5 questions to ask before applying for Social Security
BY Karyn Koenig, wealth analyst
One common question people have as they approach retirement is, “How will Social Security fit into my plans?” No matter how much you have set aside for retirement, you’ll want to make sure that you have adequately planned with all the tools in your arsenal; and that includes Social Security. Here are 5 questions to ask before applying for Social Security:
1. When should I apply for Social Security?
When to apply for Social Security is the most important question for most retirees. It’s also very specific to each person and married couple. So while we can’t give you specific advice about what to do without a consultation, here are a few things to think about before you apply.
You can apply for Social Security when you reach the age of 62. But anytime between age 62 and your full retirement age will permanently decrease your benefits. This affects not only you but could affect your spouse if they survive you.
Most workers don’t realize that if they wait until after their full retirement age (70), their benefit will actually grow 8% every year. For those born in 1953 and before, their full retirement age is 66 years old. After 1954, the full retirement age goes up by 2 months every year until those born in 1960 (and after) who have a full retirement age of 70.
What does this mean for you? If you can wait to apply, do so. The longer that you can wait, the better.
2. How will my benefit amount be decided?
Your benefit amount is decided by taking an average of your highest 35 years of earnings. This calculation produces your Primary Insurance Amount (or PIA). Of course, these are years of earning at a job that withheld Social Security taxes for you. If you worked at a job that did not withhold Social Security taxes like a teaching or government position, then those years would not be included. In the event that you receive a pension from a teaching or government position, it will affect the amount of your PIA that you are able to receive. If this is the case, you should speak with a Social Security analyst.
Another reason to wait as long as possible to start Social Security is that most of us will have our highest earning years later in our careers. This is especially important for any parents that may have taken several years out of the workforce to raise children and have several years of $0 earnings on their record.
3. Can I qualify for spousal Social Security?
This is a question that you will need to talk to Social Security office to verify. If you or your spouse were born before 1953, you may be able to file what is called a ‘restricted application’ so that you can receive spousal benefits before taking your own Social Security at full retirement age. This requires the guidance of a knowledgeable Social Security advisor. If you fall into that age group, it may be worth calling one.
For those of us born after 1954, it’s a little more straightforward. If you are married and at least 62 years old, you may qualify for a spousal benefit if your spouse is also claiming their benefits as well. Just like with regular Social Security, if you start to receive payments before your full retirement age there will be a permanent payment reduction.
If you don’t have enough earnings on your own account, or your Primary Insurance Amount is less than half of your spouse’s payment, you will qualify for a spousal Social Security payment. However, your spouse must be collecting his or her Social Security before you can claim your portion of theirs.
If you are at least 62 you may be eligible to receive benefits on the record of an ex-spouse. You must have been married for at least 10 years and not be currently married. It doesn’t matter if your ex-spouse has remarried or not, all that matters is that you are not married. Of course, your benefits will be reduced and even at full retirement age, your monthly payment will never be more than ½ of what your former spouse would receive at their full retirement age.
4. Can I still work and claim Social Security?
Yes, BUT….
If you are younger than full retirement age and make over $18,240 (in 2020) you will lose $1 for every $2 in Social Security benefits that you receive (for every dollar you earn starting over the yearly limit).
If you are in the last year before your full retirement age–say you are 65 and your full retirement age is 66–then you will only lose $1 for every $3 dollars that you earn over the yearly limit.
Once you reach your full retirement age, whether it is 65, 66 or 67, there are no penalties on your Social Security check for any amount that you earn. As with everything about Social Security, this means that you have to do careful planning.
Also, keep in mind that there is a mechanism for altering your claiming decision. You have a 12-month ‘do-over’ ability once you start claiming. You can pause your Social Security payments and repay all that you have receive already, then your future payments won’t be reduced in any way.
If you decided to take Social Security any time before age 70 and you have now reached your full retirement age, you could also suspend your benefits and allow them to grow at 8% per year. This will permanently lock-in a higher payment for the rest of your life. The one catch for this is that you will have to be at (or older than) your full retirement age before you can suspend your benefits.
5. What happens to my beneficiaries after I pass away?
The hardest part of planning when to take Social Security is knowing that you are locking in a future benefit without knowing what the future holds. The most important thing that you can do for your beneficiaries or survivors is to consult a financial planner to go over all of your assets, investments and future needs. You are not only planning for future income needs, but you will need to factor in medical expenses that you might have many years from now.
When you pass away, your spouse will “inherit” the larger of the two Social Security payments. It doesn’t matter who receives the larger benefit, but he or she will only receive one, not both of your benefits combined. That is one of the reasons that planning as a couple becomes crucial, because the survivor will be left receiving only the one benefit, sometimes for many years. An example would be if Bill receives a benefit of $2,000 per month and his wife Sally receive $1,500 per month. When Bill passes away, Sally will now receive a monthly check for $2,000 and her $1,500 per month would be discontinued. Likewise, if Sally would die first, Bill would continue to receive only his monthly check for $2,000 and Sally’s benefit would be discontinued.
In summary, here are a few key points to remember when planning for Social Security:
· Start thinking about Social Security early!
· Keep in mind that you are planning for decades in advance.
· You’re not planning just for yourself, but your spouse as well.
· Most decisions are irreversible once you start to take Social Security, so do your research.