Mary Stokes, CLU, CDFA, CFP
Franklin Roosevelt signed Social Security into law in 1935 calling it the Cornerstone of Retirement. Did you know a Secretary by the name of Ida Mae Fuller was the first to receive a check. She worked three years under the system, paid $24.75 in taxes, lived to 100 and collected $22,888.92!
Eighty years later Social Security Retirement Benefits still play an important part in retirement income planning, especially for women who tend to live longer and have fewer guaranteed pension plans and may have taken time out of the workforce to have children.
If you have worked at least 40 qualifying quarters, earning at least $1220 per quarter in 2015, you will be eligible for a Social Security Retirement Benefit. Your retirement benefit will be based on the 35 highest years in your income history. If you work more than 35 years, the higher earnings will replace lower earning years. If you are married to, divorced from or a widow of someone that has qualified for benefits, you may also be eligible for a Retirement Benefit.
You can choose your own or 50% of your spouse’s benefit.For a full explanation go to www.ssa.gov/pubs/EN-05-10070.pdf.
Retirement benefits are guaranteed and cannot be outlived. You may permanently reduce your full benefit by 25% by taking it early or increase it by 32% by delaying to age 70. With very few guaranteed pension benefits today and a growing fear of the stock market, the benefits received from Social Security should not be ignored while planning your retirement assets.
Full Retirement Age (FRA) is defined by Social Security Administration. See www.ssa.gov/retire2/retirechart.htm for full details of your age. If you were born from 1943 to 1954 your FRA is 66 increasing to age 67 for birth years of 1960 or later.
You can take your retirement benefit as early as age 62, reducing your benefit by 25% for the rest of your life. Delaying your retirement from a FRA of 66 to age 70, would increase your benefit by 32% over your FRA benefit. Consider a monthly Full Retirement Benefit at age 66 of $1800.00. It would be reduced to $1350 if taken at age 62 but increased to $2376 if delayed to age 70. Using a woman’s life expectancy of 81, total benefits collected by starting at age 62
would be $243,000 vs $313.632 starting at age 70!
Widows must have been married at least one year and not remarried before age 60 to collect a Survivor Benefit You could be eligible for 100% of your spouse’s benefit at FRA or your own, which ever is larger. By taking the benefit before your FRA, you will reduce your benefit. There is a maximum of the benefit at your spouse’s FRA, with no delayed credits. That leads to the point of a long reaching effect for taking benefits early. If the higher earner decides to
start their benefits before Full Retirement Age and the spouse does not have a very high benefit, or any at all based on their work history, they will only receive 100% of the the reduced benefit amount after their spouse dies.
Here is an example of having taken benefits early versus waiting for Full Retirement Age:
John’s FRA monthly benefit at age 66 is $2200. At age 62 he can collect a reduced benefit of 75% or $1650 per month. Assume John starts his reduced benefit at age 62 and dies at age 75. Jane had a $600 FRA benefit at age 66 on her own earnings, $450 at age 62. Her age 62 benefit would increase to $577 as 35% of John’s $1650. She would collect $577 per month until John’s death at which time she would increase to his benefit of $1650. If Jane lives to Age 82, total benefits collected by John and Jane together are $486,012.
If John and Jane both wait to age 66 to collect, John’s benefit is $2200. Jane now has her own $600 plus $500 for a monthly total of $1100 (50% of John’s) as a Spousal Benefit. Now if John dies at age 75 and Jane at 82, total benefits collected are $541,200. That is an additional $55,000 that mostly Jane would have collected.
Taxes and Social Security
Many people do not realize that Social Security Retirement benefits can be taxable. If you are single with an income more than $34,000 or married with income more than $44,000 up to 85% of your Social Security Retirement Benefit might be added to your income for calculation of your Federal tax due. You should consult your own tax professional to see how benefits would affect your personal tax calculation.
As you can see, there are many variables to take into consideration when choosing when to start your Social Security Retirement Benefit. Start by building your own profile at SocialSecurity.gov. Consult with a CERTIFIED FINANCIAL PLANNER™ professional to help you understand your own personal financial situation.
Mary Stokes, CLU, CDFA™, CFP® has been working as a financial professional for 32 years. She works with individuals through life transitions such as retirement, divorce and widowhood.