Social Security is one of the most critical components for retirement planning. The payments from Social Security are cashflows to supplement living expenses in retirement. Franklin Delano Roosevelt signed the Social Security Act on August 14th, 1935, as part of the New Deal to assist with poverty among the elderly during the Great Depression. Social Security provides guaranteed lifetime income benefits that are adjusted annually to account for inflation. The program has been expanded over the years to include widows, minor children, and people with disabilities.
According to the Social Security Administration (SSA), in 2023 the program will pay out over one Trillion dollars, with almost 67 Million Americans receiving benefits each month. What was originally designed as a safety net for retirees has now become one of the most important decisions that retirees make on choosing when and how to claim Social Security benefits. A bigger question lingers for Social Security, will it still be there when I retire?
Social Security Basics
You pay into Social Security with payroll deductions at 6.2% of earnings for those that are W-2 employees up to $160,200 in 2023. Your employer also contributes 6.2% into the Old Age, Survivors, and Disability Insurance (OASDI) trust funds. Those that are self-employed must kick in the full 12.4% based on net earnings. Payroll deductions are pooled and then used to pay out existing Social Security beneficiaries with anything left over put into the Social Security trust fund.
To qualify for Social Security retirement benefits, you need 40 “credits,” about 10 years of work. In 2023, you must earn $1,640 in wages or self-employment income to qualify for one Social Security work credit. You would need at least $6,560 in wages to get the maximum four credits for the year. Unfortunately, if you don’t meet those minimums, you will have Social Security money withheld and not get it back.
Social Security uses your highest 35 years of earnings to calculate your primary insurance amount. Those 35 years are indexed to a national average wage index. If you have fewer than 35 years, those years will be treated as no earnings with a zero. As you add higher earning years to your 35-year history, the lower or no earning years will roll off your earnings record. You can increase your Social Security benefit by continuing to work even part-time during retirement. The primary insurance amount (PIA) is how much you would receive at your full retirement age. Full retirement ages have increased slightly over the years.
|Year of Birth||Full Retirement Age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
You can find your current Social Security estimated benefits and earnings history at My Social Security: https://www.ssa.gov/myaccount. Note the estimated benefits assume that you continue earning at the same level until you start to collect, so the estimates could be overstated.
When to File
Patience is Rewarded – One of the most important questions for retirees is at what age should you file for Social Security benefits. If you file at your full retirement age, you will receive your primary insurance amount as your monthly payment. If you postpone starting Social Security, you are credited 0.66% for each month you delay for a total of 8% a year, up to age 70. There is no benefit for waiting beyond age 70 to start collecting.
For example, if the primary insurance amount (PIA) is $3,000 for someone born in 1961 whose full retirement age is 67 and they wait until age 70 to start drawing benefits, they will have increased their benefit 24% by delaying, for a payment of $3,720 for the rest of their life, plus any cost-of-living (COLA) increases. It is a simple interest of 8% of the PIA, with no compounding. This amount would also be their spouse’s survivor benefit, which will be covered in more detail later.
It Cuts Both Ways – If you take Social Security before your full retirement age, your monthly payment is reduced permanently. The benefit is reduced by 0.56% for each month before full retirement age up to 36 months. If you take it earlier than 36 months, the benefit is further reduced 0.42% per month. For someone whose full retirement age is 67, if they choose to take Social Security at the earliest age 62, their benefit would be reduced off their primary insurance amount by about 30% for the rest of their lives.
Knowing the reward for delaying filing for Social Security and the penalty for early filing are helpful in the decision-making process. People should also factor in their current health, family history, lifestyle, spouse’s benefits, and overall financial picture. The Bedell Frazier Financial Planning Team can run a Social Security analysis in our financial planning software to help quantify how different timings can impact a retirement plan, as well as examine the breakeven point for filing at different ages.
Another important timing factor to consider is if you want to keep working while receiving Social Security payments. You can work and receive Social Security benefits but will have reduced benefits if you start collecting before your full retirement age. In 2023 your benefits will be reduced by $1 for every $2 earned above $21,240. In the year that you reach full retirement age, your benefits are reduced by $1 for every $3 above $56,520. Once you reach full retirement age, this earnings penalty goes away no matter your income. Your benefit is recalculated at that point to give your credit for the months that were reduced.
Married Couple Strategies
One strategy for married couples to consider is to delay the highest earning spouse from filing for as long as possible, hopefully the maximum benefit at age 70. This gives the maximum retirement benefit during their lifetimes but also increases the survivor benefit when one spouse passes away. When a spouse passes away, their survivor benefit is worth 100% of what they were receiving or would have been eligible to receive at their full retirement age.
Example: Hannah waits until age 70 to start taking her Social Security payments. Her primary insurance amount (PIA) is $3,500 at full retirement age 67. By delaying, it grows at 8% a year until 70 final total of $4,340. Her husband Robert starts his Social Security at full retirement age 67 with a payment of $2,100. If Hannah were to pass away first, Robert could collect Hannah’s increased payment of $4,340 in lieu of his $2,100.
What if Robert had taken his Social Security at the earliest possible time, age 62? Maybe the couple needed a small amount of cash flow early in retirement, and they were trying to avoid pulling from retirement accounts to avoid taxes. Robert’s payment of $2,100 would be cut by around 30% at age 62 to $1,470. That is a permanent reduction. He will still qualify for Hannah’s full $4,340 survivor benefit if he is at least full retirement age of 67 when he takes it.
If one spouse does not have enough credits to qualify or a low primary insurance amount (PIA) they can draw a spousal benefit that is worth up to 50% of the other spouse’s PIA. The higher-earning spouse must be collecting Social Security benefits for spousal benefits to be available. If spousal benefits are taken before full retirement age, they are reduced. If you take your own benefit early and add the spousal benefit when your spouse starts to collect, your benefits will still be reduced.
What if I Am Divorced?
You can receive Social Security spousal benefits from your ex-spouse as long as you were married for at least 10 years, and you have not remarried. Similar to regular spousal benefits, you can receive up to 50% of an ex-spouse’s benefit at your full retirement age, less if you claim early. One major difference from regular spousal benefits is that you can claim benefits from your ex-spouse even if they have yet to apply for benefits. If you have been married more than once, you can pick which ex-spouse’s benefits you want to claim.
You can claim survivor benefits of an ex-spouse once they have passed away. If at full retirement age, it will be worth 100% of what the ex-spouse received. If you remarry before age 60 you lose the survivor benefit, if you wait until age 60 or later to tie the knot, you are still eligible for the survivor benefit.
Cost of Living Adjustment
A very important feature of Social Security is the annual Cost of Living Adjustment (COLA) that helps your payments keep up with inflation. Based on changes in a federal consumer price index, the size of the COLA depends on broad inflation levels each year. The 2023 Cost of Living Adjustment was the largest since 1981, coming in at 8.7%. You don’t have to be receiving Social Security to get the COLA increase; everyone 62 (the youngest age to start Social Security) or older receives the annual bump. If you are not currently collecting, the COLA is added to your future benefit.
What if You Change Your Mind?
As discussed, the right age to begin to draw your Social Security benefits is an important decision. What if you regret your choice? You can withdraw your application once per lifetime; you get one mulligan. You must repay any benefits received and the withdrawal must come within the first 12 months of the initial filing for benefits.
There is one more way to impact your Social Security benefit if you change your mind. Once you reach full retirement age, you can suspend, but not repay, your retirement benefit. While pausing your benefits, you will earn delayed retirement credits each month your Social Security is on hold up until age 70.
Will Social Security Be There for Me?
The federal government announced last month that due to the economic slowdown, high persistent inflation, and weaker productivity growth that, Social Security won’t have enough money to pay all beneficiaries the amount they are due in 2034. This is one year earlier than previous estimates. At that point, if Congress doesn’t take action, beneficiaries would receive only about 80% of their benefits.
The Wall Street Journal reported some analysis from the Social Security Trustee’s report that to keep Social Security solvent for the next 75 years, payroll taxes would have to be increased from the current 12.4% payroll deduction rate to 15.84% split between employee and employer. The other option was to cut benefits immediately by 21.3% to put the program on better footing without a tax increase.
Bedell Frazier will continue to monitor all news out of our nation’s capital that impacts you, including Social Security. Our Washington insiders are closely monitoring both houses of Congress as well as any campaign proposals that arise during the 2024 Presidential elections.
Secure Your Financial Goals with Bedell Frazier
The timing of when to take Social Security is a cornerstone of the financial planning process. One must balance current cash flow needs with the enhanced benefit for delaying starting that impacts your payment for the rest of your life and the survivor benefit. The Bedell Frazier Financial Planning Team can model multiple Social Security scenarios in our planning software. This also opens up conversations about other financial planning opportunities, including Roth Conversions and Qualified Charitable Distributions, that we can model for you to create the best possible retirement for you and your loved ones. Contact us today to create your retirement plan or, if you already have one, to update it.