By Shawndi Purselley, CFP®, CDFA®, Owner and Co-Founder, Wealth Advisor
I remember when I was young, my great grandfather Lloyd made a joke once about his annual cost of living adjustment (COLA) he received on his social security check. He told my grandmother while laughing “look honey, we can go out to eat at Grandy’s one time on our raise!” I didn’t understand what that meant of course back then, but I do now. My grandparents lived from Social Security check to Social Security check. By no means did a COLA raise ever increase their standard of living. To be truthful, I don’t think it kept up with it very well either. I guess that’s why he thought the joke was so funny. Don’t get me wrong, Social Security is a very important part of a retirement plan. However, it was not designed to be the only source of income in retirement. That being said, it is important to ensure you are getting the full value of the benefits you are eligible for.
Most of us probably have a basic understanding of how Social Security works. We have watched our parents and grandparents navigate through it, but I continually speak to people that have misunderstandings about some key factors. Let’s take a look at a few factors that I believe are commonly overlooked.
Spousal Benefits –
- During marriage: When a worker files for retirement benefits, that worker’s spouse may be eligible for benefits based on the worker’s earnings. The spouse must be at least 62 or have a qualifying child in his/her care. The spouse can receive a benefit by as much as half of the worker’s primary insurance amount (depending on age). If the spouse is eligible for benefits under his or her own earnings, and if it is higher than the spousal benefit, the spouse will receive their own retirement benefits.
- After death: A surviving spouse may be eligible to receive benefits from a deceased spouse if the survivor is age 60 or over (or at least age 50 and disabled). Surviving spouse can receive full benefits at their own full retirement age or reduced benefits as early as age 60. If spousal benefits are started at age 60, survivor spouse can switch to his/her own record as early as 62. If the surviving spouse remarries AFTER reaching age 60, the remarriage WILL NOT affect eligibility of survivor benefits. If surviving spouse is already receiving spousal benefits, the payments will automatically convert to survivor benefits after the death is reported. Surviving spouses have the option of collecting the larger eligible benefit (deceased spouse’s benefit amount or their own benefit amount).
- After divorce: If a marriage lasted 10 years or more, and ended at least two years before applying for benefits, an individual may be eligible for a spousal benefit. The individual must be at least age 62 and unmarried. If all of these criteria are met, then an individual can apply to receive benefits based on a former spouse’s record. The most an individual can collect from a former spouse is half of the worker’s primary insurance amount. This does not affect the amount the worker will receive in his/her own benefit. The same rules apply for benefits received on a deceased former spouse’s record.
Delay Credits –
Social Security retirement benefits can increase above your primary insurance amount if you opt to start your benefits past your full retirement age (FRA). Depending on your year of birth you may receive a delay credit to your retirement benefit amount by as much as 8%. This credit is always subject to change. However, at the writing of this blog, delay credits range from 5.5% to 8%. (www.ssa.gov). Delaying your Social Security benefit can be a way of potentially protecting against your risk of longevity. This credit could be significant should you live a very long life.
Since 1984, Social Security recipients with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit. The majority of our clients do pay some amount of federal income tax on their Social Security benefit. As annoyed as they are about paying taxes on their benefits, it indicates that they have other measurable forms of income. An individual tax filer may pay federal income tax on benefits received if the combined income for the tax year is at or above $25,000. For joint tax return filers, tax may be owed on Social Security benefits if combined income is at or above $32,000 as of the publication of this blog. Each year this is subject to change. Each year, recipients receive Form SSA-1099 or SSA-1042S showing the amount of benefits received for the previous year.
I hope this synopsis helps you uncover some things you may have missed when considering Social Security benefits. If you have questions, we are always here to help. You can also find great information directly at www.ssa.gov. In addition, this link provides great insight to Social Security retirement benefits.