Social Security was signed into law in 1935. It’s part of American culture. You’d be hard-pressed to find someone who hasn’t heard of Social Security. But hearing about and understanding it are two completely different things. So, let’s clear up some of the confusion to keep you from making costly mistakes.
Qualifying for Social Security benefits
To qualify for Social Security, you must have worked a minimum of 40 calendar quarters (at least 10 years). Those quarters do not have to be consecutive.
The amount you will receive is determined by your earnings. Social Security uses your 35 highest earning years to make the calculation. You want to keep track of your earnings and make sure the Social Security Administration (SSA) posts the correct figures. You can check those numbers anytime by setting up a My Social Security account at ssa.gov.
When should I start claiming Social Security?
There’s no right or wrong answer to that question because everyone’s situation is different. You can begin receiving Social Security as early as age 62, but if claim your benefit between 62 and your full retirement age (FRA) you’ll receive a permanently reduced benefit. Social Security penalizes you for taking money early.
To receive the full amount of your benefit you have to wait until FRA. Depending on your date of birth that is between the ages of 66-67.
But if you want to draw Social Security between your FRA and age 70, you get rewarded for waiting with delayed credits. For every year you wait to begin your benefit past full retirement age, Social Security adds an additional 8% per year.
Social Security and spouses
There are two Social Security options that may be available to a spouse. The first is a spousal benefit, which can be as much as 50% of the benefit received by the higher earning spouse.
Let’s say Mary spent most of her married life at home raising kids. She has worked some and has the required 40 quarters, but she earned very little income. Based on her own work history, Mary is eligible for $500/month. But her husband is eligible for $2,000/month based on his work history. Mary can file for the spousal benefit and receive $1,000 based on her spouse’s work record rather than the lower benefit based on her own.
The second option is the survivor benefit. Using the example above, Mary has been receiving the $1,000/month spousal benefit. Her husband dies. Now she can begin receiving the survivor benefit, which is the amount her husband was receiving at the time of his death. But she will stop receiving the lower amount. Social Security does not allow you to double-dip.
Receiving either the spousal benefit or the survivor benefit before your full retirement age means you will receive a permanently reduced amount.
Will Social Security be enough for retirement?
Social Security was never meant to provide all of a person’s retirement income. It was intended to replace about 40% of a worker’s pre-retirement earnings. A general rule of thumb says that in retirement you will need at least 80% of the income you earned while working.
Working and claiming Social Security at the same time
Yes, you can work and receive Social Security at the same time, but if that’s the plan, you need to know the Annual Earnings Limit.
Every year, Social Security sets a maximum amount you can earn by working, before your full retirement age, without being penalized. Break the rule and SSA takes back $1 of your Social Security benefit for every $2 dollars you earn above the threshold. For example, if the Social Security earnings threshold is $25,000 and you earn $27,000, SSA will take back $1,000 of your benefit.
But here’s the good news. Once you reach full retirement age, you can earn all you want and still receive your full Social Security benefit with no reductions.
Taxes on Social Security
Whether you’re taxed on Social Security depends on your combined income. According to the IRS:
Combined income = Adjusted Gross Income (AGI) + nontaxable interest + ½ of Social Security benefits.
Here are the combined income brackets that determine whether you have to pay taxes on your Social Security benefit.
- If you’re single and your combined income is between $25,000-$34,000 you’ll have to pay income tax on up to 50% of your benefit.
- If you’re single and your combined income is more than $34,000, you’ll pay income tax on 85% of your benefit.
- If you’re married filing a joint return and combined income is between $32,000-$44,000 you’ll pay income tax on up to 50% of your benefits.
- If you’re married filing jointly and combined income is above $44,000, you’ll pay income tax on 85% of your benefit.
It’s a good idea to check your Social Security statement regularly and make sure SSA has posted the correct numbers to your account. SSA only gives you 3 years, 3 months and 15 days to correct errors. You don’t want any unwelcome surprises when it’s time to receive your benefit.
This information is presented for informational purposes only and does not constitute an offer to sell, or the solicitation of an offer to buy any investment products. None of the information herein constitutes an investment recommendation, investment advice or an investment outlook. The opinions and conclusions contained in this report are those of the individual expressing those opinions. This information is non-tailored, non-specific information presented without regard for individual investment preferences or risk parameters. Some investments are not suitable for all investors, all investments entail risk and there can be no assurance that any investment strategy will be successful. This information is based on sources believed to be reliable and Alhambra is not responsible for errors, inaccuracies, or omissions of information. For more information contact Alhambra Investment Partners at 1-888-777-0970 or email us at info@alhambrapartners.com.
