Retirement income planning is often thought of as a three-legged stool. One leg is your personal investments (IRA, traditional brokerage accounts, precious metals, etc.). The second leg constitutes retirement benefits accumulated through your employer, such as a pension or a defined-contribution plan (e.g., a 401k or 403b).
The third leg comprises your Social Security benefits. Some retirees overlook these benefits and assume that they constitute a small portion of their retirement income. Others believe that there’s relatively little that can be done to increase their lifetime benefits. The reality is that Social Security is an asset that could be potentially worth more than $1.75 million over the course of you and your partner’s lifetimes.
Furthermore, the Social Security Administration estimates 74% of beneficiaries are receiving permanently reduced benefits. Since you have a limited period of time to reverse your claiming decision, it’s critical you evaluate your options before you file to help ensure you’re not leaving money on the table.
Fully understanding the ins and outs of Social Security is difficult, and it’s understandable if you have questions when determining how and when to claim your benefits. It’s these complexities that can cause people to make a suboptimal decision when filing for Social Security benefits.
To help clear up any confusion and to limit the chances you’ll leave any of your hard-earned benefits on the table, we’ve compiled a comprehensive Social Security overview that contains 9 of the most commonly asked Social Security questions that you need to know before you file.
Full Retirement Age (FRA) is one of the key fundamentals to help you understand how and when to claim Social Security benefits. FRA is the age at which you will receive 100% of your benefits.
The year you were born will dictate the year you reach FRA. If you were born from 1943-1954, your FRA is 66. If you were born in 1960 or later, your FRA is age 67. For those born from 1955-1959, your FRA will be 66 and some number of months.
Watch Bruce Helmer address this question on WCCO-TV's "Mid-Morning":
No matter what your FRA is, there’s an 8-year window between ages 62-70 in which you can begin receiving benefits. Claiming at age 62 will leave you with a smaller monthly benefit that you’ll receive over a longer period of time. If we assume an FRA age of 66, you’ll receive 75% of your FRA benefits if you claim benefits at age 62. If you have an FRA of 67, your benefits will be permanently reduced by 30%.
Delaying receiving your benefits beyond FRA will increase your FRA benefits by 8% for each year you wait. For those with an FRA of 66, you’ll receive 132% of your FRA benefits at age 70 while those with an FRA of 67 will have a maximum benefit of 124% their FRA amount.
The decision to claim early versus delaying benefits boils down to a tradeoff between choosing a lower monthly benefit that you receive over a longer period of time versus choosing a larger monthly benefit for fewer years.
Know Your “Break-Even” Age
One of the factors to consider when deciding at what age to begin receiving Social Security benefits is your “break-even” age. This is the age at which you come out ahead if you opt to delay receiving your benefits. Your break-even age will shift depending on the amount of your FRA benefit and the age at which you begin receiving Social Security benefits.
If you’re relatively healthy and have a history of longevity in your family, there’s a greater likelihood that you’ll reach your break-even age.
Life expectancy and your belief that you’ll reach your break-even age is just one factor to keep in mind when deciding whether to delay receiving benefits. Other items to consider include the following:
Reasons to draw benefits before FRA
Reasons to wait until FRA (or later) to draw benefits
|You need the income from Social Security immediately.||You want to have a larger monthly benefit check.|
|You want your spouse or eligible children to be able to draw benefits derived from your work history.||You’re still working, and you earn more than the earnings limit.|
|You are the lower-earning spouse and want your partner to be able to delay receiving his/her benefits.||You have other income streams and don’t need the cash flow from Social Security.|
|You would prefer to invest your Social Security benefits.||You have other income streams and don’t need the cash flow from Social Security.|
|You want to preserve your other assets so you can use them later in retirement.|
Listen to Peg Webb & Rhonda Whitenack address this question on the “Your Money” radio show:
There is a common misconception that you must retire before you can begin receiving Social Security benefits. That isn’t true. In fact, if you are over FRA, your benefits won’t be affected if you are working, no matter how much you earn.
If you are younger than FRA and are receiving Social Security, there’s a chance a portion of your benefits may be reduced. Prior to reaching Social Security, earnings over $15,720 ($16,920 in 2017) will result in a $1 reduction in benefits for every $2 you earn over that limit.
Example: Tom is 63 and is currently receiving $18,000 annually in Social Security benefits. He still works part-time as a consultant and expects to earn $20,000 from his job ($4,280 over the earnings limit). Because he is younger than his FRA of 66, he’ll be subject to having a portion of his benefits reduced. In this instance, his benefits would be reduced by $2,140.
The rules change slightly during the year you reach FRA. You can earn up to $41,880 ($44,880 in 2017) before your earnings will be reduced. Exceeding this limit will result in a $1 reduction in benefits for every $3 over the earnings limit. It’s important to note that this earnings limit only applies for the months prior to the date at which you reach FRA, meaning once you’ve reached FRA, you can earn as much money as you want for the rest of the year without a reduction in benefits.
Example: Mary will reach her FRA on November 1 and is currently receiving Social Security. She earns $8,000 a month in income, meaning she’ll earn $80,000 prior to reaching FRA. Since she is $38,120 over the earnings limit when she reaches FRA, her benefits will be reduced by $12,707.
Example: Scott will reach his FRA on July 17 and is currently receiving Social Security, meaning he can earn $41,880 from January-June without reduced benefits. He currently earns $6,500 in monthly income, meaning he’ll have $39,000 income, which is below the $41,880 earnings cap. Scott won’t see any of his benefits reduced because of his income.
Even if you begin claiming benefits prior to FRA, once you reach your FRA, your benefits will not be reduced if you work, regardless of how much you earn.
|Earnings Limit Prior to FRA||$15,720||$16,920|
|Earnings Limit in Year Turning FRA||$41,880||$44,880|
Listen to Bruce Helmer, Peg Webb & Ryan McKeown address this question on the “Your Money” radio show:
Many people believe that their Social Security benefits aren’t taxable, but the reality is that most beneficiaries do pay tax on some portion of their benefits. The Social Security Administration estimates that 52% of beneficiaries paid income tax on their benefits in 2015, and 56% of all beneficiary families will owe income tax on their benefits from 2015-2050.
The percentage of your benefits that will be taxed is based on your “provisional income”—not your adjusted gross income. Your provisional income is the sum of the following:
- Job earnings
- Investment returns and dividends
- Interest from tax-exempt bonds
- 50% of your Social Security benefits
The threshold to have a percentage of your benefits included in your taxable income is relatively low. If your income exceeds $25,000 ($32,000 if married filing jointly), up to 50% of your benefits may be taxable. If your provisional income is over $34,000 ($44,000), up to 85% of your benefits may be taxable. This doesn’t mean that your benefits will be taxed at a 50% or 85% tax rate—it’s the maximum percentage of your benefits that will be taxed. Social Security benefits that are taxable are taxed at your marginal income tax rate.
Example: Francine and Allen have combined Social Security benefits of $10,000. Including the $5,000 from Social Security, they have a provisional income of $40,000, putting them $8,000 over the $32,000 limit. This means that $4,000 (50% of $8,000) of their benefits will be included in their taxable income.
Example: Mark receives $15,000 in Social Security benefits and his provisional income is $60,000 (including the $7,500 from Social Security). This means Mark is $26,000 over the 85% earnings limit of $34,000. Mark would have $12,750 ($85% of $15,000) of his Social Security benefits included in his taxable income.
|Filing Status||Provisional Income||Percentage of Benefit Taxed|
|$25,-000 - $34,000||50%|
|Married Filing Jointly||< $32,000||0%|
|32,000 - $44,000||50%|
It’s important to note that these income levels are not currently indexed to inflation. This means that, over time, an increasingly greater number of people will see a percentage of their benefits be included in their taxable income or will see a greater percentage of their benefits being taxable.
In an effort to keep up with inflation and to protect retirees’ spending power, Social Security benefits usually increase each year as living expenses increase. However, these cost-of-living adjustments (COLAs) are not guaranteed; those receiving Social Security benefits saw a 0% COLA in 2016, meaning their benefits remained flat.
Watch Bruce Helmer address this question on WCCO-TV’s “Mid-Morning”:
When the Social Security Administration calculates the annual COLA figure, they use the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). CPI-W looks at a basket of goods and services purchased for consumption, including:
- Food and beverages
- Medical care
- Education and communication
- Other goods and services (e.g., tobacco, personal services)
For retirees, CPI-W is unlikely to be an accurate representation of how your spending habits change on a year-to-year basis. The reason for this is that CPI-W does a poor job reflecting how important health care costs are for retirees. So even though you’ve likely seen significant increases in your medical expenses in recent years, because of the low-inflation environment that many other sectors of the economy are experiencing, your expenses may be increasing at a much higher rate than what the CPI-W represents.
While you’ll likely see a COLA most years once you’re enrolled in Social Security, it’s important to remember that there’s always the potential for a year with an abnormally low COLA. To better protect yourself from a year with a low—or zero—COLA, consider reducing your reliance on Social Security or saving in a health savings account if you’re eligible.
Listen to Peg Webb & Rhonda Whitenack address this question on the “Your Money” radio show:
If you’re married, you can either receive benefits off of your own work record or your spouse’s work record. You can generally begin receiving benefits off of your spouse’s record once you reach age 62. You typically must be married for one year before you’ll be eligible to receive spousal benefits.
These spousal benefits can be worth up to 50% of your spouse’s benefit. If you begin receiving spousal benefits prior to your FRA, you will receive permanently reduced benefits.
Example: Tim began receiving monthly Social Security benefits of $1,500 at his FRA of 66. His wife, Lisa, was a stay-at-home mom and does not qualify for Social Security based on her own work record. If she waits until her FRA, she will receive $750 in monthly spousal benefits based on Tim’s work record. If Lisa claimed the spousal benefit at 62, she would only receive 35% of Tim’s FRA benefit, leaving her with a monthly spousal benefit of $525.
Listen to Bruce Helmer, Peg Webb & Rhonda Whitenack address this question on the “Your Money” radio show:
In order to be eligible to receive benefits based on your ex-spouse’s work history, you generally have to meet the following three criteria:
- You were married to your ex-spouse for at least 10 years.
- You must be at least age 62 and unmarried.
- Your ex-spouse must currently be eligible to receive Social Security benefits.
Keep in mind that your ex-spouse doesn’t have to currently be receiving Social Security benefits; they only have to be eligible to receive benefits.
Example: Bruce and Lauren, ages 63, were married for 11 years before getting a divorce. Bruce is still working and wants to delay receiving Social Security until he reaches his FRA of 66. Lauren wants to retire and begin receiving Social Security benefits immediately. Since Lauren was married to Bruce for more than 10 years and hasn’t remarried, she can receive a spousal benefit off of Bruce’s record, even though he hasn’t begun receiving Social Security benefits.
Claiming off of your ex-spouse’s record will have no effect on the benefits your ex-spouse will receive, and your ex-spouse is not notified if you choose to claim on their record. If your ex-spouse has remarried, your ex-spouse’s new partner will also be able to apply for a spousal benefit off of their work history.
Example: William and Martha, ages 66, divorced after 16 years of marriage. If they claimed Social Security today, William would be eligible for a $2,300 monthly benefit and Martha would be eligible for a $1,100 monthly benefit. Because they were married for longer than 10 years and Martha hasn’t remarried, she can receive a larger spousal benefit of $1,150 off of William’s work history.
Example: Now let’s assume that William remarried. His new spouse, Angela, age 66, and his former spouse Martha would both be eligible to receive $1,150 spousal benefit off of William’s work history.
If you did remarry, that marriage must have ended by annulment, divorce or death before being able to claim off of your ex-spouse’s record.
Listen to Peg Webb & Rhonda Whitenack address this question on the “Your Money” radio show:
A widowed spouse may be eligible for survivor benefits off of a deceased spouse’s record if they were married for at least nine months (10 years if you were divorced). These benefits can be claimed as early as age 60, although your benefits will be permanently reduced.
If you remarry prior to age 60, you will no longer be eligible to receive benefits off of your deceased spouse’s record unless that remarriage ends in annulment, divorce or death. If you remarry after you turn 60, your survivor benefit is not affected.
Survivor benefits may be drawn as soon as you reach age 60, although those benefits will be permanently reduced. In order to the highest possible survivor benefit, you must wait until you reach FRA. If you file for survivor benefits between age 60 and your FRA, you will receive between 71.5-99% of the amount you would have received if you had waited until reaching FRA.
If the deceased spouse was receiving Social Security benefits at death, the maximum amount you may receive in survivor benefits is the amount the deceased spouse received in benefits.
Example: Paul, age 68, was receiving $1,200 in monthly Social Security benefits at the time of his death. His spouse, Cathy, is currently 65. She will receive $1,200 in survivor benefits if she waits until reaching FRA before claiming these benefits. If she files for survivor benefits prior to reaching FRA, she will receive reduced benefits based on the number months remaining before her FRA date.
If the deceased spouse hadn’t begun receiving Social Security benefits at the time of death, the surviving spouse may be eligible for 100% of the deceased spouse’s FRA benefits. Even if the deceased spouse died prior to reaching FRA, the surviving spouse will still be eligible to receive the deceased spouse’s FRA benefits, so long as the surviving spouse waits until they reach their own FRA to file for survivor benefits.
Example: Walter died without filing for Social Security at age 63 and would have been eligible for a $1,000 monthly benefit at his FRA of 66. His spouse, Jessie, is currently two years away from FRA. Jessie can receive $1,000 in monthly survivor benefits by waiting until FRA to file for benefits.
Example: Instead of waiting until FRA, Jessie instead opts to begin claiming survivor benefits early. In this instance, Jessie will receive 71.5-99% of Walter’s FRA benefits depending on the number of months Jessie has until reaching FRA.
If the deceased spouse was older than FRA at the time of death and hadn’t begun receiving benefits, the surviving spouse would be eligible to receive the benefits the deceased spouse would have been eligible for at the time of death. In other words, if the deceased spouse dies at 68, the surviving spouse may be eligible for 116% (assuming the deceased had a FRA of 66) of the deceased spouse’s FRA benefits, so long as the surviving spouse waits until reaching FRA before filing for benefits.
No Social Security overview would be complete discussing how to “undo” your decision to claim. If you claim benefits and regret that decision, you do have the option to reverse that decision, although you have a limited window of time in which you’ll be allowed to do so.
In order to withdraw your application, you must fill out Social Security Form SSA-521 and state why you’re choosing to withdraw your application. This form must be submitted within 12 months of the date when you filed for benefits, and you must repay all the benefits you and your family received based on your application. This means spousal benefits, benefits your children received and your own personal benefits must all be returned to the Social Security Administration.
If you do file to reverse your Social Security decision, you will have 60 days to cancel an approved withdrawal of benefits. Additionally, you are allowed only one reversal during your lifetime.
While this is a collection of nine of the most commonly asked questions about Social Security, it’s likely there are still other questions that pertain to your specific situation. Working with your financial advisor can help you identify the best time and method for claiming benefits to help potentially maximize the lifetime benefits you and your spouse will receive.
 Hypothetical estimate of lifetime benefits assumes a high earner receives the maximum 2016 FRA of $2,787. Low earner FRA is assumed to be $0 and receives spousal and survivor benefits. Life expectancy of high earner is 85; low earner is 92. A 2% cost of living adjustment (COLA) included in the calculation.
 Patrich J. Purcell. “Income Taxes on Social Security Benefits.” December 2015.
Wealth Enhancement Group is a Greater Minneapolis-based independent wealth management firm offering comprehensive and customized financial planning and investment management services. Established in 1997, Wealth Enhancement Group uses a team approach with a focus on simplifying their clients’ financial lives and has offices nationwide.