Mysteries of Social Security Benefits

How to become eligible for benefits. It's worth having a basic understanding of how Social Security works so that you'll know how to maximize your benefits. Our thumb nail sketch follows.  To become entitled to any retirement benefits at all, you have to earn 40 Social Security credits. You get a credit by having a minimum amount of earned income (or, net earned income if you're self-employed) per year. In 2021, the amount needed for one credit is $1,470. This amount will be adjusted upward in future years in line with general increases in wages. You can earn up to 4 credits per year. Accumulate 40 credits (which would take at least 10 years of working in jobs subject to Social Security taxes) and you'll cross the threshold for retirement benefits. After you have 40 credits, more credits won't affect your retirement benefits. 

How Your Benefits Are Calculated.  Social Security next looks to the 35 years of your life with the highest earnings. The amount of your benefits will be based on your earnings in those years. You can get an idea of how much your benefits will be from the annual statement you get from Social Security.  Or you can use the benefits calculators at Social Security's website (https://www.ssa.gov/OACT/anypia/index.html). Why does this matter? For people who have full careers of 30 or more years, it probably doesn't matter much. But understanding Social Security retirement benefits may be important for people who work substantially less than 30 years. Let's say you started working full-time in your 20's but then took a number of years off to raise children. If you have 32 credits, you're not entitled to any benefits. Understanding that you need to earn a modest amount of income for a couple of years to reach the threshold for benefits is now an important piece of information. With 40 credits, you could collect a few thousand dollars a year in benefits, even you've worked only ten or twelve years. That may not sound like much, but it could total many tens of thousands of dollars (or perhaps more than $100,000) over the course of your retirement.

Social Security calculates the amount of your retirement benefits based on the 35 years of your working life with the highest income.  You can often boost your benefits by working longer.  If you've worked a lifetime total of 10 years and have your required 40 credits, you also have 25 years of zero earnings that go into the calculation of your retirement benefits. Every additional year you work reduces the number of zero years and increases your benefits.

When to Start Collecting Social Security. The earliest you can start collecting retirement benefits is age 62. The amount with an early start will be less than what you'd get if you waited until your "full" Social Security retirement age. Your "full" Social Security retirement age depends on when you were born. If you were born any time from 1943 to 1954, your full retirement age is 66 (it's lower if you were born before 1943, but in that case you're probably already collecting benefits). If you were born in: (a) 1955, full retirement age is 66 and 2 months; (b) 1956, full retirement age is 66 and 4 months; (c) 1957, full retirement age is 66 and 6 months; (d) 1958, full retirement age is 66 and 8 months; (e) 1959, full retirement age is 66 and 10 months; and (f) 1960 or later, full retirement age is 67. 

The reduction of benefits from an early start depends on how early you start.  If your full retirement age is 66, the reduction in benefits: (a) at age 62 is about 25%; (b) at age 63 is about 20%; (c) at age 64 is about 13.3%; and (d) at age 65 is about 6.7%. If your full retirement age is 67, the reduction in benefits: (a) at age 62 is about 30%; (b) at age 63 is about 25%; (c) at age 64 is about 20%; (d) at age 65 is about 13.3%; and (e) at age 66 is about 6.7%. If your full retirement age is between 66 and 67, the reductions apparently are somewhere between the amounts for ages 66 and 67. It's important to understand that these reductions are permanent. If you start collecting benefits at age 62, they will always be about 25-30% less than the benefits you would have gotten if you had waited until your full retirement age. The fact that you are getting benefits sooner, and may be able to stop working at an earlier age, may make it worth your while to forego the higher benefits available at a later age. Just be sure you understand the cost. 

 If you delay taking benefits after your full retirement age, your benefits will increase even more. That's especially true if you continue to work. The amount of the increase will depend on whether or not you work, how long you work and how much you earn. For people born in 1943 or later, a boost of 8% per year is provided for each year of delay (and your benefits may be further increased if you keep working). So you might be able to leverage your benefits upwards as much as 24% or more over your full retirement age benefits if you wait until age 70. But start collecting them when you hit the big 7-0, because they don't increase with further delay. 

So, when should you start collecting retirement benefits? That depends on your personal situation. If your health is good and you think you have a long life expectancy, delay benefits as long as possible. That way, you'll have better protection for the last years of your life, when your savings may run low. The benefits you get by waiting until 70 can be 50% or more than the amount you'd get starting at age 62, so we're talking about some serious pocket change.  But be careful if you've stopped working. Without a job, how would you live for the years before you started to take Social Security? If you have a pension, you may be able to get by with that. But if you'd have to burn off a lot of your savings in order to delay benefits, you may be better off starting benefits earlier and conserving your savings. Retired people have a hard time replacing spent savings, so if your savings are modest, keep them warm and dry for big expenses like medical care. 

If your health is poor, consider taking benefits at age 62, especially if you are unable to work. That way, you'd get something back for all the Social Security taxes you paid. 

When to start collecting becomes a more complicated question if you are married. Your spouse is entitled at age 62 or older to collect Social Security benefits based on your record, and can collect up to half the amount of your benefits (but only when you start to collect). If the two of you are short of cash, and the total amount of your combined benefits would provide badly needed cash flow, it could make sense to start collecting earlier. However, the spousal benefit is less if your spouse begins collecting it before their full retirement age. Make sure the sacrifice is worthwhile. There may be many nuances to the question of when you should begin collecting Social Security retirement benefits, and you should research the question carefully.

Who receives benefits. You, naturally, receive benefits based on your employment history. Your spouse beginning at age 62 can also receive benefits based on your employment history, up to as much as half of your benefits. Like you, however, your spouse is receives reduced benefits if they start collecting benefits before their full Social Security retirement age. Conversely, you might be able to receive Social Security based on your spouse's employment history.  The amount you get will be the greater of your personal benefit or your spousal benefit. 

Divorced persons may be able to collect Social Security retirement benefits based on the employment history of their former spouse under some circumstances. They must have: (a) been married for at least 10 years; (b) reached the age of at least 62; (c) be currently unmarried; and (d) not be entitled to a larger benefit based on their own employment history. So not all is lost from the relationship. You can receive up to half of the amount of your ex's full retirement benefits if you wait until your full retirement age. Your spousal benefits from an ex will be permanently reduced if you start earlier. 

Benefits for Dependents. One little known fact about Social Security is that if you are entitled to retirement benefits and have dependent children or grandchildren, the kids under the age of 18 or who are disabled can start collecting benefits when you do. So late in life parents, and grandparents who are raising their grandkids, can get some help. This benefit is subject to limitations on much your family can collect in total (about 150% to 180% of the benefits you receive). If you are eligible for Social Security retirement benefits and are in need of cash to raise the young ones, here's some relief. If you don't need the money, save it up and use it as a college fund for the kids. 

Survivors Benefits. Social Security also provides life insurance of a sort, in the form of survivors benefits. Survivors can receive benefits, depending on the deceased person's employment history. A widow or widower can receive benefits as early as age 60, although they will be sharply reduced from what the widow or widower would receive at full retirement age. A divorced survivor who was married to the deceased for at least 10 years and remains unmarried may also be entitled to survivors benefits starting as early as 60. A widow or widower (or divorced survivor) of any age who is supporting dependent children under the age of 16 or disabled children (who themselves are entitled to a child's benefit) may also be able to get survivors benefits. Unmarried children under the age of 18 can receive benefits (and can get them up to age 19 if they are still attending primary school or high school). Even your dependent parents, if you are providing at least half their support, can collect benefits if they are at least 62. Survivors benefits are complex, and we have only touched the surface. You may need to do some careful research to understand your situation.

More Headaches. People receiving pensions from governments or nonprofit institutions may be subject to nasty reductions and offsets if they didn't pay Social Security taxes in those government or nonprofit jobs, even if they otherwise qualify for Social Security benefits from other jobs. Your painkiller budget will skyrocket if you ever have to deal with Social Security disability questions. But it's important to be familiar with Social Security. Over 55 million Americans receive retirement or related benefits of one type or another, and over 13 million receive disability benefits.  Social Security will probably benefit you and/or your family some day, so it's worth the effort to understand it.