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The Simple Math Behind Social Security Benefits

“Should I start collecting Social Security retirement benefits as early as possible, or hold off for longer in exchange for plus-size payments?”

How much time you need to figure out the best time to take Social Security benefits can be as much of a puzzle as figuring out the actual answer, according to the recent article “The Head-Scratching Math Behind When to Claim Social Security Benefits” from Barron’s. It helps to start with the basics.

If you were born in 1960 or later, your “normal” retirement age is 67 and the payments that you can lock in if you take them at age 67 are called your “primary insurance amount,” or PIA.

You have the option to lock in smaller payments earlier—once you celebrate your 62^nd birthday—or larger payments up to age 70. The amounts are calculated to rise every month. The increases are calibrated to rise as follows:

• By 5/12ths of 1% of the PIA between 62-63
• By 5/9ths of 1% of the PIA between 63-66
• By 2/3rds of 1% of the PIA between 66-70.

It is that simple. The actuaries and economists have done all the work. These numbers have been in place since 1983. The only question is, can you figure out what’s best for your personal situation?

It is important to understand that even people who study these numbers come to different opinions, because the answers are based in part on when you will die and how your investments will do in the future.

However, for anyone approaching their 62^nd birthday, here are some insights. A male who delays until age 70 receives a real compounded return of 3.2% a year. A female will receive a compounded return of 4%, because women tend to live longer. For couples, the increase is 5.2% because of spousal benefits, as payments last the longer of the two lives.

Compare these returns with any other investment that provides inflation-adjusted returns backed by the U.S. government. Even 10-year Treasury Inflation-Protected securities (known as TIPS) right now yield less than zero: -1%.

The general answer is that delaying payments is the best bet, unless the income is needed, or someone has a terminal illness. For couples where one earns much more than the other, the lower earner might want to take their benefit early, knowing that it will eventually be replaced by spousal benefits on the higher income of the higher earning spouse.

Claiming benefits late reduces longevity risk—the chances that you’ll outlive your savings. However, it prevents the risk that you won’t max out your benefits. If that happens and you have life insurance, at least your heirs will be sure of receiving those proceeds.

Reference: Barron’s (Sep. 4, 2020) “The Head-Scratching Math Behind When to Claim Social Security Benefits”

 

Make the Most of Your Social Security Benefits

 

“The more you know about Social Security, the more you'll likely be able to get out of the program.”

Famous motivational speaker Zig Zigler reportedly said “If you want to earn more, learn more.” That’s true for careers and investments. It is also true for Social Security. The more you know how Social Security works, the more likely you’ll be able to maximize your benefits, says the article “Social Security tips: 10 ways to get more money in benefits” from USA Today.

1—Check your Social Security work record for errors. Create an account for yourself at the “My Social Security” page on the Social Security Administration’s website. You’ll be able to see your entire income history. Check it against your tax returns to be sure that the numbers are right. If you see mistakes, call the SSA and have them fixed now.

2—Work for at least 35 years. The SSA uses a formula to calculate benefits based on 35 years of earnings (adjusted for inflation). If you’re thinking about working for 28 years, your benefits are going to be lower. If you can keep working to reach the 35-year mark, you’ll increase your benefits.

3—Boost your earnings. Bigger paychecks equal bigger benefits. If it’s too late for a career change, adding a part-time job could boost your lifetime income. You could also just work a few more years—it makes a difference. The annual statement from SSA on the website will show you just how much.

4—Wait until age 70 to start collecting. For every year after your full retirement age, your benefits grow by about 8%. If you are able to tap other sources of income before you turn 70, you can maximize this benefit.

5—You can also start collecting benefits at age 62. Your checks will be smaller, but if you have had a job loss and need the money, you are now eligible to take them. There will be many more checks now, than if you waited until age 70. If your health is poor, or your family history does not include longevity, there’s no benefit in waiting.

6—Understand how spousal benefits work. For non-working spouses, Social Security allows a spouse to collect a benefit based on their spouse’s earnings record – up to one half (50%) of the spouse’s benefits.

7—Can you delay a divorce? You might be able to collect benefits based on your former spouse’s earnings record, if you meet the requirements. You need to have been married for at least ten years. If it’s been nine years, and if your not-soon-enough ex has significantly higher earnings than you, consider delaying until the ten year mark. Not everyone can do this, but if you can, it could make a big difference.

8—Keep your income lower, while collecting Social Security. If you plan on working while collecting benefits, understand that some of your benefit dollars will be withheld. For someone who is younger than their Full Retirement Age in 2020, for every $2 earned over $18,240, $1 dollar will be deducted. If you reach Full Retirement Age in 2020, the SSA will deduct $1 for every $3 you earn above $48,500, until the month you do reach full retirement age. Be mindful of the “cost” of your working on your benefits.

9—Find out if you qualify for survivor or disability benefits. There are Social Security benefits for spouses, ex-spouses, the disabled and survivors. Other programs with benefits include Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI).  If your spouse dies after working long enough to qualify for Social Security, the surviving spouse and children under age 17 may also be able to collect survivor benefits.

10—Think strategically about Social Security. If your spouse has a stronger earnings history than you, they might delay collecting benefits to age 70 to maximize the size of their benefit checks. If they die before you, as a surviving spouse you may collect either their benefit amount or your own—whichever is larger.

Reference: USA Today (July 28, 2020) “Social Security tips: 10 ways to get more money in benefits”

 

 

Working and Collecting Social Security Benefits

“For most Americans, Social Security plays an important role in maintaining retirement security. The benefit payments represent an income stream that is free of default, investment, inflation and longevity (outliving your money) risks.”

For decades, Americans have taken comfort from knowing that no matter what else happened with their retirement savings, they would be able to get Social Security benefits when they stopped working. Even better, the benefit grows with inflation and continues for as long as the person or their spouse lives, explains the article “How working changes your Social Security benefits” from The Sun.

Workers and spouses who qualify for Social Security have the option of starting to receive benefits at any time from age 62 to 70. Benefits received before reaching Full Retirement Age (FRA) will be smaller than those received after a worker reaches their FRA. These amounts are worked out in a series of complex calculations by actuaries to ensure that everyone receives their fair share. If you retire later, after FRA, the monthly benefit will be higher. If you wait until age 70, the monthly benefit will have reached its maximum level.

Less well understood is the effect of continuing to work, while collecting Social Security benefits. You can decide to stay in the workforce and apply for benefits. However, if you claim benefits before your FRA and your income exceeds certain levels, there’s a reduction in the full monthly benefit that you would otherwise receive.

This is known as the Retirement Earnings Test, or RET. It does not apply to earnings from investments and pensions, but it does apply to earned income.

Someone who will be younger than their FRA during the entire calendar year will lose $1 in benefits for every $2 they earn above $18,240 in 2020. There was a $600 increase from the 2019 earnings test.

For every two dollars you earn above $18,240, Social Security will deduct one dollar from your benefits. However, the money that is withheld will be added back into your benefits when you reach FRA.

Let’s say you earn $20,240 in 2020 and you’re 62 years old. You’ll temporarily give up $1,000 in benefits for going $2,000 over the earnings limit test. However, you will get it back.

What if you are reaching FRA in 2020? The earnings test limit is $48,600 in 2021, a jump of $1,680 from the 2019 limit of $46,920. In this situation, once your earnings reach $48,600 in 2020, $1 in benefits will be withheld from every $3 you earn.

The typical response to learning how the RET works, is that it’s a harsh penalty and why work at all?

Some people stop working altogether or work less to avoid the penalty. That is a mistake. By continuing to work, once a person does reach FRA, Social Security increases the monthly benefit amount for the rest of the person’s life. Any benefits lost in earlier years are recouped. Think of it as a rescheduling of payments, from pre-FRA to post-FRA. It’s not a penalty, but another means of saving for the time when you are not working.

Reference: The Sun (June 21, 2020) “How working changes your Social Security benefits”