Ten Things You Need to Know Before You Start Taking Social Security

October 17, 2011 — Bulletin: Today (October 19)  it was announced that Social Security benefits will increase 3.6% starting in January, 2012. It is the first such increase in almost 3 years, amounting to about $516 per year per beneficiary.  See our article on the 2012 Social Security increase for more, as well as What You Think You Know About Social Security Might Hurt You.

If you are a baby boomer or just slightly older (born before 1946), social security is about to become a big part of your financial life. Getting ready to take advantage of that benefit is therefore a critical step in your financial future. Here are some of the top questions asked by visitors to the Social Security and AARP websites, along with the answers everyone needs to know.

1. When can I start taking my benefits?
The earliest you can get your first check is the first full month after your 62nd birthday. But before you rush to sign up, just be aware that there might be significant benefits to holding off (see question 7 below).

2. When Can I apply?
You can apply 3 months before you turn 62. You can sign up for Medicare (and you should!) 4 months before your 65th birthday.

3. Do I have to pay taxes on my social security income?
If your total income is more than $25,000 as an individual or $32,000 filing jointly, you must pay federal income taxes on your social security benefits. A critical thing for retirees to know is whether your state will also tax that income – most don’t, but some do. This is a link to the SSA answer about paying taxes.

4. I’ve always heard I shouldn’t work and collect social security at the same time – I will just be giving it all back to Uncle Sam. True or False?
Bunk. Between the ages of 62 and your Normal retirement age your benefit will be reduced by $1 for every $2 you make over $14,160 ($14,640 in 2012). So chances are if you are working part-time, it will have no impact. If you make more than that, your earnings will be reduced, true, but you will still have at least half of the extra money. If you are in some of your higher earning years, the amount you are paying into the system will increase your monthly payment in the future. The benefit reduction for making more than $14,160 is, however, another good reason for delaying taking your benefits if you can afford to. In the year you reach Full retirement age (FRA, usually 66), your benefit will be reduced by $1 for every $3 you make over $38,880 (starting in 2012), until the month you reach FRA, at which point there is no more reduction. Here is a link to the SSA’s Retirement Earnings Test Calculator.

5. What is Full Retirement Age, the Normal Retirement Age, and what is the Maximum Retirement Age?
There has been, understandably, a lot of confusion over these terms. While you can start taking your benefits at age 62, your Full Retirement Age (annoyingly, also called Normal Retirement Age) is later. It is 66 for those born 1943 to 1954, and a few months later for those born after 1954, up to age 67 for those born in 1960 or later (see chart).
The Maximum retirement age is 70. This is the point when your benefits stop increasing if you have delayed retirement.

6. How Can I apply for Social Security?
It’s easy. You can apply online, call 1-800-772-1213, or contact your local Social Security Office.

7. When should I start taking Social Security?
There are many opinions on this, and much depends on your individual situation. In general, our opinion is that if you think you and/or your spouse have a reasonable chance of living into your 80’s, delay as long as possible. If you live to 65 and you are a man your average life expectancy becomes 82. If you are a woman, you are likely to live until you are 85. Given that the “break-even” point for delaying vs. taking benefits early is 78, it’s easy see the advantage of delaying if either you or your spouse hits your life expectancy or beyond. The issue can be quite complicated for couples; for example should a lower earning spouse start taking it early and the higher earning later? If either or both are working and making good money, it is usually better to delay because your benefits will get higher. Your financial advisor should be able to help you decide on the right strategy for your situation. One drawback of getting a higher benefit is that you might have to pay more for Medicare insurance. Of course if you really need the money you might have no choice but to start taking it early. See our article, “When Should You Start Taking Social Security“. This page shows how your benefit increases if you delay from age 62 to 66.

8. How does a divorced spouse qualify for benefits?
A person can receive benefits as a divorced spouse on a former spouse’s Social Security record if he or she:
Was married to the former spouse for at least 10 years;
Is at least age 62 years old;
Is unmarried; and
Is not entitled to a higher Social Security benefit on his or her own record.

9. How is my benefit calculated, and what is the average monthly Social Security benefit for a retired worker?
Your benefit is calculated on the amount of money you earn in your lifetime, with the emphasis on your 35 highest earning years. The average monthly Social Security benefit for a retired worker was about $1,177 at the beginning of 2011. This amount changes monthly based upon the total amount of all benefits paid and the total number of people receiving benefits.

10. If I remarry will I be able to receive benefits based on my former spouse’s social security account?
Yes, depending. A person who is divorced after at least 10 years of marriage keeps certain benefit rights on their former spouse’s Social Security record. In order to get benefits, a divorced spouse must be at least age 62 and the former spouse must be eligible for benefits, but not necessarily receiving them. If you remarry before age 60 you will not be eligible for benefits from the former spouse (50 if you are disabled). If you remarry you might be eligible for the benefit from your new spouse at 62, if that benefit is higher. This issue is complicated enough you will probably want to get advice about it.
Have More Questions?
Here is a link to the SSA’s Most Frequent Questions page

And here is a link to the AARP’s “Top 25 Social Security Questions“.

What are your questions? The more you get into it, the more there is to know. Please use the Comments section below to post your questions or tips. Note: Please don’t post about whether or not you think Social Security is fair or is going bust or not. Where those are fascinating topics for many, let’s keep those out of this discussion.

For further reference:
Too many baby boomers leave money on the social security table
Social Security Administration: Social Security Benefits Estimator
What You Think You Know About Social Security Might Hurt You, a 2 Part Series