Social Security benefits are largely funded by today’s workers via payroll taxes. However, the number of retired workers is projected to double in less than 30 years. Furthermore, the ratio of workers paying Social Security taxes relative to the number of people collecting benefits is expected to fall from 2.9:1 to 2:1 by 2034.
Obviously, there’s been a lot of media attention given to the shortfalls of the Social Security system and the need for retirees to be prepared to fend for themselves. However, it’s also important to know that there are strategies you can employ today that will help maximize benefits for both you and the surviving spouse.
First of all, it’s important to know that if you begin drawing benefits before full retirement age (which is 67 if you were born in 1960 or later), the amount of your eligible benefit will be permanently reduced.
|Age to receive full Social Security benefits as of 02/28/13|
|Year of birth||Full retirement age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
|NOTE: People who were born on January 1 of any year should refer to the previous year.|
Spousal or “derivative” Social Security benefits are determined by the work history and earnings of each spouse, as well as the age at which they apply for and/or begin drawing benefits. The spousal benefit is half of the higher earner’s accrued benefit at the time the spouse begins drawing benefits. Should the higher-earning spouse start taking benefits earlier than full retirement age, the spouse’s derivative benefit will be less. Be sure to consider the longer-term advantages of delaying your benefits – for both you and your spouse.
Delayed Retirement Benefits
If you continue working past full retirement age and wish to delay withdrawing benefits, you could earn Delayed Retirement Credits. DRCs are applied to future benefits after full retirement age. Currently, the Delayed Retirement Credit is 8 percent per year and stops once you reach age 70. Be aware that spousal benefits do not include any DRCs, but a spouse may draw benefits while the higher earner accrues the credits.
File and Suspend
A lower-earning spouse can collect benefits based on the higher earning spouse’s history. To do so, the higher earner must apply for Social Security retirement benefits first. However, if the higher-earning spouse has reached full retirement age, he or she may apply for benefits and then file to suspend drawing them until later. This allows the spousal benefit to begin while enabling the higher earner to earn Delayed Retirement Credits.
One little-known strategy is that once you reach full retirement age, you may apply for a restricted benefit based on your spouse’s earnings as long as that earner is already receiving benefits. Even if you are the higher earner, you may instruct Social Security to restrict your benefit to your spouse’s earnings – which means you will be entitled to up to 50 percent of the benefit your spouse receives. This strategy enables you to earn Delayed Retirement Credits on your own benefit up until age 70, at which time you can switch over to the higher benefit based on your work history with the extra credits. This option is not available before full retirement age.
How Job Income Affects Taxes
If you begin drawing Social Security benefits before you reach full retirement age and your earnings exceed the eligible limit ($15,120 in 2013), your benefits will be taxed. Once you’ve hit your earnings threshold, $1 in benefits will be deducted for every $2 earned above $15,120.
To calculate a personalized estimate of your Social Security benefits, use the online Retirement Estimator at ssa.gov/estimator.