Social Security Facts and Strategies

If the beneficiary chooses to continue working while receiving benefits prior to the month he/she reaches Full Retirement Age, he/she will be subject to an earning limitation. The earning limitation is $14,640 prior to the year they reach Full Retirement Age; $1 is withheld for every $2 earned above the limit. In the year in which they reach Full Retirement Age, the earning limit is $38,880 and for every $3 above the limit there will be $1 benefits withholding. The withholdings only apply to the benefits taken prior to the month the beneficiary reaches Full Retirement Age. Once the beneficiary reaches Full Retirement Age, he/she is no longer subject to any earnings limitation.

Social Security Basics

For 2012 the taxable earnings base and FICA tax rate are $110,100 and 6.2%. Amount of earnings required to earn one Social Security credit in 2012 is $1,130. Forty credits must be earned with a maximum of four credits per year in order to be fully insured. Each year, Social Security benefits are increased by a percentage based on inflation, also known as the Cost of Living Adjustment (COLA). The 2012 COLA is 3.6%.

Strategies

As previously mentioned, the age the beneficiary chooses to retire plays the most important role in determining his/her Social Security benefits. Choosing the right strategy could increase benefits by hundreds of thousands of dollars over a couple's lifetime. Various factors must be taken into account when choosing the age to retire, including: marital status, the age difference between a married couple, the married couple's projected life span, general health, financial resources, potential future personal/medical needs, inflation and increasing cost-of-living, and investment interest rates. There are various strategies that can help properly plan retirement in order to maximize these benefits. Married couples should also consider taking advantage of spousal benefits. Social Security allows a spouse with a lower earnings history to apply for Social Security benefits based on a higher earner spouse's earnings history. Currently, the spousal benefit is approximately 50% of the benefits of the spouse with the higher earnings history.

There are various strategies that revolve around taking advantage of spousal benefits. One strategy is for a spouse with the lower earnings history to claim benefits at 62, giving the spouse with the higher earnings history the option to apply for spousal benefits. The higher earner spouse will switch to his own benefits when he reaches age 70, collecting higher benefits than if he took benefits on his own record at Full Retirement Age (66+).

Another way to take advantage of spousal benefits is for a higher earner spouse to claim benefits at her Full Retirement Age (66+), which allows the lower income earner spouse to claim spousal benefits at age 62. The higher earner spouse will then suspend her benefits and reclaim at age 70, thus receiving higher benefits. The advantage of this strategy is that the higher earner spouse can delay retirement up to age 70, while the lower earner spouse can receive spousal benefits without waiting for the higher earner spouse to start receiving benefits.

Claiming and repaying Social Security benefits has been a commonly used strategy throughout the years. Prior rules permitted beneficiaries to withdraw their application for any reason. Beneficiaries would take advantage of this rule through two strategies: claiming an Early Retirement benefit at age 62 and repaying at age 70; or claiming benefits each year and repaying them at the end of the year. Either of these strategies would provide the beneficiary, in effect, with an interest free loan. The new regulations, effective as of December, 2010, end these strategies by providing a 12-month window for beneficiaries to withdraw their application and also limit the re-filing to one per lifetime. The new regulations also limit the suspension of benefits. Beneficiaries are now only allowed to suspend future benefits beginning after the month in which the request for suspension is made. Beneficiaries can no longer claim suspension for benefits they have already received.

Survivor's Benefits

A widow(er) can apply for survivor's benefit, which is 100% of their deceased spouse's benefits. The surviving spouse can claim benefits as early as age 60; however, applying prior to Full Retirement Age will result in smaller monthly benefits, as the total benefits are obtained over a longer period of time. The surviving spouse can switch to their own benefits at age 62 if their own benefits are higher. If the surviving spouse is younger than Full Retirement Age and continues to work while receiving benefits, their benefits will be reduced if the earnings exceed $14,640. The surviving spouse cannot claim survivor's benefit if she remarries before age 60, however remarriage after age 60 will not prevent her from collecting benefits based on her former deceased spouse's record.

Taxability of Social Security

The taxability of Social Security benefits depends on the amount of the beneficiary's other income. The sources of income included in this calculation includes taxable pensions, wages, interest, dividends, capital gains, tax-exempt income, and half of Social Security benefits. Benefits are taxable if your Modified Adjusted Gross Income is higher than $25,000 for a single beneficiary ($32,000 for a married couple filing jointly). Fifty percent of Social Security benefits will be taxable if your income falls between $25,000 and $34,000 ($32,000 to $44,000 for a married couple filing jointly). Eighty-five percent of the benefits will be taxed if your income exceeds $35,000 ($44,000 for a married couple filing jointly). Beneficiaries might consider accessing their retirement plans first and delay collecting Social Security benefits in order to lower their Modified Adjusted Gross Income, and ultimately lower the tax on their Social Security benefits.

Final Thoughts

There are various calculators that can help estimate your potential Social Security benefits. The Social Security Administration office will also send out statements providing estimated benefits. Errors and miscalculations in Social Security statements are possible and happen quite often. Therefore, personal information and earning records should be carefully reviewed. Recent studies show that millions of Social Security numbers are shared by more than one person, and many Americans have more than one Social Security number, due to bad record-keeping, identity theft, and careless memory of Social Security holders. Inquiries should be made in order to correct these errors.

Social Security is the biggest retirement system in the United States and its benefits play an important role for retiring Baby Boomers. Millions of Americans depend on their monthly benefits, the amount which can be affected by various factors, most importantly the age at which you retire.

Retirement Age

The normal retirement age, also known as the Full Retirement Age, is currently 66, which applies to anyone born between the years 1943-1954. Full Retirement Age is deferred by two months for each year born after 1954, and is age 67 for anyone born after 1959. Beneficiaries can delay their retirement up until age 70, and receive an increase in their benefits of approximately 8% for every year they wait. There is also a permanent monthly benefit reduction of up to 25% if the beneficiary chooses to retire early, currently as early as age 62.

If the beneficiary chooses to continue working while receiving benefits prior to the month he/she reaches Full Retirement Age, he/she will be subject to an earning limitation. The earning limitation is $14,640 prior to the year they reach Full Retirement Age; $1 is withheld for every $2 earned above the limit. In the year in which they reach Full Retirement Age, the earning limit is $38,880 and for every $3 above the limit there will be $1 benefits withholding. The withholdings only apply to the benefits taken prior to the month the beneficiary reaches Full Retirement Age. Once the beneficiary reaches Full Retirement Age, he/she is no longer subject to any earnings limitation.

Social Security Basics

For 2012 the taxable earnings base and FICA tax rate are $110,100 and 6.2%. Amount of earnings required to earn one Social Security credit in 2012 is $1,130. Forty credits must be earned with a maximum of four credits per year in order to be fully insured. Each year, Social Security benefits are increased by a percentage based on inflation, also known as the Cost of Living Adjustment (COLA). The 2012 COLA is 3.6%.

Strategies

As previously mentioned, the age the beneficiary chooses to retire plays the most important role in determining his/her Social Security benefits. Choosing the right strategy could increase benefits by hundreds of thousands of dollars over a couple's lifetime. Various factors must be taken into account when choosing the age to retire, including: marital status, the age difference between a married couple, the married couple's projected life span, general health, financial resources, potential future personal/medical needs, inflation and increasing cost-of-living, and investment interest rates. There are various strategies that can help properly plan retirement in order to maximize these benefits. Married couples should also consider taking advantage of spousal benefits. Social Security allows a spouse with a lower earnings history to apply for Social Security benefits based on a higher earner spouse's earnings history. Currently, the spousal benefit is approximately 50% of the benefits of the spouse with the higher earnings history.

There are various strategies that revolve around taking advantage of spousal benefits. One strategy is for a spouse with the lower earnings history to claim benefits at 62, giving the spouse with the higher earnings history the option to apply for spousal benefits. The higher earner spouse will switch to his own benefits when he reaches age 70, collecting higher benefits than if he took benefits on his own record at Full Retirement Age (66+).

Another way to take advantage of spousal benefits is for a higher earner spouse to claim benefits at her Full Retirement Age (66+), which allows the lower income earner spouse to claim spousal benefits at age 62. The higher earner spouse will then suspend her benefits and reclaim at age 70, thus receiving higher benefits. The advantage of this strategy is that the higher earner spouse can delay retirement up to age 70, while the lower earner spouse can receive spousal benefits without waiting for the higher earner spouse to start receiving benefits.

Claiming and repaying Social Security benefits has been a commonly used strategy throughout the years. Prior rules permitted beneficiaries to withdraw their application for any reason. Beneficiaries would take advantage of this rule through two strategies: claiming an Early Retirement benefit at age 62 and repaying at age 70; or claiming benefits each year and repaying them at the end of the year. Either of these strategies would provide the beneficiary, in effect, with an interest free loan. The new regulations, effective as of December, 2010, end these strategies by providing a 12-month window for beneficiaries to withdraw their application and also limit the re-filing to one per lifetime. The new regulations also limit the suspension of benefits. Beneficiaries are now only allowed to suspend future benefits beginning after the month in which the request for suspension is made. Beneficiaries can no longer claim suspension for benefits they have already received.

Survivor's Benefits

A widow(er) can apply for survivor's benefit, which is 100% of their deceased spouse's benefits. The surviving spouse can claim benefits as early as age 60; however, applying prior to Full Retirement Age will result in smaller monthly benefits, as the total benefits are obtained over a longer period of time. The surviving spouse can switch to their own benefits at age 62 if their own benefits are higher. If the surviving spouse is younger than Full Retirement Age and continues to work while receiving benefits, their benefits will be reduced if the earnings exceed $14,640. The surviving spouse cannot claim survivor's benefit if she remarries before age 60, however remarriage after age 60 will not prevent her from collecting benefits based on her former deceased spouse's record.

Taxability of Social Security

The taxability of Social Security benefits depends on the amount of the beneficiary's other income. The sources of income included in this calculation includes taxable pensions, wages, interest, dividends, capital gains, tax-exempt income, and half of Social Security benefits. Benefits are taxable if your Modified Adjusted Gross Income is higher than $25,000 for a single beneficiary ($32,000 for a married couple filing jointly). Fifty percent of Social Security benefits will be taxable if your income falls between $25,000 and $34,000 ($32,000 to $44,000 for a married couple filing jointly). Eighty-five percent of the benefits will be taxed if your income exceeds $35,000 ($44,000 for a married couple filing jointly). Beneficiaries might consider accessing their retirement plans first and delay collecting Social Security benefits in order to lower their Modified Adjusted Gross Income, and ultimately lower the tax on their Social Security benefits.

Final Thoughts

There are various calculators that can help estimate your potential Social Security benefits. The Social Security Administration office will also send out statements providing estimated benefits. Errors and miscalculations in Social Security statements are possible and happen quite often. Therefore, personal information and earning records should be carefully reviewed. Recent studies show that millions of Social Security numbers are shared by more than one person, and many Americans have more than one Social Security number, due to bad record-keeping, identity theft, and careless memory of Social Security holders. Inquiries should be made in order to correct these errors.