This is the first post of Social Security Benefits of the “All You Need to Know about Social Security Benefits”. The second post will discuss about the tax and tax planning for Social Security Benefits
Social Security Benefits Introduction
Before deciding at what age a taxpayer should start collecting social benefits, taxpayers should understand the benefits differences between collecting the benefits at the age 62 and 70. This post shows how to calculate the benefits for the worker and his/her spouse and benefits for widower and children.
Most of us may have heard that a person needs a minimum of 10 years of work which equals to 40 credits to be eligible for Social Security retirement benefits.
Social Security benefits are computed by using average indexed monthly earnings up to 35 years of a worker’s earning. A worker can receive full retirement social security benefits if he/she waits until full-retirement age. For persons who were born between 1943 and 1954, the full retirement age is 66, at which the age the person is eligible to receive 100% of his/her benefits. See the below table for a full list of birth date and its corresponding full retirement age.
| Workers and Spouses | |
| Birth Date | Full Retirement Age |
| Prior to 1/2/1938 | 65 years |
| 1/2/1938–1/1/1939 | 65 years 2 months |
| 1/2/1939–1/1/1940 | 65 years 4 months |
| 1/2/1940–1/1/1941 | 65 years 6 months |
| 1/2/1941–1/1/1942 | 65 years 8 months |
| 1/2/1942–1/1/1943 | 65 years 10 months |
| 1/2/1943–1/1/1955 | 66 years |
| 1/2/1955–1/1/1956 | 66 years 2 months |
| 1/2/1956–1/1/1957 | 66 years 4 months |
| 1/2/1957–1/1/1958 | 66 years 6 months |
| 1/2/1958–1/1/1959 | 66 years 8 months |
| 1/2/1959–1/1/1960 | 66 years 10 months |
| 1/2/1960 and later | 67 years |
How to calculate the benefits if an individual decides to take the benefits before he/she reaches full retirement age?
Formula
The worker’s retirement benefit will be reduced by 5/9 of one percent for each month before full retirement age for up to 36 months. For each month in excess of 36 months, the benefit is reduced by 5/12 of one percent per month.
A spousal’s benefit is reduced by 25/36 of one percent for each month before full retirement age for up to 36 months. If the number of months exceeds 36, the benefit is further reduced 5/12 of one percent per month.
A worker will receive an 8% per year increase (until age 70) in benefits for every year of Social Security delayed beyond full retirement age. Delaying the retirement age beyond age 70 will not result in additional benefits.
Spousal Benefits
A spousal insurance benefit is one-half of the worker’s primary insurance amount.
- The spouse is either at least 62 yrs old or disabled in order to qualify for the benefits on the worker’s social security record and the spouse has been married to the worker for at least one continuous year before filing for the application. The benefits will get reduced if the spouse starts collecting the benefit before his/her full-retirement age.
- If the spouse is under 62 yrs old and spouse is responsible for children under 16 or mentally/physically disabled child at age 16 or over.
Examples
Below is an example to illustrate the different amounts of benefits for both a worker and his/her spouse based on the age when the worker starts collecting social security benefits. In this example, the full-retirement age for both worker and his/her spouse is age 67, and the full-benefit is $1,000/month at age 67.
| $1,000.00 | Worker | Spouse | |||
| Age to | Months before 67 years old | Percent (Reduction/Increase) | Amount | Percent Reduction | Amount |
| 62 years old | 60 | -30.00% | $700.00 | -35.00% | $ 325.00 |
| 63 years old | 48 | -25.00% | $750.00 | -30.00% | $ 350.00 |
| 64 years old | 36 | -20.00% | $800.00 | -25.00% | $ 375.00 |
| 65 years old | 24 | -13.33% | $866.67 | -16.67% | $ 416.67 |
| 66 years old | 12 | -6.67% | $933.33 | -8.33% | $ 458.33 |
| 67 years old | 0 | 0.00% | $1,000.00 | 0.00% | $ 500.00 |
| 68 years old | 0 | 8.00% | $1,080.00 | 0.00% | $ 500.00 |
| 69 years old | 0 | 8.00% | $1,160.00 | 0.00% | $ 500.00 |
| 70 years old | 0 | 8.00% | $1,240.00 | 0.00% | $ 500.00 |
| 71 years old | 0 | 8.00% | $1,240.00 | 0.00% | $ 500.00 |
| 72 years old | 0 | 8.00% | $1,240.00 | 0.00% | $ 500.00 |
Benefit Calculation
If the worker and spouse start collecting the retirement benefits at age 62 which is 5 years earlier than his/her full-retirement age (67) or 60 months before 67 years old.
Reduction percent (Worker) = 36 x (5/9) + (5/12) x (60 -36) x 1% = 30%
Amount of benefit to receive (Worker) = $1,000 x (100% -30%) = $700/month
Reduction percent (Spouse) = 36 x (25/36) + (5/12) x (60 – 36) x 1% = 35%
Amount of benefit to receive (Spouse) = ($1,000 x (100% – 35%))/2 = $325/month ( Spousal benefit equals 50% of the worker benefit)
From the above table, spousal benefits will not increase even if the spouse delays collecting his/her spousal benefit. Moreover, the worker won’t get any additional benefits if he/she delayed collecting his/her benefit beyond age 70. Therefore, DO NOT delay collecting your social security benefits beyond age 70 and spouse should start collecting his/her spousal benefit at 67 to get the full benefits.
Can a divorced spouse be eligible for spousal social security benefits?
The good news is if an individual is divorced and if the previous marriage lasted 10 years or longer, he/she is still eligible for spousal benefits on his/her ex-spouse’s record (Regardless whether the ex-spouse remarries or not) as long as the individual meets following conditions:
- The individual is unmarried. If the individual remarries, he/she may not be eligible to collect benefits on the former spouse’s record (some exceptions) unless the later marriage ends.
- The divorced spouse is 62 years old or more.
- Worker is qualified for the benefits and marriage has ended for at least two years.
If the divorced spouse is eligible for his/her own benefits and spousal benefits, the individual will get the higher amount of both benefits. Remarriage before age 50 may end the benefits unless the subsequent marriage ends.
A divorced spouse receives 50% of the ex-spouse’s full-retirement amount. And that does NOT effect the benefits of the worker or his/her current spouse benefits.
Widower (Surviving Spouse) Social Security Benefits
A widower can claim benefits on a worker’s Social Security Record if he/she meets the following conditions:
- The widower is age 60 or more.
- The surviving spouse is between 50 and 60 years old and disabled.
- The widower is not married.
- The surviving souse was married to the worker for at least 9 months before the worker died.
What will happen if the widower or the surviving divorced spouse remarries?
Surviving spouse can claim benefits if he/she meets one of the following:
- Remarriage after age 60.
- Surviving divorced spouse or widower is at least 50 yrs old and is disabled prior to the remarriage.
How much social security benefits will a widower receive?
The widower receives 100% of the deceased worker’s benefits, and in addition to any of the worker’s delayed benefits. However, the widower’s benefit will be reduced depending on the family’s maximum benefits.
How about the social security benefits for children?
An unmarried child can get up to half of the parent’s full benefits or 75% of the deceased parent’s benefits which is subjected to family maximum if he/she is:
- Younger than age 18.
- Age 18-19 and a full-time student (no higher than grade 12).
- 18 or older with a disability that began before age 22.
Other things to consider for Social Security Benefits
If a person begins to receive Social Security benefits before full retirement age, $1 in benefits will be withheld for every $2 the taxpayer earns above the maximum earnings limit. For 2021, the maximum earnings limit is $18,960. This earnings limit applies to earned income such as W-2 wages and self-employment income. It does not apply to investment income such as interest, dividends, and pension benefits.
If a person begins to receive Social Security benefits before full retirement age, $1 in benefits is withheld for every $3 the taxpayer earns above the maximum earnings limit for the year the taxpayer turns full retirement age. The limit only applies to earnings for months prior to attaining full retirement age. For 2021, the maximum earnings limit for the year of full retirement is $50,520
A worker can keep all social security benefits regardless of how much they earn when they reach full retirement age. Therefore, it’s also important to pick the time to collect retirement benefits. I will discuss about tax impact and tax planning for social security benefits in the follow-up POST.
References
- Retirement Benefits
https://www.ssa.gov/benefits/retirement/
Khanh Le, preferred name as Jessica Le, is a licensed Certified Public Accountant (CPA). Jessica also earned a Master of Business Administration (MBA) from San Jose State University.
