Social Security Benefits

Your Social security benefit is calculated by three things: how long you worked and paid FICA taxes, how much you earned, and when you choose to get your social security benefits.

How Social Security Works:

Social Security functions just like a pension. As you work and pay FICA taxes, the government is putting aside money for you. To receive retirement benefits, excepting if you become disabled, you must have worked for 10 years and earned a minimum amount. For 2023, the minimum amount was $6,500. Your social security benefit is calculated by taking your 35 highest paid years in the labor force. Once you reach retirement and elect to gain your benefits, the government will send you a paycheck each month for the rest of your life.

FICA taxes are 15% of your income. However, employers pay half of it, so you only end up paying 7.5% of your income for FICA taxes. Social security has a wage cap which means to get the maximum social security benefit, your income must be at or above the wage cap for 35 years. The wage cap varies from year to year. For 2023, the wage cap was $160,200.

When you choose to gain your social security benefits also determines how much you will gain. Once you reach full retirement age (67 for everyone born after 1960), you will get your complete monthly benefit. If you choose to elect social security early (you are eligible at 62), you will get a reduced benefit (electing at 62 will reduce your benefit by 30%). However, for each year after your full retirement age that you wait to claim your benefits, your benefit will grow by 8% (you can defer benefits until age 70).

Note: Electing your social security benefits will not decrease your spouse’s spousal benefits. Their benefits are based off your benefit amount at full retirement age.

Example: If someone worked for 35 years paying FICA taxes, made more than the wage cap each year, and waited to gain their benefits until 70, they would gain the maximum benefit of each month ($4,555 in 2023).

Spousal Benefits

If you are married and your spouse has qualified for social security and has claimed their social security benefit, you can claim spousal social security benefits. If 50% of their benefit amount is more than your personal insurance amount, you will get your full amount + additional payment so your total benefit equals 50% of their benefit amount. For example, if your spouse’s PIA is $2,000 and your PIA is $800, you would get your $800 + $200 to get your total monthly benefit to $1,000.

If you claim your spousal benefits at your full retirement age, you will get 50% of your spouse’s full social security amount. Claiming your social security benefits early reduces your personal insurance amount and the amount of spousal benefit you can receive. The smallest spousal benefit you can get is 32.5%, leaving 17.5% on the table.

Note: Your spousal benefits will not include any delayed retirement credits your spouse received. This means the spousal benefits you receive will be the greatest once you reach full retirement age.

In the past, once reaching full retirement age, a spouse could claim their spousal retirement (dependents) benefits without claiming their own retirement benefit. This was called “filing a restricted application.” But now that option is only available to people who were at least 68 at the end of 2021. Anyone younger doesn’t have to opportunity to file a restricted application due to the Bipartisan Budget Act of 2015. This requires deemed filing which means you have to file for your benefits and spousal benefits simultaneously, if possible.

For most people, the first time that you can sign up for Medicare is 3 months before you turn 65. Enrolling in Medicare during this Initial Enrollment Period helps lock in the lowest premiums for Medicare coverage. For people who have already elected to gain social security benefits, their Medicare premiums are automatically deducted from their social security benefit. If you have enrolled in Medicare but are not receiving social security, you will get a premium bill from Medicare that you can pay online, through your bank, or by mail.

Both you and your spouse will receive social security benefits through separate payments, and they will either be through direct deposit or loaded onto a debit card.

Working During Retirement

You can receive social security benefits and work at the same time. However, if you have not reached full retirement age, there is a yearly earnings limit ($21,240 in 2023) that if you exceed in your earnings, your social security benefit will be reduced. For every $2 you earn above the earnings limit, social security will deduct $1 from your benefit. In the year you reach full retirement age, your limit changes ($56,520 in 2023) and social security will deduct $1 for every $3 above this limit. If your social security benefits are offset by earnings before full retirement age, social security will increase your monthly benefit at full retirement age. However, once you reach full retirement age, working will not reduce your social security benefits.

Survivor Benefits

When a spouse dies, social security provides monthly income benefits to the survivor if you’ve been married for at least 9 months and the spouse qualified for social security benefits by working. These survivor benefits are based off the social security payments that your spouse would have received. If they had early elected, their lower payment is the most you could get. On the flip side, if they had earned delayed retirement credits, they will be included in the benefit. If you decide to elect in survivor benefits early, the benefit will be reduced by .00339 for each month that is left until your full retirement age (your benefit would be reduced by 28.5% if you elected at age 60). Full retirement age for survivor benefits is 67 for everyone born in 1962 and later.

With a few exceptions, the earliest that you can receive survivor benefits is 60. If you are disabled and became disabled before or within 7 years of your spouse’s death, then you can receive 71.5% of benefits at 50. You can receive 75% of the benefit at any age if you have not remarried and you take care of your spouse’s child who is under age 16 or who is disabled and receives child benefits. Remarrying after age 60 will not affect your eligibility for survivor benefits.

Widows or widowers aren’t the only ones who can receive survivor benefits. Ex-spouses can receive survivor benefits at any age if they are the caretaker of the deceased’s child who is younger than 16 or has a disability is their natural or legally adopted child. If they aren’t the caretaker, if they were married to the deceased for at least 10 years they can receive benefits when they turn 60 or if disabled, 50. Unmarried children younger than 18 can get benefits, and under certain circumstances, stepchildren, grandchildren, step-grandchildren or adopted children can also receive benefits.

Key Takeaways

Social Security can be a great benefit to receive in retirement if you’ve worked for at least 10 years paying FICA taxes. Your work can also provide a benefit to your spouse during your retirement and when you pass away. Understanding when to elect in your benefits and knowing how much you will receive is tricky. A financial professional who has expertise in retirement planning can help you make an optimal social security election for your situation.

If you have any questions on how to best prepare your family for the future, one of our advisors would be happy to help!