How to Understand Social Security Benefits
We will all hopefully have some sort of Social Security benefit at some point. Understanding how those benefits work and how Social Security works in general is a pivotal component of proper retirement planning.
There are three questions that I’m frequently asked regarding Social Security benefits.
- How old do I need to be to claim Social Security?
- How do spousal benefits work?
- When should I start taking my benefits?
The answers can vary depending on your situation. Here is what you need to know.
Age
When you claim Social Security Benefits, your age will impact what you earn. Claiming benefits early will reduce your benefit amount. The older you are when you claim your benefits, the higher your earnings could potentially be.
When I meet with people, they often tell me they want to claim Social Security benefits as early as possible to get the most from the system. The fundamental issue with claiming early is that it can substantially reduce your benefits, which is the opposite of what they want to achieve.
The Big Picture
When you claim can either reduce or increase your Social Security benefit. Let’s take a look at two examples to help you see the bigger picture.
Claiming Early
Typically, the earliest you can claim Social Security benefits is 62. Yet most people’s full retirement age is 67. Claiming five years early at 62 means losing just around 7 ½ % per year of income.
Claiming five years early means almost 35 to 40% less in benefits on a monthly basis than you would receive at age 67. So, when you consider the long-term effect, claiming Social Security at 62 can significantly impact your overall lifetime benefits.
If you plan to claim Social Security benefits earlier than your full retirement age, consider the amount of reduction carefully. So what happens if you claim later than full retirement age?
Claiming Later
The maximum age to claim Social Security benefits is 70. When you delay your claim until 70, Social Security will increase your benefit by the same factor. They use a formula for calculating this, which again comes out to roughly 7 ½%.
Waiting until age 70 means an additional 21% to 23% increase in your Social Security benefit annually. This increase is good for you and can potentially impact your spouse’s benefits as well.
Spousal Benefits
People often need clarification about how spousal benefits work regarding Social Security benefits. Your spouse may be able to claim Social Security based on your benefits, which does not impact your benefits at all. Some possible scenarios are
- Stay-at-home spouses
- Having low or non-earning years
- Earning less than your spouse
If you both earn similar amounts, you will likely take your own Social Security. This is because the spousal benefit is generally 50% or half of the primary earner’s Social Security benefits.
Example
If one spouse worked their entire career and one spouse was a stay-at-home spouse the entire entire time, it’s pretty simple. The primary earner will receive their benefit, and the spouse will receive 50% of the primary earner’s benefits, for a collective total of 150% of the primary earner’s benefit.
For example, Susie has been a homemaker and stay-at-home parent her entire life. Her husband, Dave, worked for Disney in Imagineering, making $125,000 per year. For easy numbers sake, let’s say his Social Security benefits would be around $2500 per month.
That would mean Susie would be eligible for roughly $1300 monthly for a collective of $3,900 a month coming from Social Security. That’s not an insignificant amount of money.
That’s not an insignificant amount of money which is why It’s essential to understand the spousal benefits as you’re doing your retirement planning. Some people question whether Social Security will be there when they retire, but that’s a different conversation for a different time.
Timing
The question of when to claim Social Security can be tough to answer because we don’t know for sure how long one might live. Statistics show that the older you are, the longer you will live. It’s crucial to consider your potential longevity to help guide us in making the decision.
If you have specific health issues or your family does not have a long history of longevity, that will probably impact whether you should claim earlier or not. It’s about looking at the total benefit over your lifetime rather than just the monthly benefits and taking it as soon as possible.
I like to plan for longevity with my clients. If you end up living longer, it matters that you still have income. Understanding the impact of longevity helps us decide when the right time is to claim Social Security benefits.
You need to understand the trade-offs and what you’re potentially giving up if you start early. It’s safe to say that by starting to claim early, you’re giving up a good chunk of money over your lifetime if you end up living into your 80s or 90s. However, if you pass away in your 70s, claiming early would have been the best way to go.
Of course, nobody knows the hour that we will pass away. Deciding when to claim Social Security benefits has a lot to do with your
- Overall health
- Potential for longevity
- Income needs
Roughly 1 in 4 people are forced to retire for health reasons. They may not have been financially ready, so they need that Social Security income. It’s essential to understand your current situation and whether you have other income sources to be able to retire and live in the manner you would like.
If not, you may need Social Security income to start right away. In that case, you just have to say, “It is what it is,” and take the income now.
To Summarize
The questions about Social Security benefits are not always easy to answer because every situation is different. Understanding the basics of Social Security can help you make decisions based on the potential outcomes. A good foundation involves thinking about
- The age you claim
- Spousal benefits
- The timing of your claim
Retirement is a time that should be enjoyed, not fraught with stress over paying the bills. Talk with your financial planner to help you make the best decisions for your desired retirement.
Important Information
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