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social security benefits

How to Compute Your Monthly Social Security Benefit

So you’ve seen your statement from Social Security, showing what your benefit might be at various stages in your life.  But not everyone files for benefits at exactly age 62 or 66 – quite often there are months or years that pass before you actually file.  This article will show you how to compute your monthly Social Security benefit, no matter when you file. Computing your monthly Social Security benefit First of all, in order to compute your monthly Social Security benefit, you need to know two things: your Primary Insurance Amount (PIA) and your Full Retirement Age (FRA).  The PIA is rather complicated to define, but for a shorthand version of this figure, you might use the figure that is on your statement from Social Security as payable to you on your Full Retirement Age (or “normal” retirement age).  

File Now. Suspend Later.

Suspending benefits is a facet of Social Security filing that usually only gets written about in connection with filing – File and Suspend is often referred to as a single act, but it’s actually two things.  First you file for your benefits, which is a definite action with the Social Security Administration, establishing a filed application on your record.  Then, you voluntarily suspend receiving benefits.  If this happens all at once, the end result is that you have an application filed with SSA, but you’re not receiving benefits.  Since you have an application filed (in SSA parlance, you’re entitled to benefits), your spouse and/or dependents may be eligible for a benefit based on your record. Since you are not receiving benefits, your record earns delayed retirement credits (DRCs) of 2/3% per month that you delay receipt of benefits past your Full Retirement Age (FRA).  (Note: you can only suspend receipt […]

Your Social Security Benefits: Are They Taxable?

If you’re receiving Social Security benefits, either for disability, retirement, or survivor’s benefits, when you file your tax return you will need to figure out if the benefits you’ve received during the prior year are taxable to you. You’ll receive a Form SSA-1099 from Social Security sometime in the first months of the year, showing what your benefits were in the prior year, as well as any deductions that were made throughout the year – including Medicare premiums (Part B and/or Part D) if applicable, and federal income taxes withheld. But are the benefits taxable to you?  At most, 85% of your benefit might be taxed – and it’s possible that none of your benefit is taxable, all dependent upon your total income for the year.  See this article for a detailed explanation of How Taxation of Social Security Benefits Works.  The IRS recently published their Tax Tip 2014-23, which […]

How Adding to Your Earnings Can Increase Your Social Security Benefits

Given the way that Social Security benefits are calculated, it should come as no surprise that increasing your income over time will make a difference in your eventual Social Security retirement benefits.  But how much of a difference does it make when your income is increased? Of course, this is going to depend upon what your current income is, and how many years you have left before you’ll begin receiving benefits.  Keep in mind how your benefits are calculated – see this article for information about Computing Your Social Security Monthly Benefit – it’s based on your average monthly income over your lifetime.  Increasing that average will increase your PIA, which will in turn increase your benefit. It’s definitely not a simple calculation to figure out what difference each increased dollar of income will have on your benefit.  Let’s walk through a few examples to see how it plays out. […]

A Few Things for a Single Person to Consider When Planning Social Security Filing

The decision of when to begin receiving Social Security benefits can be a bit daunting, because there are many things to take into account when making this decision. The basic concept of the lifetime value of benefits taken at various ages is the most common thing to consider, when this is really not as important as you might think.  This is especially true for single person – since the benefit reduction and increase factors are designed to achieve a similar lifetime result for the average lifespan. In other words, if you are an average person with an average lifespan, it won’t make much difference at what age you file for benefits, as you’ll receive approximately the same amount by the end of your average life, whenever you begin receiving the benefits. However. Another factor that you need to keep in mind is how Social Security benefits are treated, tax-wise.  At […]

3 things you can do if you’ve filed for Social Security benefits too early

I often hear from people who, for whatever reason, decided to file for their Social Security retirement benefit immediately upon reaching 62 (or 66, or whatever age), and now they have found out that this wasn’t necessarily the best option for them to maximize their lifetime Social Security benefits. There are several things that you can do about this – three that come to mind at the moment.  Below we’ll work through each of these ways to fix a situation where you filed too soon. Pay it back If it’s been less than 12 months since you filed, it’s possible for you to withdraw your application for benefits and pay back all that you’ve received to date.  Once you’ve done this, as far as Social Security is concerned, you never filed.  All of your benefit options are intact, just as if you hadn’t filed in the first place. If your […]

Restricted Application is Available via the Online Application

I learn something new almost every day. Today (well, not today but recently), I learned something about the online application for Social Security that I didn’t know: the restricted application for Spousal Benefits is available as a choice when you apply using the online application system! (If you want more information on why a restricted application is important, see this article about Leaving Money on the Table.) For quite a while now I’ve been telling folks that the best way to apply for the restricted application is to go to your local office.  When you get there and explain that you want to submit a restricted application for Spousal Benefits only, the first person that you talk to will likely tell you that you can’t do this, because your own retirement benefit is greater than half of your spouse’s PIA, or something like that.  Then my advice has been to […]

How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit

In prior articles we have discussed the Windfall Elimination Provision (WEP) which has the effect of reducing a portion of your Social Security retirement benefit if you’ve worked in a job that was not covered by Social Security which also provides a pension.  This article deals with two ways that you can remove the impact of the WEP from your benefit – neither of which is simple, and neither of which can be done after you’ve retired. The two methods are: Add years of “substantial earnings” to your record Take a lump sum distribution from your pension before you are eligible to receive the pension. Adding Substantial Earnings Years If you have the opportunity to work in a job that is covered by Social Security withholding and you have “substantial earnings” from that job, each year that you work in this SS-covered job adds to your ability to begin eliminating […]

Average Indexed Monthly Earnings Years

We’ve discussed the AIME (Average Indexed Monthly Earnings) calculation before, and it’s not like anything has changed about those calculations.  It turns out that the calculation process can be a bit confusing (shocked? I think not). The AIME is calculated using what’s known as the “base years”, which are those years between your age of 22 and 62 that occurred after 1950 (I realize most folks needing to know about this didn’t need that 1950 reference, but it’s part of the rules, so I included it).  Of those 40 years, only the 35 years with the highest earnings are used to calculate the AIME.  The earnings for each year is indexed (see the original article for details) and then the earnings are averaged. One of the questions that comes up is how years after age 62 are handled in this process.  If earnings in subsequent years are greater (after indexing) […]

“Swim With Jim” Radio Interview by Jim Ludwick

I recently had the honor of being interviewed on the radio by Mr. Jim Ludwick, a colleague that I admire and look up to a great deal.  Jim is a CERTIFIED FINANCIAL PLANNERTM professional, and his practice is based in Odenton, Maryland with additional offices in Washington, DC, Santa Barbara, California, San Mateo, California, and New York City.  Jim also is a fellow member of the Garrett Planning Network. In the interview we talk very briefly about some of the important factors of Social Security that baby boomers need to address as they plan for Social Security benefits. You can follow Jim’s radio program on BlogTalkRadio; his channel is Swim With Jim.   Listen to internet radio with Swim with Jim on Blog Talk Radio To hear the interview, click the “Play” button above. In the interview I mention that it can be helpful to have an advisor work with you […]

Wealth Defense: When Should You Start Social Security Benefits?

The foregoing is a re-post of an article that I wrote which was included in The Motley Fool’s Rule Your Retirement newsletter.  Enjoy! Want to double a chunk of your retirement income? It’s easy — just delay taking Social Security by about six years! OK, so it’s not really that simple. The time to apply for Social Security benefits is different for each individual; there is no magical “best age” for everyone. Thus, to maximize your benefit, it’s important to understand the consequences of choosing to apply at different ages. It all starts with the most important age: your full retirement age, or FRA (see table below). If you receive your Social Security retirement benefit before your FRA, the benefit will be reduced. The biggest reduction is at age 62, the earliest you can begin receiving benefits (except for widows and widowers, who can begin survivors’ benefits at 60). Year […]

Early Social Security Filing Examples

Most of the examples that you see indicate that filing for Social Security benefits as late as possible is the best way to go.  However, this is not always the case, given that you’re receiving the benefit (albeit at a reduced rate) for a longer period of time.  Let’s work through some examples to show how this works.  This article will only deal with single individuals – we’ve covered spouse benefits in several other articles, it’s time to provide some guidance for single folks. Example 1, Filing at 62 vs 66 John is single, age 62, and his benefit at Full Retirement Age (FRA) has been estimated at $2,000, so his benefit at age 62 would be $1,500, or 75% of the amount at FRA.  If he takes the benefit now, he’ll receive $18,000 per year for the next four years. (COLAs have been eliminated in this example to keep […]

Example Using Spousal Benefits and Delayed Retirement Credits for Social Security

(Photo credit: jodigreen) This particular situation was presented to me by a reader.  Since the facts represent a fairly common situation that we haven’t addressed here in the past, I thought I’d present it here for discussion. Here’s the original question (altered a bit for clarity): My wife and I are age 65 & 67 respectively.  We’re both still working part-time, and my wife has now 20 years of earnings on her Social Security record.  At this point her PIA is approximately 45% of my PIA, and increasing with each additional year of earnings added to her record.  We are in a position to delay retirement benefits to age 70 to increase our Delayed Retirement Credits (DRCs) to the maximum.  What is a good strategy for us to maximize Social Security retirement and Spousal Benefits? Given that the wife in this example has a PIA equal to something less than […]

Working While Receiving Social Security

[Hank Gowdy, Dick Rudolph, Lefty Tyler, Joey Connolly, Oscar Dugey (baseball)] (LOC) (Photo credit: The Library of Congress) For many folks, starting to receive Social Security as early as possible is important – even if they’re still actively working and earning a living. Something happens when you do this though: depending on how much you’re earning, you will be giving up a portion of the Social Security benefit that you would otherwise receive.  Up to the year that you will reach Full Retirement Age, for every two dollars that you earn over the annual limit ($14,640 for 2012, or $1,220 per month), your Social Security benefit will be reduced by one dollar. Then in the year you will reach Full Retirement Age (FRA) there is a different income limit – actually $3,240 per month.  For every three dollars over that limit, your Social Security benefit will be reduced by one […]

The Social Security Survivor Benefit – Part 2

Note: you can find the first part of this discussion of Social Security Survivor Benefits at the link. Part 1 covered the basics of Survivor Benefits, and this article covers other considerations with the Survivor Benefit, including non-spouse survivor’s benefits and coordinating the Survivor Benefit with your own benefit. As mentioned in the prior articles, don’t expect to fully understand these calculations and definitions in the first run-through. Check over the other articles (Part 1 here, Spouse Benefits here and especially the further explanation of Spouse Benefits here) for more information, and post questions in the comment section if they come up.

Social Security Income Replacement Rates

Image by woody1778a via Flickr You might not know this, but it’s a fact that Social Security retirement benefits are not designed to provide retirement income in the same ratio to all levels of wage earners.  The system, being a social insurance system, benefits folks who have had lower income levels through their lives at a higher rate than folks who have had higher incomes. So, what are the replacement rates that are experienced?  Of course it is different for each individual, but some averages are listed in the table below:   Average Lifetime Earnings FRA Social Security Benefit Replacement Rate $16,700 $9,400 54% $37,200 $15,570 40% $58,900 $20,610 34% $87,800 $24,000 28%   This is just a representative sample of various levels of lifetime average income.  It shows how, at lower income levels, Social Security replaces a much higher ratio of the pre-retirement income.  This means that at higher […]

2012 Social Security Earnings Limits

For the Earnings Test, there is a limit to the amount of income that can be earned if you’re under Full Retirement Age (FRA).  The limits for 2012 were recently released: For years in which the recipient of Social Security retirement benefits is younger than FRA, Social Security benefits will be reduced by $1 for every $2 greater than $14,640, or $1,220 per month. For the year in which the recipient reaches FRA (but prior to reaching FRA), Social Security retirement benefits will be reduced by $1 for every $3 over the limit of $38,880 or $3,240 per month. After reaching FRA, there is no limit on earnings.

The Mystery of Social Security

Social Security has become a significant part of many retirees’ sustenance, ever since it was first introduced back in the 1930’s. As the traditional pension plan goes the way of the buggy-whip and common investor behavior leads to poor results in savings plans (if there are any savings at all!), the Social Security benefit becomes more and more important. Unfortunately, the way Social Security works is a mystery for most folks. There’s really not much in the way of guidance for using the system, and relying solely on the phone representatives from the Social Security Administration is bound to lead you to a less-than-optimal result. As with most financial activities, it pays to learn as much as you can about your options, possible strategies, and the pluses and minuses of various choices that you make. A Social Security Owner’s Manual is an attempt at providing you with the groundwork to […]

The Do It Yourself Do Over For Social Security

Image by iNNoVaNDiS via Flickr Late last year the Social Security Administration made a change to the rules that took a powerful option off the books – the payback and Do-Over. Back in the olden days (prior to December, 2010), there was an option available that allowed a person to file for Social Security retirement benefits at any age, and then later pay back all of the benefits received and re-file at a later age, effectively cleaning the slate and starting over at your later age. When the rule was changed, the payback and re-file now has to be done within 12 months.  But all is not lost – there is still a way to reset things if you find yourself having filed earlier than you really needed to and you wound up working longer than you thought. The Do It Yourself Do Over If you’re still under Full Retirement […]

What Can Be Done to Save Social Security?

Image by Lady_Helena via Flickr This is, of course, one of the most volatile questions on the political landscape these days.  We have some constituencies claiming that the whole plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system. True, the system is in dire straits – not bankrupt, but needing attention.  Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes. Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed.  In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – […]