The Social Security program is one of the essential sources of income for most seniors in the United States. The Social Security Act was established in 1935 to provide benefits to retirees, and social Security's overall benefits package includes retirement benefits, disability benefits, survivors' benefits, Medicare, and family benefits.
Over the past 25 years of providing financial advice to thousands of seniors seeking guidance to help them sort through the available options, I have noticed that many seniors tend to start benefits at age 62 instead of waiting until Full Retirement Age. Some worried that the system was running out of money, and some lacked an understanding of Social Security payout rules. It is one of the most critical financial decisions retirees must make. Retirees will need 70% to 80% of their pre‑retirement earnings to maintain their pre‑retirement standard of living comfortably, given that Social Security benefits typically will replace about 40% of their earnings.
This article focuses on the facts and strategies of retirement benefits for working retirees, widows, divorced spousal benefits, same-sex marriages, common-law marriages, and social security subject to WEP. My readers will learn the different options and best strategies to maximize your Social Security benefits by the end of this article.
Before discussing your Social Security payment options, let us quickly review the following standard terms used when talking about social security:
Primary Insurance Amount (PIA). It is the benefit that a person would receive if they began receiving retirement benefits at their full retirement age. When estimating a beneficiary's benefit amount, the Social Security Administration uses the average earnings accumulated over their working lifetime. The highest 35 years of earned income is used to calculate a beneficiary's PIA.
Full Retirement Age (normal retirement age or FRA). The full retirement age is based upon the beneficiary's birth year and birth month. The FRA can be between 66 to 67 years, depending on the beneficiary's birth year. The Social Security benefit will be reduced for early retirement or increased for delayed retirement at the beneficiary's full retirement age. The age at which the beneficiary begins taking benefits determines how much they will receive in monthly payments.
Windfall Elimination Provision (WEP). The Windfall Elimination Provision (WEP) applies to individuals who receive a pension from a federal, state, or local government job without paying Social Security tax. It is also known as Government Pension Offset (GPO). GPO typically reduces spouses' or survivors' benefits by 2/3 of the pension amount.
Now, let us begin thinking about the below questions to create the best-suited strategy:
1. Will you still be working part-time or full-time in retirement?
It is possible to receive retirement or survivor benefits and continue working, but the beneficiary is subject to the Social Security earnings test. According to Social Security, "For people attaining FRA after 2022, the annual exempt amount in 2022 is $19,560. For people attaining FRA in 2022, the annual exempt amount is $51,960." Until an individual reaches their FRA, Social Security also deducts $1 in benefits for every $2 earned above the annual earnings exemption. The common apprehension is that the $1 benefits withheld while you continue to work will be lost forever, and that is false. Social Security will raise the beneficiary's monthly benefit after reaching their FRA to account for the month's withheld benefits before FRA. The beneficiary can also wait until full retirement age to claim Social Security benefits. When additional earnings result in a higher monthly benefit, the SSA will notify the beneficiary of the new benefit amount.
2. Do you have other income streams such as rentals, pensions, investments, or IRA withdrawals? If so, what is your tax situation?
If a beneficiary takes benefits but is still working or withdrawing money from their other taxable retirement accounts, the beneficiary needs to be aware of the "tax torpedo." The tax torpedo occurs when IRA withdrawals cause the taxation of Social Security benefits and push taxpayers into a higher tax rate. By holding off on taking Social Security benefits and living on IRA income in the early retirement years, the beneficiary could receive an immense benefit later, reducing the taxable income they will need from their IRA. Smaller IRA withdrawals could also increase the likelihood that Social Security benefits will remain tax-free.
Taxation Thresholds- Social Security income may be received tax-free if your combined income is below the stated thresholds. For 2022, the combined income thresholds for singles are $32,000, or $44,000 for couples filing jointly. The combined income is (Adjusted gross income + Nontaxable interest + ½ of their Social Security benefits). Once the combined income passes the threshold, up to 50 cents of every Social Security dollar becomes taxable. Still, the taxable portion of a beneficiary's Social Security benefits cannot exceed 85% of the total.
3. Does longevity run in the beneficiary's family?
The Social Security program first estimated that a 65‑year older person would live and spend about 13 years before the end of life. The current statistics show that one out of every four 65‑year‑olds today will live past age 90, and one out of 10 will live past age 95. For example, Mr. A begins taking his benefits at age 62, while Mr. B waits until age 66. Mr. A will receive 48 more reduced checks than Mr. B. The breakeven point to catch up with total dollars received with one another is approximately 12-13 years. So, Mr. A and Mr. B will receive the same full payment when they reach age 78/79. However, if Mr. B lives past age 80, it can be a huge difference. Mr. B will easily collect twice more cumulative amount than Mr. A because of the more significant benefit checks, plus adding COLA (Cost of living adjustments) to the bigger check benefits over the years.
4. Are you qualified to receive benefits on another person's record, such as a divorced spouse, deceased spouse, unconventional marriage, or others?
a. Divorced Spouses: Unlike a married spouse, a divorced spouse becomes entitled to a spouse's benefit when the former spouse reaches eligibility age, regardless of whether the former spouse has filed for benefits. To qualify, the marriage must last ten years, the ex-spouse must stay unmarried, and each ex-spouse must attain an age of 62 or older. Note that the benefit paid to a divorced spouse will not affect the benefit amount paid to other wives, husbands, or children who receive benefits on the same record. Also, there can be multiple ex-spouses claiming benefits on the same Social Security account. Even if a divorced beneficiary dies, the ex-spouse can get benefits just like the current widow or widower.
b. Surviving spouses: the surviving spouses can receive full benefits at FRA or reduced benefits as early as age 60. A surviving spouse can also collect benefits at age 50 if the worker was disabled and started disability SSI before or within seven years of their death. To qualify for this benefit, the surviving spouse must not remarry until age 60 or older, and the marriage must have lasted at least nine months (unless it was ruled as an accident under the exemptions). One strategy to maximize the survivors' benefits is to draw the survivor's benefit at 60 and subsequently switch to their retirement benefits later, such as at age 70. Another strategy is for the survivor to draw their own Social Security retirement benefit at age 62 and then switch to a survivor's benefit at full retirement age.
c. Spousal Benefit: Even if one spouse has never worked, they can still collect spousal benefits because of their family-earned income. Nevertheless, suppose an individual chooses to wait until they reach full retirement age to begin taking part of their spouse's benefits. In this case, the non-working spouse will be entitled to the maximum benefit, up to 50% of the retired spouse's benefit. Of course, if both spouses worked and paid into Social Security, they should choose either their own benefit or a percentage of their spouse's benefit, whichever is greater. Based on the full retirement age of 66, below is how much a spouse can collect:
· At age 62, the benefit amount would be 35% of the retired worker's full benefit (PIA);
· At age 63, it would be 37.5% PIA;
· At age 64, it would be 42% PIA;
· At age 65, it would be 46% PIA; and
· At age 66, the benefit amount would be 50% of the retired worker's full benefit.
d. Same-Sex Couples and Common-Law Marriages: Social Security offers same-sex couples the same benefits as heterosexual married couples. Some states recognize these marriages, and the Social Security Administration will request evidence of proof for couples living in those states for spouses to obtain benefits. For example, forms such as a Statement Regarding Marriage or Statement of Marital Relationship are available on the SSA's website. An individual will submit the forms and the evidence (mortgage/rent receipts, bank records, insurance policies, etc.) to confirm same-sex marriage or common‑law marriage.
e. Benefits Subject to WEP: For example, a person retired as a teacher with a pension and was not covered by Social Security, but the spouse worked and paid into Social Security. If the spouse who paid into Social Security passes away, the teacher can apply for Social Security survivor's benefits. The GPO will cause two-thirds of the pension to be deducted from the survivor's benefits. Therefore, the teacher will usually receive a small survival benefit. Nevertheless, if one spouse never worked and the other spouse who was subject to WEP (e.g., the teacher) passed away, the surviving spouse will receive a portion of workers' pension benefits but no SSI benefits.
In conclusion, I hope you now understand Social Security facts and strategies better. We looked at how working during retirement, tax situation, and longevity can affect your strategy of drawing social security. We also have covered the drawing strategies concerning working retirees, widows, divorced spousal benefits, same-sex marriages, common-law marriages, and benefits subject to WEP.
You can either visit your local Social Security office or go to the Social Security Administration website to check your benefits. You can also locate the Social Security Administration's retirement benefit Estimator tools through the link on my website.
By utilizing this tool, you will find out details of your earnings record, estimated Social Security and Medicare taxes you have paid, and your estimated monthly benefits in the three typical retirement ages (62, FRA, or 70). If you have any questions, feel free to contact us.
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