Most pre-retirees who reach out to our firm have questions regarding collecting Social Security. Questions range from the terminology, to when is the best age to collect benefits, to complex filing strategies that take advantage of loopholes in Social Security. But before we can get into the fun stuff, we must cover the basics of collecting.
The first thing you should know about collecting Social Security is how to determine if you are eligible to receive a benefit. The Social Security Administration determines your eligibility via a credit system. You need 40 credits to qualify, and you can get four credits a year (one per quarter). Therefore, you need to work for only 10 years to qualify for Social Security.
However, the amount of your benefit is based on your highest-earning 35 years. So if you worked for less than 35 years, you will have zeros on your earnings history, which will reduce the amount you receive.
Full Retirement Age
Once you have determined your eligibility, you need to figure out when you can receive your full benefits.
To do that, you need to know your full retirement age, or FRA—the age you become eligible to receive your full Social Security benefit. Previously this was age 65, which is why most people want to retire at 65. Unfortunately, for many people, 65 is no longer the full retirement age.
For anybody born after 1960, your FRA is age 67. For those born between 1954 and 1959, your FRA is 66 and a certain number of months. The Social Security Administration has a great table on its website that will show you your FRA.
An individual can collect Social Security 96 times between the age of 62 and 70. If you collect before your FRA (age 62–67), your benefit will be reduced by as much as 30%. If you collect your benefit after your FRA, your benefit will increase by 8% per year until age 70, when it will stop increasing. Therefore, it makes no sense to not collect your benefit on your 70th birthday.
Essentially, every year you delay your benefit from the day you become eligible (62nd birthday), your benefit will increase by a certain percentage.
If you are married, your partner can generally collect half of your benefit if your benefit is larger than theirs or if they did not qualify for Social Security.
For example, if your benefit is $2,000 and your spouse’s benefit is $700, your spouse will collect spousal benefits off you of $1,000. This works out to half of your benefit (2,000/2 = 1,000). So instead of having $2,700 total from Social Security, you would have $3,000 per month.
Finally, the biggest misconception about Social Security is taxes. Most people think they will not pay taxes on their Social Security income—that is not true. In retirement, if you have other sources of income, you will be taxed on your Social Security benefits. Sources of income include pensions, dividends, interest, retirement account distributions, business distributions, rental income, capital gains, and much more.
For example, a married couple with income between $32,000 and $44,000 will pay taxes on up to 50% of their benefits. Couples who make over $44,000 will have 85% of their Social Security income subject to income taxes!
That said, if your only source of income is Social Security, you will not be taxed.
Deciding when to collect Social Security is one of the biggest retirement decisions a family will make. In addition to selecting the age at which you collect, you can also choose from different filing strategies that can greatly increase your lifetime benefit. We regularly hold workshops in the community that go into detail on the above topics and much more. Just sign up for our email list to get word of upcoming workshops.