your decision within 12 months. You can only do this once.

    by Julie Obey — April 25, 2012

  3. The article says social security was made as a safety net for widows and seniors. It also says if you have not earned your 40 credits get a job. Why get a job if you are they spouse of a working spouse. You can get a free ride by not working. Say your husband gets $2,000 a year from Social Security since he waited till 66 to collect. If you are the wife and never worked, you still get $1,000 a month. How come experts never tell you the whole story as we saw in other reader postings? We are not the experts like Mr. Czarnowski, but non-experts always seem to have more of the truth and the facts. For now, you can get a free ride and not have to those pesky 40 credits.

    by scott — April 25, 2012

  4. Hi – Like some of the previous comments I think there are individual factors that are not mentioned often in these presentations regarding when to take Social Security. Not the least of which is that if part of the solution to underfunding is changing benefit formulas it really becomes hard to predict the right choice! Anyway I’m inserting a web address for a short article that I thought gives some good and simple examples about this decision-making process. At the end I think they make a few good points about the personal aspect (versus purely financial) of making this decision. Thanks for the continuing informative articles.

    by Mejask — April 25, 2012

  5. I began to draw Social Security at my full retirement of 65 amd 8 months but also continued to work fulltime. I was shocked to find out that I still have to pay into the system, pay federal and state taxes on Social Security benefits which leaves a net of about 70% of my benefit. Why isn’t at least the Social Security deductions from my paycheck refunded back to me or listed as a credit off of my adjusted gross income whne I file my taxes? When did they start taxing Social Security benefits? Why am I penalized becuase I have continued to work?

    Editor’s note: Yes, it is true you continue to pay into the Soc.Sec. system if you keep working, whether you are collecting or not. The silver lining for you might be that, at least until age 70, your earnings could help increase your monthly payment, assuming your earnings are high enough to “kick out” some of your lower earning years. SS keeps recalculating your benefit based on your new earnings, up to age 70, even if you started collecting before then. Social Sec. benefits have been taxed for some time, although the income threshold has changed.

    by Mike Schultz — April 25, 2012

  6. Q: where is part 2 of Mr Czarnowski’s article?

    A: We havent written it yet! We will be publishing it and linking to it in the newsletter 2 weeks from today. But it might be up a few days sooner.

    Hope you like it – there was so much info we couldnt get it all in 1 article.

    by Admin — April 25, 2012

  7. Something that will matter to a few people, but who may still get incorrect info from SSA: you can quit SS after enrolling as long as you pay back what you have received.

    Say circumstances force you to enroll at 64. Then you pick up a project paying say 10,000 a month – and you are getting paid monthly. You owe SSA 9,000. You can pay them back and delay retirement to the full retirement age. It may be to your benefit (or may not) but SSA MAY have told you that once enrolled you cannot opt out. They may tell you that three times – as they told me.

    So be aware of that, and also be aware that you should check and recheck anything SSA Reps tell you, either in personal interview or over the 800 number.

    Editor’s note: Sorry, this is one of the more common myths about social security. It is not correct (see earlier note). You can sign up and reverse your decision within 12 months (and do it only once). Once you have received benefits for more than 12 months, you cannot reverse your decision (although you could suspend payments and possibly see your benefit go up in the future if you are working). See and

    by Frank Blank — April 25, 2012

  8. I just wanted to thank you for this write-up on Social Security. While I am not quite able to collect Social Security just yet, I am reading and learning all I can so hopefully I make the right decision when my time arives. I am eagerly looking forward to part 2.

    by lnduncan — April 26, 2012

  9. Good stuff… and here is some additional info. If you are divorced and you were married for at least 10 years, at your retirement age (66 for boomers) you may choose to defer your benefit up to age 70 and take your spousal benefit which is 50% of your ex-spouses benefit. This allows your benefit to continue to grow which you may need if you expect to live past 78 (mostly women). It does not cut your ex-spouse’s benefit. The only time I get paid for staying home and raising the kids!

    by LuluM — April 26, 2012

  10. […] on the social security table Social Security Administration: Social Security Benefits Estimator What You Think You Know About Social Security Might Hurt You Posted by John Brady on October 17th, 2011 Comments (10)  Email This Post Entries (RSS) and […]

    by » Ten Things You Need to Know Before You Start Taking Social Security Topretirements — April 26, 2012

  11. […] is some helpful information about all aspects related to when to take your social security benefits. Posted by Admin on November 17th, 2007 Comments (1)  Email This Post Entries (RSS) […]

    by » How Much Can I Earn and Still Receive Social Security Benefits? Topretirements — April 26, 2012

  12. If I work for a school district, which doesn’t contribute to SS, will that still count as earnings while I’m collecting benefits?

    Editor’s Note: I doubt it very much. But you will be getting credit for the school based pension.

    by Chuck — April 28, 2012

  13. […] in a 2 part series about “Social Security: What You Think You Know Might Hurt You”.  Part 1 provided an overview of the program, how your benefit is calculated, and strategies for optimizing […]

    by » Social Security Part 2: Claiming Strategies for Couples and Divorced Spouses Topretirements — May 8, 2012

  14. […] More Resources Social Security COLA increase set for 2012 When to Start Receiving Retirement Benefits from the Social Security Administration is also extremely helpful. Another is the Center for Retirement Research’s “Social Security Claiming Guide“. Schwab has an excellent guide that explains some of the more complex strategies for claiming social security benefits. 2 Part Series: What You Think You Know About Social Security Might Hurt You […]

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  15. […] In our previous series on Social Security we stressed how waiting until full retirement age or until age 70 provides a very large benefit vs. […]

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  16. […] their spousal collection strategy should be. Solution: Do your homework. Start with our series on Social Security Collection Strategies. Then talk with your financial advisor, visit the helpful Social Security website, and map out a […]

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  17. Dear Members: We just updated the “References” section of this post to add a number of online Social Security calculators that will help you determine when and how you should claim your benefit.

    by Admin — July 25, 2012

  18. […] Retirement Unexpected Expenses in Retirement Social Security’s Retirement Benefit Estimator What You Think You Know About Social Security Might Hurt You Posted by Admin on October 2nd, 2012 Comments (1) Entries (RSS) and Comments […]

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  19. […] Cars for Aging Baby Boomers We had to mention this popular story about baby boomers and their cars. Seems car manufacturers are making cars a lot easier and safer to drive, just in time for us baby boomers and our declining skills. Cars can now park themselves, give alerts about cars in blind spots, following too close, etc. The marketing approach: For heaven’s sakes don’t say they are for seniors, they are just “easier” to drive. See “Drive These Cars (Before They Drive You)”. For further reading What You Think You Know About Social Security Might Hurt You […]

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  20. […] Reading 3 Part Series: What You Don’t Know About Social Security Could Hurt You Social Security’s Retirement Estimator Myths and Truths About Social […]

    by » 7 Social Security Myths That Can Cost You Serious Money Topretirements — January 23, 2013

  21. […] How Social Security calculates your benefit How work affects your benefits Social Security FAQ’s What You Don’t Know About Social Security Could Hurt You […]

    by » What is Your Social Security IQ? Topretirements — March 24, 2014

  22. […] further reading: The 2014 Social Security and Medicare Trustees Report What You Think You Know About Social Security Could Hurt You (A […]

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  23. […] further reading What You Don’t Know About Social Security Could Hurt You (3 part series) Comments? How is your experience with Social Security going. Use the Comments […]

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  24. […] For further reading Our Social Security Quiz: A Learning Experience for All What You Don’t Know About Social Security: A 3 Part Series […]

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  25. This article interests me because I am potentialy one of unluckly 30%. I have been delaying taking social security for the 8% annual increase. However, I do not want to pay the higher Medicare premiums and it is very hard to get answers from the government.


    by elaine — July 27, 2015

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