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Social Security Retirement Benefits: Fundamentals Thumbnail

Social Security Retirement Benefits: Fundamentals

This blog accompanies Episode 10 of The Retirement Oasis Podcast. To listen to the podcast, you can visit your favorite podcast platform (Apple, Stitcher, Podbean, etc.) or go here: 

Let’s start off by providing a brief overview of Social Security. What is it? How is it structured? What can I expect?

As you know, Social Security system was created to provide benefits for three purposes: retirement, survivorship and disability. Just like any government benefit, it’s not free, of course. We, as workers, pay into the system in the form of FICA taxes. In particular, it is the Old Age, Survivors, and Disability Insurance  (OASDI) portion of the FICA taxes, or 6.2% of your earnings (up to a cap) plus the 6.2% paid by your employer. If you are self-employed, you will actually pay both those amounts, or 12.4%.

Who is eligible for Social Security? 

The Social Security benefit we will address today is the retirement benefits.  To be eligible for your own retirement benefits, you generally need to have worked – and paid into the system - for a certain minimum amount of time during your life.  The threshold for retirement benefits is 40 quarters or 10 years’ worth of work. By years of work, that means you paid into the system for that amount of time. So, that’s the minimum time threshold to get the retirement benefit on your own earnings record.  

Spousal benefit. We will revisit this later, but spouses may also receive a benefit if their spouse is eligible. It does not matter how long the non-eligible spouse worked. 

Divorced spouses. Moreover, individuals may receive a Social Security benefit if their ex-spouse is eligible regardless of the earnings record of the individual. This is basically the spousal benefit.

How is the Social Security retirement benefit calculated?

The calculation of the Social Security retirement benefit is based on two basic factors: your earnings history (which is comprised of both your annual earnings and the number of years you worked) and when you start taking Social Security, or your claiming age.

Earnings history. Regarding your earnings history, Social Security will take into account your highest 35 years of earnings when determining your benefit. So, if you just worked 20 years, you will still be eligible for Social Security retirement benefits but it will be quite a bit less than if you worked 35 years, all else equal. The calculation will basically assume you did not make any money for those remaining 15 years.  Of course, Social Security Administration provides inflation-adjustment calculations to your past earnings to calculate your benefit today, but we will not get into those details.

Claiming age. The other major factor to determine your benefit amount is your claiming age, or when you start taking your Social Security benefit. In general, you can begin receiving Social Security as early as age 62 or as late as age 70. Of course, the earlier you take the benefit, the lower the annual benefit. The Full Retirement Age (FRA) is effectively the anchor age that your base benefit is calculated, and the benefits are either reduced or increased from that amount based on your actual claiming age. For most people yet to retire, the FRA is generally age 66 or 67. The decision of the optimal claiming age for your Social Security benefits will be the main part of our future episode.

What amount of Social Security benefit can I expect?

Many of you may already have a good idea of what you can expect to receive from Social Security because you have received your Social Security statement, but some of you may not have seen this so let’s talk about what one can expect as a retirement benefit. Since I don’t know your earnings history, of course, let’s talk averages and maximums. 

The maximum base amount for someone receiving Social Security today (in 2022) at Full Retirement Age is $3,345 per month or a bit over $40,000 annually here in 2022.  If you made around $147,000 in today’s dollars for 35 years, then you are likely at the maximum.   But, that’s a relatively high amount to make for all of those 35 years. For most of you, you will likely receive less. Let’s say you made $100,000 per year (in today’s dollars) for each of those 35 years. In that case, your Full Retirement Age benefit may be around $34,000. If you averaged $75,000, your benefit may be around $30,000. At $50,000, the benefit is around $23,000.  Of course, your earnings throughout the years were probably somewhat meandering and perhaps increasing in your later years so the estimates are not a simple, but that perhaps gives you a general idea of what to anticipate.

As you can see, the OASDI tax is progressive in some sense. Although the tax rate is the same at income levels up to the cap, the extra benefit you receive for each dollar in taxes decreases as a percentage. For example, when an earner goes from $140,000 to $100,000, the earner’s taxes paid in decreased by about 32%; however, their annual benefit is only decreased by 15%.  IN other words, the SSA replaces a higher percentage of the lower-earning workers than higher earning workers.

What’s the average Social Security?  For 2022, the average annual benefit received for those that begin receiving payments at Full Retirement Age is around $20,000. For the demographics of folks listening to this podcast, the range is likely between $25,000 to $40,000 at Full Retirement Age. 

What is the impact of claiming Social Security at an age other than Full Retirement Age?

We have been focusing on claiming at Full Retirement Age and Full Retirement Age has a special meaning in the Social Security System. It’s the age that the SSA calculates this amount called the Primary Insurance Amount. I call it the base amount or the anchor amount. The Full Retirement Age is generally somewhere between 66 and 67, depending on the year of your birth. For that $40,000 maximum benefit amount I mentioned earlier, that was for someone reaching Full Retirement Age this year and the FRA for those born in 1956 is 66 and 4 months.  As a side note, I think there is a pretty good chance that Congress will extend the Full Retirement Age for the younger crowd at some point in the future as they need to shore up the funding of SSA. We’ll touch on that a bit more. But, for now, again, the FRA is generally between 66 and 67.

Delayed or Enhanced Credits. 

Again, your benefit will be impacted if you retire at an age other than your FRA.  If you elect to claim your benefits earlier, you get a lesser amount. If you take benefits later than the FRA, you get a greater amount and get “enhanced credits”. That obviously makes sense because there are tradeoffs – by taking Social Security earlier, you will ultimately receive more payments at a lower amount. If you take Social Security at age 70, you will get fewer payments but at a greater amount per month.

So, let’s review the adjustments based on when one elects to take Social Security.

For every year you elect to claim Social Security before your FRA, the benefit is basically reduced by 6.67% per year for the first 3 years that you retire before FRA and by 5% per year for the next two years you retire before FRA. (It’s actually done on a monthly basis, but the annual amount is easier to conceptualize). For every year you wait to collect after FRA, the benefit is enhanced by 8% per year. So, if someone waits until age 70 and their FRA is age 67, then their benefits would be 124% of the Primary Insurance Amount. If someone took at age 62 and their FRA is age 66, their benefits would be 70% of the Primary Insurance Amount. In reality, the adjustment is based on a percentage .0 rather than year, but we are keeping it simple here. 

How do the adjustments based on claiming age impact the Social Security optimal claiming strategy?

So, these calculations and your payout amounts obviously impact your decision on when to begin taking Social Security. Do you take it age 62 and get many more payments at a lower amount?   Do you wait until age 70 to get a much larger amount but fewer payments?  Or, do you take it somewhere in between. That will be the topic of our next episode, but here’s the spoiler answer – it depends!  The main factors are the payout amounts, your claiming age and life expectancy, and the rate of return.  And, there are other nuances and individual circumstances that will influence the decision as well. There are a wide variety of views out there. I would say the majority of advisors say that everyone should wait to take Social Security until age 70 while many people on the street say that you should take it as early as possible because you don’t know how long you will live or whether Social Security will be around for the long term.  I suggest that depends on your unique situation, and the correct decision will vary.

What kind of Social Security retirement benefits can a spouse receive?

There is a special rule about spouses and it’s quite generous. It says that a spouse can effectively receive the higher of his or her own Social Security benefit based on his or her own earnings or 50% of the spouse’s base amount. You would obviously take the larger of the two benefits. So, even if there was just one breadwinner in the house and the non-working spouse did not qualify for Social Security on his or her own earnings, a married couple can still potentially receive 1.5 times the base amount. So, that $40,000 figure that I spoke of becomes $60,000 – that’s a nice benefit in retirement. If you have two maximum earning couples, you can get $80,000 at Full Retirement Age. That’s relatively rare, but we are seeing that more and more.

To get the spousal benefit, the non-earning spouse has to be at least age 62 (in most cases) and the other spouse must already be receiving his or her own benefit. (Note that there used to be a Social Security claiming strategy that allowed spouses to effectively get around this rule, but we won’t go there at this point.)  (There 

And, for the spouse to get the 50% benefit, that assumes that the spouse starts taking it his or her Full Retirement Age. If he or she claims Social Security sooner than FRA, then the spousal benefit is reduced.[1]  If the spouse claims later, however, she does not get an increase in the spousal benefit. That increase in benefit after the FRA only applies to one’s own benefit based one’s own earning records.  That’s important to consider when deciding on the optimal claiming strategy for married couples.

Technically, the spouse that is receiving the 50% benefit may be comprised of two segments: his or her own benefit if he or she is eligible and the spousal benefit that equals the amount to get up to the 50%.  There are more complications around this, but we will keep it simple for now. Suffice it to say that if the spouse takes any benefit before FRA – even if just the spousal benefit – the spouse’s own retirement benefit is still forever reduced. As noted elsewhere, the old restrictive application claiming strategies are generally no longer available.

Survivor Benefits in Social Security: Widow(er) Benefits

There is one other rule about spouses that you should be aware of and this rule could impact your decision on when to claim your benefit. At the death of one spouse and if both spouses are already taking Social Security, both Social Security benefits do not continue, of course. However, a surviving spouse has the option of taking the greater of the two benefits. So, if the higher earning spouse died, the surviving spouse will take that Higher Earning spouse’s benefits upon the higher earning spouse’s death and that will remain the survivor’s benefit until the survivor’s death.  Keep that rule in mind as we discuss the optimal claiming age question in a future episode. 

If the surviving spouse was not taking his or her own benefit at the time that her spouse passed away, she will receive at least 100% of the deceased spouse’s benefit if the surviving spouse claimed at his or her FRA or later. If the surviving spouse took the benefit before FRA, then the benefits are decreased, of course. Also, note that if the deceased spouse had previously taken Social Security benefits before FRA, then this would also reduce the amount that the Surviving Spouse is eligible for claiming.  A final point is that the SSA decided to add even more complexity to this calculation and made the FRA slightly different for claiming widow(er) benefits than benefits on one’s own (in some cases).

There are also two special rules of interest for surviving spouses:

  1. Special age rules. Earlier I mentioned that age 62 was generally the earliest one can begin drawing on Social Security. With widow(er)s, however, one can begin drawing as early as age 60. Of course, the benefit is reduced more at age 60 than at age 62, but age 60 is nevertheless an option.
  2. Switching to own benefit. The other rule for surviving spouses is the fact that they can switch to their own benefit after having first drawn on benefits as a surviving spouse. This creates a planning opportunity in some cases. By not drawing on their own benefit, their own benefit can continue to increase due to delayed credits. So, in some cases, it makes sense for surviving spouses to take the survivor’s benefit at age 60 and their own benefit at age 70. In other cases, the math might suggest otherwise, but this should be analyzed at the right time before any decision is made.

Caution – marrying before age 60. There is a word of caution for widows. If a widow(er) remarries before age 60, then the widow cannot get a surviving benefit from the widow’s late spouse’s earnings record. The widow can get a benefit based on the widow’s new spouse’s earn0ings record, but the widow cannot choose the higher of the two methods. So, if you are a widow and want to marry a someone with a less than stellar earnings record, then you might want to postpone the marriage until after age 60. Love isn’t blind in Social Security benefits, perhaps.

Social Security Benefits for Divorced Spouses

As we touched on earlier spouses that were previously married and divorced can also receive a benefit from the ex-spouse’s earnings record. 

Eligibility. To be eligible, the marriage must have lasted for 10 years or more.

The benefits apply regardless of whether the ex-spouse is dead or alive and whether the ex-spouse is currently receiving Social Security or not.

If you remarry, however, regardless of age, you are not eligible for the benefits of the ex-spouse. So, before you remarry, make sure you understand your potential mate’s Social Security earnings.  How much do you love him or her?

Finding Out Your Actual Social Security Retirement Benefits

Before we move on, I encourage you to determine how much Social Security benefit you can expect based on your situation, and you can get that number from your Social Security Benefits statement. The amount that you will receive from Social Security will impact your retirement planning and strategies associated with your retirement planning. I will touch more on that in just a bit, but it is important to understand how much income you anticipate receiving from Social Security.

How to determine your Social Security retirement benefits. There are a few days to find your estimated Social Security benefits, but if you are a long way from retirement you could merely look at your Social Security statement. In the old days, we would automatically receive a Social Security statement in the mail on an annual basis.  This provided an estimated amount of our benefit. Now, the SSA only sends that out to those over age 60 who aren’t set up on their online system. 

Where to obtain your Social Security statement. To get your Benefits statement, go online at https://www.ssa.gov/onlineservices/.  If you do not have an account, you will need to create your Social Security online account.   It may take a few days for your new online account to register, but once you have your online account you can eventually see the history of your earnings and an estimate of your benefit. You can click on the link that references your statement or you may be able to go directly here and log-in: https://www.ssa.gov/myaccount/statement.html. 

They will provide you with various information, including whether you are currently eligible for Social Security benefits or how close you are to becoming eligible, your earnings record, and an estimate of your benefits.

Your benefits estimate.   First, you can see your statement and download a copy. I’ll discuss the statement more in a bit. In addition to being able to see the statement, the SSA created a nice interactive online tool that shows your estimated benefit based on your current situation, making various assumptions in the chart that it shows. As a default, it will show your benefits based on different initial withdrawal ages, including at age 62, Full Retirement Age, and age 70.  You can toggle the age that you plan to withdraw to obtain a better estimate.

The estimates also have to make an assumption of what your future income is.  As I discussed previously, your benefits are based on the 35 top earning years.  This online calculator – as well as your statement -- assumes you make the same (inflation adjusted) as your most recent earnings. So, if you made $100,000 in 2021, the system will assume you make $100,000 (inflation-adjusted) each year until those various withdrawal ages. 

Not only is the assumption of the income important, but how long it will last may also have an impact. Even if the salary was correct with the calculator, you may not necessarily be working until age 70  - the system’s default assumes you do. If those extra years of assumed working are part of your top 35 earning years and they are significantly more than the lower years that would drop off, then the estimated benefits will be a bit off.

So, you can make some adjustments with this online tool. For example, you can tell the system what income to assume and for how long. You can’t get too detailed with this basic calculator.

The statement basically provides the same information, including your earnings history and your estimated benefits from ages 62 to age 70.   Again, just like the estimates online, the estimates per the Benefits Statement may not be exactly accurate in your situation. The benefit estimated assumes last year’s income will be future year’s income up and until the benefit age stated.  So, if you retire at say age 62 but want to take your benefits at age 70, the benefit estimate at age 70 may not be correct, especially if you are in your high earning years at the time you receive the estimate. 

What can you do to get more accurate Social Security retirement benefits estimates?  

You can do a couple of things to get more individualized estimates. If the income is relatively accurate, you can input the age of retirement in this online tool and then make an adjustment for the time that you plan to take distributions. We discussed those adjustments earlier.

If your situation is more complex with varying income for the balance of your years, then you will want to check out online benefit calculators at https://www.ssa.gov/benefits/calculators/. Some of these calculators include the following:

Here are some general calculators that provides education on how one’s benefit is impact by earlier or later retirements. They do not provide estimates on your earnings’ history.

  • Retirement Age Calculator – includes a table that highlights the benefit reduction percentage based on your desired start date; reviews both the wage earner and the spouse.
  • Early or Late Retirement calculator – illustrates the benefit adjustment based on your retirement start date. Similar to Retirement Calculator but is an interactive tool and includes a calculation of the delayed retirement credits.

Calculating Your Specific Benefit.   The following calculators provide estimates of your Social Security retirement benefit based on your earning. They are not perfect, but they are worth reviewing.

  • Online Calculator. This can provide a general estimate of your benefits based on your inputs.  Unfortunately, you have to manually input a lot of data. I would recommend doing this as you start to narrow down the retirement date, perhaps when you are 10-15 years from retirement. You can input your actual earnings per year (you can actually leave off the lower years if you know you will have 35 other higher earning years), average future earnings, and the date you plan to retire.   You cannot vary the income by year for future years. https://www.ssa.gov/benefits/retirement/planner/AnypiaApplet.html
  • Detailed Calculator. True to its name, this calculator provides more details. It is excel-based and allows you to make different inputs based on your income, including the ability to vary the future amounts, different retirement dates, and different claiming ages.  This takes more time to understand, and it is not necessarily intuitive so you may want to spend time reading the instructions before you dive in.   On occasion, I have had trouble downloading this tool in proper format so you may have to be patient. 

Will My Social Security Retirement Benefits Be Around When I Retire?

We often get the question about whether, despite the Social Security statements laying out our expected benefit, we can expect Social Security benefits to actually be around when we retire. Will the Social Security system be solvent by the time I retire?  

I think the answer is yes -- Social Security will be around despite the current soundness or lack of soundness in the system. It’s true that the Social Security trust fund reserves are estimated to be depleted by 2035 without any further Congressional action, but even without any action about 75% to 80% of the future Social Security benefits can be met by the future income FICA taxes – from workers paying into the system. I don’t think there’s any question that Congress will take some kind of action to begin to build back the reserves, especially to shore up the benefits for those that are already retired or near-retired.  

Congress could take a variety of steps to shore up the funding of Social Security, including increasing FICA taxes one way or the other or adjusting the various ages of the Social Security payout. In particular, they will probably push the Full Retirement Age back as they did previously.  The previous time the Social Security Full Retirement Age was adjusted, or pushed back from 65 to 67 (with a phase-in), was 1983 and it applied to those that were age 45 or younger at that time. So, I think those that are 60 or so can certainly rely on the full amount being there and pretty likely that those 50 and above are safe. Whether or not 45 is the age that is vulnerable to change this time around is unknown, but it seems like a good age in that they have a bit more time to make adjustments. The rug is not quite being pulled out from under them. I am ok with that age, because I am just older than that.

So, I think it is indeed reasonable to assume you will receive most or all of your Social Security.  If you don’t include Social Security in your retirement projections, you are certainly being conservative in the projections. While I like the idea of being more conservative than less conservative in preparing a retirement analysis, assuming you don’t receive any from Social Security may be too conservative and too unrealistic. If you excluded Social Security benefits in your analysis, the analysis could indicate that you have to work 5 to 15 years or longer than if you included the benefits or the analysis would say you have to save significantly more in your pre-retirement years, depending on your situation. Sure, it might feel good to be overfunded for retirement if you planned for your retirement without the Social Security and yet ended up receiving Social Security, but you can’t get those younger years back. Retirement planning is all about striking the right balance between living for today and planning for tomorrow. Not using proper analysis will result in an unbalanced view of your retirement situation. So, I do think while it is good to be aware of the Social Security funding, I think it is still realistic to count on receiving Social Security.

That’s a quick review of the fundamentals of Social Security, and that was certainly not an exhaustive, detailed review of all of the ins and outs of Social Security. Your action step is to understand what your potential Social Security benefits are under various scenarios and see how that impacts your retirement planning.  We’ll touch on the optimal claiming strategies in our next episode.

[1] The Spousal Benefit is reduced by about 8.3% each year the spouse takes before FRA for the first 36 months and 5% per year for each year they take early in excess of the first 36 months. Again, this is actually calculated on a monthly basis.  Thus, the 50% spousal benefit is further reduced by the reduction percentage to arrive at the actual percentage of the higher earning spouse’s Primary Insurance Amount.