Things you should know about Social Security

Social Security benefits play a vital role in most American’s retirement plans. Social Security provides benefits to almost 65 million people, accounts for 50 percent of income for more than half of the 65-plus population and provides more than 90 percent of income for nearly a quarter of that group, according to U.S. Census Bureau data. There are thousands of claiming rules, an abounding amount of claiming strategies, and many variables at play when deciding when to file for benefits. As a result, this topic can be confusing and leave retirees with many question marks.

Know Your Social Security Full Retirement Age (FRA)

People born between 1943 and 1954 have an FRA of 66. It gradually increases toward 67 if your birthday falls between 1955 and 1959. For individuals born in 1960 or later, FRA is 67.

Know How Benefits are Earned

To be eligible for Social Security benefits, you need to earn at least 40 credits throughout your career. Credits are based on your total wages and self-employment income for the year. In one year, you can earn up to four credits. In 2021, you earn one Social Security or Medicare credit for every $1,470 in covered earnings each year. You must earn $5,880 to get the maximum four credits for the year.

Know How Benefits are Calculated

Throughout your lifetime, you accumulate a work earnings record. The Social Security Administration uses this as the bedrock to calculating your benefits. First, they take the 35 years in which you earned the most money to determine your average indexed monthly earnings or AIME. Only income up to the maximum taxable earnings is counted (in 2021, the maximum taxable earnings are $142,800). Next, they apply a formula to that monthly average to determine your primary insurance amount or PIA. This is the amount you’ll get every month from Social Security if you wait until full retirement age to claim benefits. The formula divides your average monthly wage into three parts. In 2021 it goes like this:

90 percent of the first $996 of your AIME + 32 percent of any amount exceeding $996 up to $6,002 = 15 percent of any amount over $6,002

Last, but not least, Social Security factors in the age at which you claim benefits. They decrease the full benefit if you are younger than full retirement age. Keep in mind, the pendulum can swing either way; you lose more than a quarter of your benefits if you claim Social Security at age 62 (the earliest age you can claim), but you can gain 30 percent extra in benefits by waiting to claim. They add to your benefit for each month between full retirement age and 70 that you delay claiming benefits. Your benefit will grow by 8 percent per year until age 70. Note, if you have less than 35 years of earnings, each year with no earnings will be factored in at zero. Also important, Social Security recalculates your benefit annually, adjusted for inflation. This is known as a cost-of-living adjustment or COLA. The COLA is based on the average rate of inflation over the prior three months and is typically announced every year in October. In 2021, Social Security beneficiaries will see a 1.3 percent COLA in their monthly Social Security benefits. Some estimates of the Social Security COLA for 2022 have been between 5 percent and 6 percent.

Marriage Matters

When one spouse dies, the lower Social Security payment disappears, and the surviving spouse keeps only the higher of the two benefits. A widow or widower may start taking a survivor benefit at age 60, but the benefit would be reduced since it is being taken prior to full retirement age. If you remarry before age 60, you can’t get a survivor benefit. However, if you remarry after age 60, you may be eligible to receive the benefit based on your former spouse’s earnings record.

There is also something called a spousal benefit. One spouse can take this benefit, which is up to 50 percent of the other spouse’s benefit. If your monthly benefit is $3,000 and your spouse’s is worth $500, your spouse can collect a spousal benefit of $1,500.

You Can Retract a Social Security Claiming Choice

If you file for benefits and determine that was a bad decision, you can withdraw your application, but it must be within 12 months from the time you filed. You will need to pay back all the benefits received, but you can later reapply for Social Security benefits.

Understand How Your Benefits Will Be Taxed

According to the IRS, a fast way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax – exempt interest. (Combined income = adjusted gross income plus nontaxable interest plus half of your SS benefits). If your combined income is above $25,000 for single filers, head of households or qualifying widow or widower with a dependent child, you will need to pay taxes. The limit for joint filers is $32,000.

If your Social Security income is taxable, the amount of tax you will pay will depend on your total retirement income. You will never pay more than 85 percent of your Social Security income. For married couples filing jointly with combined income of $32,000 to $44,000, 50 percent of your Social Security income will be taxed. Beyond $44,000, you can expect to pay taxes on up to 85 percent of your SS benefits.

Numbers to Know

  • Social Security benefits averaged $1,543 per month in 2021.
  • $17,707.20 is the maximum amount of Social Security you’ll pay in 2021 if you’re self-employed. The wage cap this year is $142,800 and the Social Security tax rate is 12.4 percent.
  • If you work and collect Social Security at the same time, you need to be aware of the earnings test limits. In 2021, if you’re under full retirement age, the annual earnings limit is $18,960. If you reach FRA in 2021, the limit is $50,520. From there, you’ll have $1 in benefits withheld for every $3 you earn.
  • Maximum Social Security benefit you can receive in 2021 is $3,895.

As the saying goes, “knowledge is power.” The more you know, the greater your chances for maximizing your benefits. Everyone’s situation is unique, therefore the optimal claiming strategy for one person may not be the ideal strategy for someone else. Give us a call today at (410) 840-9200 so we can review your personal situation and determine the strategy that will not only help you maximize your benefits, but also work in concert with your overall financial picture.

Kiplinger. (March 2021). Social Security Basics: 12 Things You Must Know About Claiming and Maximizing Your Social Security Benefits.
Kiplinger. (July 2021). Avoid These 3 Common Mistakes When Claiming Social Security.

Forbes. (July 2021). How Big Will the Social Security Cost-of-Living Adjustment Be For 2022?

Motley Fool. (Jan. 2021). $17,707.20 is the maximum tax if you’re self-employed: 5 essential Social Security numbers you need to know in 2021.

AARP. (February 2021). 10 Things You Need to Know About Social Security.

Main Street Advisors, LLC. July 2021. Main Street Advisors, Inc. is a Registered Investment Advisor. The articles and opinions expressed in this material were gathered from a variety of sources, but are reviewed by Main Street Advisors, LLC, prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of July 2021 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual situation. Always contact your financial/investment professional before making any financial decisions. Main Street Advisors, LLC is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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