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By Eric Rolshoven, MBA
Social Security benefits provide a key component of your post-retirement income. Understanding how Social Security benefits work is a critical component to retirement planning, as you will need to draw on multiple sources of income to maintain your desired lifestyle.
Timing Is Everything
The amount of your benefit will change depending on the timing of when you begin to draw on your benefits. The Social Security Administration will allow you to begin receiving payments prior to full retirement age (as early as age 62), but at a reduced rate. Conversely, if you delay your benefits beyond full retirement age, your benefit amount will increase each year until you turn 70. Full retirement age depends on your year of birth. (1) The bottom line: when considering your various sources of post-retirement income, you may benefit from drawing on other sources earlier and delaying Social Security payments to receive the maximum benefit.
You can keep working after you begin collecting Social Security benefits. Earnings will not affect your benefits after you have reached full retirement age. If you begin receiving benefits and continue to work before you reach retirement age, your benefits may be reduced. If you will not reach retirement age for the entire year, your benefits will be reduced by $1 for every $2 you earn above the income limit ($18,240 in 2020). If you will reach retirement age during the year, your benefits will be reduced by $1 for every $3 that you earn above a higher limit ($48,600 in 2020) during the months before you reach retirement age. (2)
How Much Will You Receive?
Social Security benefits are based on pre-retirement income levels during your 35 highest income years. (3) If you work less than 35 years during your lifetime, the years that you did not work will reduce your Social Security benefits. An important factor to consider toward the later end of your career: if you are earning more than you did earlier in life, continuing to work longer can increase your Social Security benefits in more ways than one. Not only can you delay drawing against your benefits, but when you begin taking payments, the amounts will be based on a higher income average.
Spousal Benefits
You may be able to claim spousal benefits, which is important if you did not work or did not earn as much as your spouse. When your spouse begins to draw Social Security benefits, you are eligible to receive up to 50% of your spouse’s benefit amount. If you and your spouse both worked, you can receive some combination of your own benefits and your spouse’s. However, you cannot “double dip.” If your benefit amount is higher than your spouse’s, you will not receive any spousal benefits. If you qualify for your own benefits but your spousal benefit is higher, you will receive a supplemental amount to cover the difference. The Social Security Administration provides an example: “Mary Ann qualifies for a retirement benefit of $250 and a spouse’s benefit of $400. At her full retirement age, she will receive her own $250 retirement benefit, and we will add $150 from her spouse’s benefit, for a total of $400.” (4)
Death And Divorce
If your spouse dies, you can claim benefits based on your deceased spouse’s income levels, if your spouse worked long enough to become eligible for benefits. A surviving spouse can begin to claim “survivor’s benefits” as early as age 60 (or age 50, if you are disabled and your disability started before or within seven years of your deceased spouse’s death). (5) You can also claim spousal benefits based on an ex-spouse’s income after divorce, provided you were married for at least 10 years and you do not remarry before age 60 (age 50 if disabled).
Start Tracking Your Numbers
Even if you are nowhere near retirement age, you can still learn your personal numbers and figure out your anticipated benefit amount based on current and expected future income levels. Regardless of your age, you can set up an online account at ssa.gov in just a few minutes, which will allow you to view your annual Social Security and Medicare income levels, as well as estimated benefits showing how much you will collect at retirement. Paying attention to your numbers early not only gives you a clearer picture of your benefits, but also increases the chance that you will catch and correct reporting errors early. (6)
We’re Here To Help
Social Security is one part of the larger picture when thinking about your retirement benefits, and every situation is different. There is no “one size fits all” answer when it comes to financial planning strategy. If you would like to explore your options and gain a better understanding of how to build income in retirement, our team at Treasure State Retirement Planning can help. Schedule time on my calendar or give me a call at 406-240-7659.
About Eric
Eric is an Investment Advisor Representative with over 30 years of experience in financial services. He helps his clients with portfolio construction and analysis with a focus on wealth preservation strategies as an anchor to help protect their hard-earned assets. He then balances the portfolios with growth strategies to help solidify his client’s retirement nest eggs.
Eric is adept at explaining advanced financial concepts in an easy-to-understand manner and sees part of his job as helping to bridge any knowledge gaps for pre-retirees and retirees. His knowledge isn’t reserved just for his clients, however, as he holds multiple seminars and workshops each month in order to help his community be better informed about their financial options. Eric holds Series 7, 63, and 65 securities registrations and is insurance licensed in MT, WI, NV and WA.
Eric received both his undergraduate degree and MBA in finance from the University of Montana. He and his wife, Julie, have two grown children, and Eric is a veteran Scout leader and baseball coach. His free time is now occupied by pursuing his passions of hunting, fishing, skiing, travel, and golf. Eric and Julie are members of Florence Carlton Catholic Church.
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Disclaimer/Legal
This information does not constitute an offer to buy or sell any investment product, and does not constitute investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances. Because investor situations and objective vary, this is not intended to indicate suitability for any particular investor.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
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(1) https://www.ssa.gov/benefits/retirement/planner/agereduction.html
(2) https://www.ssa.gov/benefits/retirement/planner/whileworking.html
(3) https://smartasset.com/retirement/how-to-improve-your-social-security-benefits
(4) https://faq.ssa.gov/en-us/Topic/article/KA-02011
(5) https://www.ssa.gov/benefits/survivors/ifyou.html
(6) https://www.ssa.gov/pubs/EN-05-10081.pdf