Social Security is the cornerstone of retirement security for most Americans. Regardless of your current age, be aware of these key features:
1. You may claim your benefits anytime between ages 62 and 70. Your claiming date is not tied to your retirement date. Most people claim in their early 60s, but most people shouldn’t. In many situations, you should wait until age 70 to maximize your benefit as each year you delay claiming, your benefit increases 5 to 8%. And if you are married, it almost certainly makes sense for the higher earning spouse to do so.
2. Benefits are based on your 35 highest earning years. If you work fewer years, your benefit is reduced proportionally. You must work a minimum of ten years to qualify for any benefit on your own work record.
3. Benefits are adjusted for inflation each year. In recent years, these cost of living adjustments have been small, but over a full retirement, the compounding effects can make a big difference.
4. Divorced spouses receive the higher of their own benefits or one-half of their ex-spouse’s. This does not affect the ex-spouse’s benefit. You must have been married for a minimum of ten years. If you have more than one ex-spouse with whom you had a ten-plus year marriage, you can claim from the one with the higher benefits. However, you cannot claim ex-spouse benefits if you’re currently married to someone else.
5. Widows receive the higher of their own benefit or their deceased spouse’s. When a spouse dies, the survivor keeps the higher of the two benefits.
6. Your income is taxed up to $128,000 (in 2018). Above that amount, you do not pay additional Social Security tax. You and your employer each contribute 6.2%. If you’re wondering, you and your employer each contribute another 1.45% for Medicare tax (with no income cap).
7. Self-employed individuals pay double the tax. Yes, you pay both portions of the tax — 15.3% for Social Security and Medicare combined. For the self-employed, this payroll tax may be higher than your income taxes.
8. While the Social Security tax is regressive, the benefit structure is progressive. Social Security benefits replace a higher percentage of income for lower income earners. A low-income earner may be able to replace ~60% of his pre-retirement income with Social Security benefits while a high-income earner may replace 30% or less of her income.
9. Benefits are subject to federal income tax, based on your “combined income.” If this amount is above $25,000 for singles and $32,000 for couples, you pay federal income tax on 85% of your benefit. Somewhat absurdly, these thresholds are not indexed for inflation so in years to come, this provision will affect nearly everyone.
10. If you or your spouse receives a pension from an employer who is not in the Social Security system (e.g., some state governments), then any Social Security benefit you receive may be reduced. This is due to either the Windfall Elimination Provision (yourself) or the Government Pension Offset (your spouse). In short, your Social Security benefit is recalculated to a smaller amount to accommodate the “windfall” you received from having the other pension.
11. Most importantly, it is the world’s best annuity. It has a federal guarantee, is inflation-indexed, and offers an automatic survivor benefit. Nothing beats that combination.
Social Security is ideal longevity insurance and you should do everything you can to maximize your benefit. The two best ways are to work 35+ years and wait until age 70 to claim your benefit.
Questions about Social Security? Are you wavering about waiting until age 70 to claim? Get in touch.