What about Social Security?
Social security, for the purposes of our discussion, is a monthly benefit paid to retirees, their spouses and/or dependent children from the Social Security trust fund that is funded every year by payroll taxes paid by all income earners. If you’ve worked for 10 years or more and earned a minimum of 40 work credits, you are vested in the Social Security system and are eligible to receive benefits as soon as age 62, whether you’re married, single, divorced, or a widow regardless of whether your spouse collects their own Social Security benefits or not.
The retirement benefit you will receive is based on a percentage of your average monthly wage using a 35 year base of earnings. If you don’t have 35 years of earnings, the Social Security system will substitute “zero” years to reach the 35 year base. If something where to happen to you and you become disabled before your full retirement age, you might qualify for Social Security disability benefits if you’ve worked and paid Social Security taxes in five of the ten years preceding the disability. If you also receive a pension from a job where you did not pay Social Security taxes like civil service jobs or positions in the education system, your Social Security benefit might be reduced.
The size of your basic monthly Social Security benefits will depend on a variety of factors. Social Security will refer to your monthly benefits as your primary insurance amount, or PIA. Your PIA can range from the number of years you’ve worked to your average earnings over your 35 highest wage earning years to when you plan on starting to collect your checks.
Generally, to qualify for your own Social Security benefits you will have needed to pay into the Social Security system for at least 10 years. If you have worked a shorter amount of time, you may still be able to collect some Social Security benefits through a spousal benefit, or if you are the surviving dependent parent (62 years of age or older) of an adult child entitled to benefits.
If you qualify you can even choose to start to claim your spousal benefit (generally 50% of the Social Security recipient’s full benefit) at your full retirement age, delaying your own benefit and building up delayed retirement credits in your PIA based on your work history, switching to your own benefit for a higher amount later. Who doesn’t want a raise at age 70?
Here is one example of how it can work:
Consider a male and female, married retirees. The husband worked for years as a W-2 employee and then started his own business; the wife has always been W-2 employed.
At the young age of 58 the husband passes away. The wife, now a widow, needed to wait (because of her financial situation) until 3 months before her full retirement age (currently 66) to sign-up for her spousal benefits from her husband’s earned Social Security.
Because of the added years she will have in the workforce and thus continued earn credits into the Social Security benefits system for herself, it made since for her to take the spousal benefit now and let her credits continue to grow as she continues to work and contribute into Social Security.
At age 70 she can now file with the Social Security office for her own benefit to start to receive her own retired worker benefit, which will have reached its maximum amount. You can only take one benefit at a time, so she will need to stop receiving the spousal benefit from her husband and switch to her own, giving her that raise mentioned above.
Couples can also use the “file and suspend” strategy to boost their benefits from Social Security. When you’ve reached full retirement age, you may claim your Social Security benefit and then immediately suspend payments. Your spouse is now able to claim their spousal benefit based on your Social Security credits. Since you are not drawing a personal benefit from the system your own future benefit will continue to increase.
*Example used as illustration only, not indicative of any particular investment, actual results will vary
Couples can also use the “file and suspend” strategy to boost their benefits from Social Security. When you’ve reach full retirement age, you may claim your Social Security benefit and then immediately suspend payments. Your spouse is now able to claim their spousal benefit based on your Social Security credits. Since you are not drawing a personal benefit from the system your own future benefit will continue to increase.
If you are divorced (as long as you were married for at least 10 years), you are still eligible to receive the spousal benefits from your ex’s Social Security. At age 62 you can start to claim benefits from Social Security. The amount you will be eligible to receive will be based on your ex’s earnings record. If you remarry, you will no longer be allowed to continue collecting benefits on your former spouses’ earnings unless your current marriage ends. You would then want to draw from the ex with the largest Social Security benefit.
Social Security Solvency
We all know the system is strained and the question is often asked if Social Security benefits will be there for you when you need them. With more Baby Boomers starting to draw money from the system, reports forecast the Social Security trust fund running out of money in 2037. Congress will likely take steps to keep the program solvent. Though there is the possibility of substantial changes to the Social Security benefit young people will receive at retirement. It is possible that today’s younger generations will have to be older to qualify for Social Security full retirement benefits while not receiving as much as today’s retirees.
Said simply, Social Security, while a valuable benefit for retirees does not provide the level of financial security that most American’s respect in their later years. It is a part of a comprehensive retirement plan, but not the whole. The key is to start to save for the kind of future you want to have in retirement and that begins with a plan on how to get there. If you would like to enjoy the time after your working life you must plan for it today while you are still earning and can affect meaningful change.
When To Take It
There is no one-size-fits-all answer to when you should take Social Security. The goal is to maximize the income you will receive from Social Security, but the answer for you will depend on your age, current income, marital status, spouse’s income, and the age disparity between you and your spouse. The best answer for you will be based on how much steady income is needed in your unique situation, and how much income from other sources you are currently earning.
Your answer will depend on whether you have pension or retirement plan incomes and are they maximally taxed? Your answer depends on your Medicare and Medicaid eligibility. Social Security affects the taxes you’ll pay on any investment income you may earn. This can start to get somewhat mottled and absurdly complicated, but we are dealing with a government run program after all.
With all the complexities to Social Security planning, there is no substitute for meeting with a trusted financial advisor. We suggest you meet with a financial advisor to discuss the best time for you to begin collecting your monthly Social Security checks. Nothing can keep you from getting your own Social Security, but making sure you are taking full advantage of the Social Security benefits you are entitled to takes an understanding of the system and careful planning. Social Security is best understood in the context of all of your other retirement and late-career planning.
Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered through Trilogy Capital, Inc., a Registered Investment Adviser. Trilogy Financial Services, Trilogy Capital, Inc. and NPC are separate and unrelated companies.