Understanding Social Security Benefits and Retirement Planning

Social Security 101 Fishers United Methodist Church Personal Finance Ministry

Began in 1935 and provided retirement benefits at age 65 Later added benefits for spouses, minor children, survivors and disability benefits Annual COLA increases were added in 1972 To keep the trust fund solvent changes were made in 1977 and 1983 to increase the payroll tax, increase wages subject to FICA tax and slowly extend the full retirement age (FRA) from 65 to 67 Designed to be a pay-as-you-go system with current workers paying for current benefits. The trust fund provides a buffer. History of Social Security

The PIA is the monthly benefit you will receive at your FRA What is the Primary Insurance Amount (PIA) The beginning point is your Average Indexed Monthly Earnings (AIME) At age 60 these past earnings are adjusted based on an Average Wage Index The top 35 years of your earnings subject to social security tax AIME is translated to PIA using a progressive benefit formula in the year that you turn 62 and on average replaces 40% of average wages

Adjustments to PIA Based on Claiming Age Claiming Age Percentage of PIA Example Monthly Benefit 62 70% $1,400 63 75% $1,500 Based on an example monthly benefit of $2,000 and FRA of 67. 64 80% $1,600 65 86.66% $1,733 66 93.33% $1,867 67 100% $2,000 68 108% $2,160 69 116% $2,320 70 124% $2,480

Each year the monthly benefit amount gets increased by a COLA adjustment based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) Cost of Living Adjustment (COLA) The COLA adjustment is applied to the PIA beginning at age 62 whether or not you have started claiming benefits COLA applies to all of the various benefits under Social Security 2023 adjustment is 8.7%

If married both spouses can claim their own benefit based upon their own earnings record The spousal benefit can be claimed on top of the benefit of the lower earning spouse up to of the benefit of the higher earning spouse at their FRA (does not increase if higher earning spouse waits beyond FRA to claim their benefit) There can be a reduction to the spousal benefit based upon the age that the spouse claims the spousal benefit The higher earning spouse has to have already claimed their social security benefit before the other spouse can claim a spousal benefit If lower earning spouse claims before higher earning spouse, then spousal benefit begins automatically when higher earning spouse claims Must have been married for at least one year to get spousal benefits Spousal Benefits

Example of Spousal Benefits Half of Spouse A FRA benefit $1,250 Less Spouse B FRA benefit 900 Spousal benefit $350 If spouse B waits until FRA to claim both benefits $1,250 Spouse A benefit at FRA of 67 is $2,500. Benefit of spouse B at FRA of 67 is $900. Both are the same age If spouse B claims their benefit at 62 but does not claim spousal benefit $630 70% of FRA benefit to claim early Spouse B then claims spousal benefit at 67 Spouse B benefit $630 Spousal benefit 350 Total benefit $980

Can be received by the surviving spouse upon the death of the other spouse if married for 9 months The survivor benefit at the surviving spouse FRA, if deceased spouse had claimed prior to their FRA, is equal to the larger of the deceased spouse s benefit or 82.5% of the deceased spouse s FRA benefit The survivor benefit at the surviving spouse FRA if deceased spouse had not claimed is the larger of deceased spouse s benefit at FRA or what they would have received at the time of their death (can be larger than FRA benefit if deceased spouse was delaying claiming) This benefit can begin at age 60, but is subject to a reduction if claimed prior to the surviving spouse FRA Survivor Benefits

Other Benefits and Considerations There are dependent and disability benefits also available You can still work after you begin collecting social security retirement benefits. There is an income limit that if is exceeded reduces temporarily the amount of your social security benefit until you reach your FRA Divorced individuals can collect benefits similar to spousal and survivor benefits from an ex-spouse if married to them for at least 10 years and not currently married

Social security benefits can be subject to income taxes If your adjusted gross income (with certain modifications) is $25,000 for an individual or $32,000 filing jointly then it will start being included in taxable income up to a maximum of 85% of the benefits received Taxes on Benefits

Due to changing demographics, there is a strain on the social security system If the current trust is depleted (2034?) then the current inflow of social security taxes would need to fund the outflow of benefits resulting in an estimated 22% reduction in benefits On two occasions in the past when faced with a similar situation congress has come to the rescue by increasing the tax, wages subject to the tax, delaying FRA, or some combination of these items Potential for Social Security Reform

Social Security Claiming Decisions Why would you want to claim benefits prior to FRA? Health issues Need the money now Coordinating payments with your spouse Other specific situations

Social Security Claiming Decisions Why would I want to wait to claim benefits? More total money over your lifetime(s) Higher spousal benefits Higher survivor benefits

How to Decide Plug different options in your retirement plan and see how they affect your overall retirement success Break even analysis (don t rely on just this type of analysis) https://www.socialsecurityintelligence.com/calculators/social-security-break-even- calculator/ Social Security claiming software Open Social Security (opensocialsecurity.com)- free to use Maximize my Social Security (maximizemysocialsecurity.com)-$40 Social Security Solutions (socialsecuritysolutions.com)-various price options

Set up you SSA.gov account if you have not already Review your earnings history on this account Look at your PIA amount and be sure that it is accurately reflected in your retirement plan Consider what we have learned, use the tools we have shared, talk with your financial advisor Formulate your claiming strategy Next Steps