Though many public sector retirees receive a monthly pension, many also rely on Social Security benefits to supplement their retirement income. It is important to understand factors that may affect your Social Security benefits and influence your retirement decisions.
Early or late retirement
You can begin receiving Social Security at age 62, but the age you begin affects the monthly benefit you’ll receive for the rest of your life. To receive your full benefit, you must wait until “Normal Retirement Age” (NRA), which varies between age 65 and 67. A chart depicting the NRA for different birth years can be found here. If you begin receiving benefits at your NRA, you will receive your “Primary Insurance Amount,” which is your normal monthly benefit based on your highest (up to 35) years of earnings. You can choose to further delay receiving benefits until age 70, which will result in an increased monthly benefit for life. For those born in 1943 or later, you will gain about 8% for each year you delay.
When should I choose to start receiving benefits?
There is no boilerplate correct answer to the question because everyone’s situation is different. Some important factors are (1) Do you have an immediate need for the money? (2) Do you plan to work following retirement? (3) What is your tax situation? (4) How healthy are you? (5) Does your family have a history of unusually long or short life spans? If you are married, additional factors to consider are (1) The difference between you and your spouse’s age. (2) The difference between your Social Security benefits. (3) Your spouse’s health and family history of longevity. While the Social Security system may have its problems, due to the way it’s funded, it is nearly impossible for it to go bankrupt. Don’t let that concern affect your decision.
How working after retirement affects your benefits
Retirees often work either full or part-time to help stay active and to continue building their nest egg. Working does not prevent you from receiving social security. However, if you are under normal retirement age, your benefits will be reduced if you earn over a certain limit. For 2017, that limit is $16,920 per year, but it is adjusted annually based on inflation. Assuming you were retired for the full year, the Social Security Administration will deduct $1 from your benefit for every $2 you earn over the limit. There are special rules that apply if you retire partway through the year.
What counts as Income?
Income limits are based on gross wages or salaries, so even wages deferred into a retirement account apply toward the limit. For those who are self-employed, only net earnings count. Only “earned income” counts, so government benefits, pension income, annuities, interest income, capital gains or other investment earnings are excluded.
You may be eligible to receive a benefit based upon your spouse’s work record if (1) You are at least 62 years old and (2) Your spouse is currently receiving Social Security benefits. This is even the case if you do not qualify for benefits based upon your own work record or even if you have never worked. If you qualify for benefits on your own work record, you will receive the higher of the two. If you wait until your normal retirement age to claim spousal benefits, your benefit amount will be one-half of your spouse’s primary insurance amount. If you begin receiving spousal benefits early, then your benefit will be permanently reduced unless you are caring for a qualifying child under 16 years old or who receives Social Security disability benefits.
Benefits for ex-spouses
If you were married 10 years or more and are now divorced, you can receive benefits on your ex-spouse’s work record, even if they have remarried. This “spousal benefit” can be up to 50% of your spouse’s “primary insurance amount.” To qualify, you must be unmarried, age 62 or older and your ex-spouse must be receiving Social Security retirement or disability benefits. Any benefit you are entitled to receive on your own work record must be less than what you would receive based on your ex-spouse’s work record. The amount of benefits you receive has no effect on the number of benefits your ex-spouse or their current spouse may receive.
Survivor benefits for spouses and ex-spouses
If your spouse dies, you are eligible to receive up to 100% of their primary insurance amount if it’s higher than your benefit. To qualify, you must be at least age 60 (age 50 if you are disabled), but the benefit will be reduced if you are under your normal
retirement age. If you are divorced and your ex-spouse dies, you may be entitled to receive up to the full amount of their Social Security benefit. You can even remarry after you reach age 60 (age 50 if you are disabled) and still receive benefits based on your deceased ex-spouse’s work record. Normally, you must have been married 10 years or more, but if you are caring for your former spouse’s natural or adopted child who is under 16 years old or disabled, the 10-year requirement does not apply.
Reduction in benefits affecting some government workers
If you receive a pension from a government job in which you did not pay Social Security taxes, but you still qualify for Social Security benefits based on other work you performed, your Social Security benefits will be reduced by 2/3 of the amount of the pension due to the Government Pension Offset Provision (GPO). This also applies to your benefits as a spouse/ex-spouse or surviving spouse/ex-spouse. Your benefits based on your own work record may be further reduced by the Windfall Elimination Provision (WEP).
Social Security rules are complex, and there are far too many exceptions and caveats to list here. For more information, visit the Social Security Administrations website at https://www.ssa.gov/. If you have specific questions, please contact me at CPS Investment Advisors at (863) 688-1725, firstname.lastname@example.org.