After providing an update to the finances of the Social Security system (“Social Security: Broken, but not Broke"), I received lots of e-mail questions. Considering that a total of 59 million Americans will receive some form of Social Security benefits in 2014, with payouts estimated at $863 billion, it's amazing how confusing the system can be.
Many of you noted that workers at Social Security offices are often not very helpful. Before you complain about these folks, remember that efforts to reduce government spending have hit the agency hard, as its workforce has shrunk by 12 percent. That means longer waits at field offices, busy signals or long wait times on the customer assistance line (800-772-1213); and if you are lucky enough to talk to a live person, you may encounter a worker who is overwhelmed by the volume of inquiries. Your best bet is to start with the web, because the SSA.gov website is easy to navigate and contains a lot of useful information.
I recommend that you seek personalized information before you make Social Security decisions; here are the top three SS questions that I field:
1. "Should I claim retirement benefits early?"
Every American who has accumulated 40 Social Security credits, which usually amounts to 10 years of work; and earns a certain amount of money, will qualify for Social Security retirement benefits. You can choose to receive benefits as early as age 62, though doing so will amount to a permanent reduction in monthly income. As a result, more people wait until their Full Retirement Age (FRA) before claiming. Workers who wait until age 70 will receive the highest benefit.
Delaying Social Security makes financial sense, with one caveat: You have to live long enough for the trade-off to work. In other words, if you knew when you were going to die, I could tell you when to file. If you can afford to wait, the decision on delaying is a bet on your life expectancy. If you delay retirement until after your full retirement age, you are entitled to "delayed retirement benefits," or 8 percent a year more for each full year that you delay, until age 70. Sounds like a sweet deal, but of course you are not receiving the monthly income for those years.
Here's how the numbers break down: if you live beyond 78, it makes sense to forego SS between the ages of 62 and 66; if you live beyond 82 1/2, it makes sense to delay SS until the maximum level, at age 70. You can take an educated guess based on your general health and your parents' health, or you can plug in your personal information at www.livingto100.com, which may help you get closer to a more data-driven number.
2. “It doesn’t make sense for me to work if I collect, right?”
If you claim retirement benefits early and continue to work, you will be subject to an annual "earnings test," or threshold, which for those people reaching FRA after 2014 is $15,480, and for those reaching FRA in 2014 is $41,400. Social Security withholds $1 for every $2 earned above that year's threshold, until you reach full retirement age. The ratio changes to $1 for every $3 earned during the year you reach full retirement age. However, after you reach full retirement age, Social Security will recalculate your benefit amount to leave out the months when benefits were reduced, which effectively should increase your benefits.
3. “Should I file and suspend?”
File and suspend is strategy for married couples, which allows the primary wage earner to apply for benefits, then suspend collecting, while allowing the other spouse to start collecting spousal benefits (1/2 the primary spouse’s benefit) immediately and then continuing to collect. The primary wage earner must reach full retirement age and the spouse must be at least 62 years old. The bonus is that the primary wage-earning spouse can wait to claim benefits until age 70, which increases the future individual Social Security benefit by eight percent each year between ages 66 and 70.
Here are some additional free SS resources:
SSA: http://www.ssa.gov/oact/anypia/anypia.html
AARP: http://www.aarp.org/work/social-security/social-security-benefits-calculator.html
T.Rowe Price: http://individual.troweprice.com/public/Retail/Retirement/Social-Security-Tool
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