Fifth Third Securities
Fifth Third Guide to Social Security

Fifth Third Bank

 

After a hard day's work, it's easy to wonder "how many more years do I have until retirement??" The answer to that question depends heavily on how much you have saved, but it also depends on your Social Security benefits. Retirees of all income levels regard Social Security as a key component of their retirement income strategy, but understanding how the benefits actually work can be a challenge. Here are some of the more common questions about Social Security.

When can I file for Social Security?

The earliest age at which you can file for Social Security retirement benefits is 62. Certain benefits like survivor’s benefits, disability and dependent benefits can be claimed earlier than age 62.

Each year that you wait after age 62 results in a higher benefit with the maximum benefit accruing to age 70. The benefit level adjusts monthly.

Your full retirement age (FRA) is an important number. While you can claim benefits as early as age 62, claiming benefits before your FRA means you permanently reduce your benefit level. For those born before 1960, their FRA is 66. For those born in 1960 or later it is age 67. The difference between collecting your benefit at age 62 and age 66 for those born before 1960 ranges up to 29 percent and is 30 percent for those born in 1960 or later on a monthly basis.

Waiting until age 70 results in an additional 8 percent per year increase in your benefit between your FRA and age 70. This is adjusted monthly, so you get a pro-rated portion of this annual increase no matter when you claim your benefit.

While it might seem like a no-brainer to wait until age 70 to claim your benefit, this is not the right answer for everyone. There are any number of factors to consider in making this decision. 

What other sources of retirement income do you have? If you have sufficient savings in an IRA, 401(k) or taxable accounts, or if you have a pension, then you can likely wait a bit longer to claim your benefit. However, if you need the money to live on earlier than age 70 or even your FRA then claiming earlier may make sense for you.

Married couples should look at the size of each spouse’s relative benefit. If one spouse’s benefit is significantly larger than the others it makes sense to wait as long as possible for that spouse to claim as this will impact the size of the survivor benefit available for the other spouse if the spouse with the higher benefit dies first. 

Can I work while on Social Security*?

If you are working past age 62, then you can work while receiving Social Security, but there are a number of considerations to keep in mind. If you work and collect Social Security, your benefits may be reduced as follows:

  • If you are younger than your FRA, then Social Security will deduct $1 from your benefit for every $2 of earned income above the 2017 limit of $16,920.
  • In the year that you reach your FRA the limits increase. During this year your benefit will be reduced by $1 for every $3 of earned income up to the 2017 limit of $44,880 of earned income.
  • There is no earned income limitation or benefit reduction once you reach your FRA.

Earned income refers only to income from employment, including self-employment. Also benefit reductions will not be lost, you will receive any reduced benefits when your situation changes in subsequent years, usually at your FRA.

However, claiming Social Security before your FRA while still working may not be a good idea because your earnings could cause a total or a significant reduction in the monthly benefit that you receive. Remember that by claiming early you are permanently reducing your benefit -- it may make more sense to wait until your income is lower or until you reach your FRA.

What if I change my mind?

If you have claimed your benefit and then change your mind for whatever reason there is a one-time do-over.

  • This must be done within 12 months of your initial filing.
  • All benefits received must be repaid, including any dependent benefits and any Medicare premiums that may have been deducted from your benefit.
  • The point at which you resume taking your benefit will be the starting point in terms of attained age, etc.

This might be a strategy if you have seen your benefit reduced via earned income or if your situation has changed since claiming your benefit in some other way. 

Do I pay taxes* on Social Security income?

Social Security benefits are subject to federal income taxes as well as to state income taxes in some states. This is based off of their income calculation and is not limited to earned income, nor is there an age limit. The formula for “combined income” is: 

Adjusted gross income + nontaxable interest income + ½ of your Social Security benefits. 

Your Social Security benefits are potentially taxed as follows:  

Filing status

Combined income between $25,000 and $34,000

Combined income greater than $34,000

Combined income between $32,000 and $44,000

Combined income greater than $44,000

Single

Up to 50% of your benefit

Up to 85% of your benefit

NA

NA

Married filing jointly

NA

NA

Up to 50% of your benefit

Up to 85% of your benefit

Source: Social Security 

Note that if your filing status is "married, filing separate" the Social Security site indicates that your benefit will likely be subject to taxes. 

This is significant for planning purposes and should cause you to at least look at your benefits in the context of the overall income that you expect to generate each year during retirement. It may make sense to defer or accelerate income or expenses in a given year in light of this factor. 

Can I receive benefits if I am divorced*?

There is an entire set of rules for those who are divorced with regard to claiming a benefit based upon their ex-spouse’s earnings record. 

If you were married for at least ten years you may be eligible to receive a benefit based upon your ex-spouse’s earnings record if:

  • You are unmarried.
  • You are at least 62.
  • Your ex-spouse is entitled to Social Security retirement or disability benefits.
  • Your own benefit is less than the benefit that you would be entitled to based upon your own earnings record.

If you do remarry, you cannot collect a benefit from an ex-spouse’s earnings record from a prior marriage unless that marriage ends and you meet the other criteria for eligibility. 

Putting it altogether

Social Security is an important, but often misunderstood, retirement benefit. The issues covered above represent some common questions asked by those entering retirement. If you have questions on these or other aspects of your benefits, please contact Social Security and consider working with a financial professional knowledgeable about Social Security and its role in your overall retirement planning. 

*Fifth Third does not provide tax or legal advice. Please consult your tax advisor or attorney before making any decisions or taking any action based on this information.