Social Security Retirement Benefits Basics | Nasdaq
Social Security Retirement Benefits Basics
By Will Goodson, CFP®
Social Security is one of the only guaranteed sources of income available to most retirees. Financial success in retirement is dependent upon generating the income necessary to maintain one’s standard of living, and Social Security helps many people do this. Before claiming your benefits, it's important to have an understanding of Social Security, including how to qualify, how benefits are calculated, when they may begin and how your decisions can affect your spouse's benefits.
To qualify for Social Security benefits, an individual must obtain 40 quarters of credit. One quarter of credit is earned for every calendar quarter an individual works (with minimum earnings of $1,300 per quarter). Thus, if an individual works for 10 full years and meets the minimum income requirements, they should qualify for Social Security retirement benefits. The quarters are cumulative, not consecutive, so a person may have gaps in employment and still meet the qualifying requirements.
Calculating Amount to Be Received
The way Social Security benefits are calculated is complex. In general, the Social Security Administration gathers up to 35 years of an individual’s income history. These wages are indexed to current values to come up with an amount called the average indexed monthly earnings (AIME). They then take the AIME amount and apply it toward set formulas known as “bend points” to calculate the primary insurance amount (PIA). The PIA is the amount an individual would expect to receive if they begin collecting Social Security retirement benefits at their full retirement age. How much a person actually receives depends upon when they decide to receive their retirement benefits.
When to Start Claiming Benefits
For most people today, full retirement age (FRA) is age 66 or 67. Upon reaching FRA, an individual would receive 100% of their PIA amount. Benefits may begin as early as age 62, but filing before FRA will result in a permanent reduction. For every year an individual starts their retirement benefit early, the amount is reduced by 7%-8%. Thus, retirement benefits at age 62 would equal approximately 70%-75% of one’s full benefit amount. Again, this decision is permanent and must be made carefully.
On the other hand, an individual can earn delayed retirement credits if they suspend their benefits beyond full retirement age. For every year a person waits past FRA, their Social Security retirement benefit is increased by 8%. Thus, overall benefits may increase by 24%-32% if one waits until age 70 to start collecting. (For related reading, see: Should You Delay Your Retirement?)
It’s equally important to understand what benefits are available for spouses. Spouse do not need a working record of their own to qualify. However, the rules surrounding these benefits are confusing, so let’s walk through it. There are three requirements to be eligible for spousal benefits:
You must be married to someone who is currently receiving Social Security retirement benefits.
You must have been married for at least one year.
Spousal benefits are capped at 50% of the amount the qualified spouse receives from Social Security. Even if both of you worked and qualify for benefits, you may still be eligible for spousal benefits. Social Security will always pay you the highest benefit available.
For example, let’s say you qualify for a $300 per month benefit based on your own working record. Your spouse is currently collecting $1,000 each month from Social Security. Half of your spouse’s benefit is $500, which is greater than your own benefit, so Social Security will pay your $300 retirement benefit plus a $200 spousal benefit, which equals the full $500 amount. You must wait until your own full retirement age to receive this maximum amount. Spousal benefits may begin as early as age 62, but like retirement benefits, filing early will result in a permanent reduction. If you file at age 62, your spousal benefit would be reduced from 50% to approximately 35%. For every year between 62 and FRA, the gap narrows by 4%-5%. (For related reading, see: How to Boost Social Security Spousal Benefits.)
If your spouse waited beyond FRA to increase his or her own benefit, your spousal benefit is still capped at 50% of his or her full retirement age amount. However, if your spouse filed early for a reduced benefit, you’ll only get up to 50% of that reduced amount. Again, these benefit reductions are very confusing so it’s important to make these decisions very carefully.
How Divorce Affects Benefits
A final point on spousal benefits pertains to divorce. You are still eligible for spousal benefits if you are divorced, but the requirements are slightly different. You must have been married for at least 10 years and your ex-spouse must be at least 62 years old. One big difference is your ex-spouse does not have to be receiving benefits, but you must have been divorced for at least two years and not remarried before your benefits can begin.
It’s important to understand how to qualify for Social Security, how benefits are calculated, when the best time is for you to start claiming them and how spousal benefits work. Having this knowledge and making an educated decision can play a big part in the benefits you’ll ultimately receive.
(For related reading, see: What Will Social Security Look Like When You Retire?)