Retirement benefits are the simplest to understand. As an employee, Social Security tax is deducted from your paycheck. If you receive a W2, you pay 6.2% of your income or if you are self-employed you pay 12.4% of your income into the Social Security trust fund. Once you’re fully insured (have 40 Quarters of Credit), you’re eligible for a retirement benefit once you reach 62 years old. Your benefits are calculated by using your highest 35 years of earnings, also indexing them to account for inflation.
The biggest misconception most people have is that working and paying more Social Security taxes will get them the most benefits. There are some instances where that is not the case.
Example 1: You worked for 35 years earning over $40,000. You get a part time job earning $20,000, still being taxed. Your new earnings will NOT increase your retirement benefits.
Example 2: You worked for 30 years earning over $40,000. You get a part time job earning $20,000, still being taxed. Your new earnings WILL increase your retirement benefits.
Remember, your benefits are calculated using your highest 35 years of earnings. If Example 1 describes your circumstances, it doesn’t mean that you shouldn’t get a part time job. It means that you need to plan accordingly since it will have no impact on your Social Security benefits as long as you’re over Full Retirement Age (FRA) or under FRA and your work is below the earnings limit.
If you are working over the earnings limit while receiving Social Security retirement benefits, that can add a few complications. First, you have a potential overpayment if you don’t report those earnings timely. If you report it timely, Social Security will determine how far over the earnings limit you are and withhold full benefits checks. Keep in mind if you go even $5 over the earnings limit, Social Security will withhold 1 full benefit check. For those earnings over the limit, you qualify for two automatic benefit increases: An increase if your top 35 years of earnings have been recalculated (See Example 1 and 2) and an increase because you didn’t receive a Social Security check for at least 1 month.
There will be an increase to your monthly checks, however one of the largest increases is waiting to start your checks. On average, Social Security Retirement benefits increase $100/month by waiting 1 year to file. In comparison, earning the additional $20,000 in Example 2 will increase your benefits by only $5-10/month. If you can afford to wait, in most cases it will get you the biggest increase in your checks but everyone’s situation can vary. This is why it is critical to develop a plan.
If you are a widow(er), disabled, are married or were married for 10 years, have a disabled adult child or minor child, or if you can’t afford to wait are all important considerations. All of these are reasons to know when to start Social Security benefits because it can yield higher benefits for your household. That’s why it’s incredibly important to understand your benefit options and have all the information available when planning and making this important decision.
Instead of relying on the varying expertise at the Social Security Administration, let our team of experts at Social Benefit Advisors help you understand your options and get the most out of your benefits. We look forward to meeting with you soon.