Social Security “Need to Knows"

By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu

Social Security is the cornerstone of retirement income for most working Americans, including service members and their spouses. It is a valuable base to build upon, along with a pension, tax-deferred employer savings plan (e.g., TSP), IRAs, and other savings, and acts like an annuity because benefits are payable for life.

It is important to understand how Social Security works, how future benefits are calculated, and how to claim benefits in later life. Below are 10 key “need to knows” for workers and their financial advisors:

1. Delayed Retirement Credits- The increase in Social Security benefits by a certain percentage (depending upon date of birth) if you delay your retirement beyond full retirement age. The benefit increase ceases when you reach age 70, even if you continue to delay taking benefits. For workers born in 1943 or later, the annual rate of benefit increase is 8% or two-thirds of 1% per month.
2. Full Retirement Age (FRA)- The age at which workers receive full (unreduced) benefits. FRA has been gradually increasing and is currently age 66 for workers born through 1954, 66 plus at least a two-month increment (e.g., 2, 4, 6, 8, and 10 months) for workers born from 1955-1959, and age 67 for workers born in 1960 and later.
3. Primary Insurance Amount (PIA)- The monthly benefit payment at FRA calculated by converting previous earnings into today’s dollars (35 years with highest indexed earnings), dividing indexed earnings by 420 to get the Average Indexed Monthly Earnings (AIME), and applying the Social Security benefit formula.
4. Reduced (Early) Retirement Benefit- The reduced benefit that someone receives by claiming Social Security before full retirement age (FRA). Workers with a FRA of 67 receive 70% of benefits by claiming at age 62 and 86.7% of benefits if claiming at age 65.
5. Social Security Benefit Estimate- A written report that provides a projection of Social Security retirement benefits at ages 62, full retirement age, and age 70, as well as estimated Social Security disability benefits, survivor benefits, and a summary of annual earnings. Workers can access a benefit estimate report online at www.ssa.gov/myaccount.
6. Social Security Claiming Date- The date that someone decides to start collecting Social Security benefits. It is typically an age between 62 (early retirement) and 70 (end of delayed retirement credits). A claiming date decision is typically based on a number of individual factors including employment status, earnings and income level, marital status, lifestyle preferences (e.g., work vs. leisure), health status, and estimated life expectancy.
7. Social Security Claiming Date for Married Couples- This refers to the strategic coordination of Social Security benefit claiming dates by married couples to earn the highest possible combined benefit. In general, the lower-earning spouse would start benefits early and the higher earning spouse would delay benefits as long as possible.
8. Social Security Earnings Limit- If you begin receiving benefits early (before FRA), and earn more than $15,720 (2016 figure) before the year of your FRA (e,g., age 66), your benefit will be reduced by $1 for every $2 over the $15,720 limit. For example, if your earnings are $19,720 ($4,000 over the annual limit), the benefit amount would be reduced by $2,000 for the year. A special earnings limit rule applies for the year that workers reach their FRA.
9. Social Security Spousal Benefits- The benefits that someone receives based on the earnings record of a spouse or ex-spouse. Divorced individuals are entitled to spousal benefits if their marriage lasted at least 10 years before divorcing and they are not remarried.
10. Social Security Taxation– Up to 85% of Social Security benefits may be taxed. Single taxpayers must pay federal income taxes on benefits when they have an income of more than $25,000. Married Social Security recipients must pay taxes on benefits if they file a joint tax return with their spouse and their combined income exceeds $32,000.