Understanding Social Security Benefits

By grasping the intricacies of Social Security benefits, individuals can make informed decisions about when to claim their benefits, how to integrate benefits into their overall retirement plan, and how to prepare for potential future changes in the program. Here are some important things to consider about Social Security:

Full Retirement Age (FRA)

FRA is increasing gradually:

• Born in 1959: FRA is 66 years and 10 months
• Born in 1960 or later: FRA is 67 years
• Reaching FRA in 2025:
  • Those born in 1959 will start qualifying for full benefits in November 2025

Benefit Calculation

• Based on your highest 35 years of earnings, adjusted for inflation
• Average Indexed Monthly Earnings (AIME) is calculated
• Primary Insurance Amount (PIA) is derived from AIME using a progressive formula

Claiming Options

• Early retirement: Available from age 62, with permanent reduction up to 30%
• Full retirement: Claim at FRA for 100% of calculated benefit
• Delayed retirement: Increase benefits by 8% annually until age 70

Strategies for Higher Payouts

• Work at least 35 years to avoid zeros in your calculation
• Maximize earnings during your working years
• Consider delaying benefits if you can afford to and expect longevity

Spousal Benefits

• Can claim up to 50% of spouse’s FRA benefit at your FRA
• Reduced if claimed early; doesn’t increase past your FRA
• Ex-spouse benefits available if married for at least 10 years

Survivor Benefits

• Widows/widowers can claim as early as age 60 (50 if disabled)
• Full survivor benefits available at FRA
• May be eligible for deceased ex-spouse’s benefits

Working While Receiving Benefits

• Before FRA: $1 in benefits withheld for every $2 earned above annual limit ($21,240 in 2023)
• Year reaching FRA: $1 withheld for every $3 earned above higher limit ($56,520 in 2023)
• After FRA: No earnings test applies

Taxation of Benefits

• Up to 85% of benefits may be taxable based on combined income
• Thresholds for taxation (2023):
• Individual: $25,000 – $34,000 (50% taxable); over $34,000 (up to 85% taxable)
• Married filing jointly: $32,000 – $44,000 (50% taxable); over $44,000 (up to 85% taxable)

Cost-of-Living Adjustments (COLA)

• Annual increases to offset inflation
• Based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)
• 2024 COLA: 3.2% increase in benefits

Planning Tools and Resources

• My Social Security account: Access your earnings record and benefit estimates
• Social Security Administration’s Retirement Estimator
• Annual Social Security Statement: Review for accuracy
• SSA.gov: Official source for up-to-date information and calculators

Future Considerations

• Potential changes to Social Security due to funding challenges
• Importance of diversifying retirement income sources (e.g., 401(k), IRA, personal savings)
• Regular review and adjustment of retirement plans as circumstances change

Remember, Social Security is just one part of a comprehensive retirement plan. Consider consulting with one of our iWealth Financial Advisors to tailor strategies to your individual needs and goals.