In the old days, people used to retire and then, if age 62 or older, start to collect Social Security. We now know that this could be a terrible approach, costing literally hundreds of thousands of dollars in lost benefits over a lifetime, depending on how long you live.
The benefit
There is no pile of money waiting for you when you retire. Instead, when you are working, both you and your employer generally contribute each year to Social Security. Those contributions support current retirees. When it is time for you to collect, working people and their employers then will pay you from incoming contributions and from the US Treasury. The amount will be based on:
- your average inflation-adjusted salary over the best 35 years (not necessarily consecutive) of your contributions. That average is recalculated each year to reflect new earnings, even if you are already collecting.
- the age you start to collect. If you start when you are younger, perhaps at age 62, you collect a smaller amount but for more months. If you start when you are older, you collect more each month but for fewer months. Can you ever catch up for lost benefits if you start later? Yes, at approximately age 79.
- the inflation rate. Once you are collecting, the benefit may increase depending on the rate of inflation. It could stay the same if there is no inflation, but it will never decrease.
Social Security periodically will send you a statement that includes your monthly benefit at three ages: 62 (the youngest age at which you can collect) or now if you are currently older, 70 (the oldest age it makes sense to begin collecting) and at your Full Retirement Age (FRA). If you were born in 1954 or earlier, then your FRA is age 66. If you were born in 1960 or later, then your FRA is age 67. If you were born in between, your FRA is in between.
You can set up your own Social Security account to learn your own numbers at www.ssa.gov
The Treasury now has a three trillion dollar Trust Fund IOU to Social Security which was accumulated when the payments to Social Security exceeded the payments out. If and when the Trust Fund is exhausted, perhaps in 14 years, payments will drop 25% across the board – unless the government changes the rules. Congress has fixed many problems in the past.
Collection and work
There is no relationship between collecting Social Security and retirement. You can work and collect or not. You can be retired and collect or not. However, if you are not yet at your FRA and are working, your benefit will be reduced by $1 for every $2 you earn more than $17,640 in 2019. At or beyond your FRA, earned income does not reduce your benefit.
Taxation of Social Security benefits
Part of your Social Security benefit may be taxed. For purpose of taxation your “combined income” is your adjusted gross income plus non-taxable income plus half of your Social Security. If you are single and your combined income is less than $25,000, it is not taxable. If between $25,000 and $34,000, 50% of the benefit is taxed. If greater than $34,000, 85% of the benefit is taxed. If you are married and filing jointly, the corresponding thresholds are $32,000 and $44,000.
Filing for Social Security benefits
You can apply on-line, by telephone, or in person at a local Social Security office (by appointment is better.) You need to present proof of age (your Social Security card, passport, or birth certificate) and marriage related information if appropriate (marriage certificate, divorce decree, death certificate if widowed). It can take six weeks to process your application and start your benefits.
Next blogs
Social Security is complicated in part because it has different rules for those of different marital statuses. It has three categories – married, never been married, and divorcees / widows. The next three blogs, to be distributed weekly instead of biweekly, will discuss the principles and strategies for each of these categories.
The author does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal, accounting and financial advisors before engaging in any transaction or taking any actions with regard to the content discussed above.