One of the most important steps clients can take in planning for retirement is to understand their Social Security benefits. Here are some common questions they may ask.
The Social Security Act was signed into law by President Franklin Delano Roosevelt in August 1935. Initially, it only paid a single lump-sum retirement benefit. Monthly payments were implemented in 1940. Ever since, Social Security has been evolving.
In its current form, Social Security is a collection of programs that include:
The first monthly Social Security check was issued to Ida Mae Fuller in 1940 for $22.54. Over the course of two years, she had contributed only $24.75 to the program.
It depends on who’s receiving it.
|2018 Estimated Average Monthly Benefit1|
|All retired workers||$1,404|
|Aged couple, both receiving Social Security||$2,340|
|Widowed mother and two children||$2,771|
|Aged widow(er) alone||$1,336|
|Disabled worker, spouse, and one or more children||$2,051|
|All disabled workers||$1,197|
Benefits are available to workers who have earned 40 credits over the course of their careers. A worker may earn only four credits each year and must meet minimum earning requirements.
Example: A worker must have earned $1,320 to earn one Social Security credit. Earnings of $5,280 (4 x $1,320) would make the worker eligible for the maximum four credits. This means most workers become eligible for Social Security benefits after 10 years of employment.
The number of credits needed for a survivor to qualify for benefits depends on his or her age when the eligible worker dies. The younger the survivor, the fewer credits one needs—but no one needs more than 40 credits.
Eligible survivors include the worker’s:
However, survivors must meet certain age and/or financial requirements. For specifics, see Publication 05-10084, Survivors Benefits.
Workers qualify for Social Security disability coverage if they cannot do their normal work (the type of work they did before becoming disabled) and cannot adjust to other work because of the medical condition. The disability must last or be expected to last for at least one year or be expected to result in death. Workers must also meet different age-based earnings tests to qualify.
Workers can begin receiving benefits at age 62. However, benefits will be greater if the individual waits until he or she attains FRA (full retirement age), and greater still if the individual delays until after his or her FRA (up to age 70). FRAs are determined by the year the person was born.
Social Security benefits are paid in the month following the month for which they are due. For example, if a client’s 62nd birthday is July 15, his or her first month of entitlement is August. Therefore, he or she would receive the first check in September.
Yes. However, if your client has not attained FRA, monthly benefits may be temporarily reduced or eliminated. Once FRA is attained, the Social Security Administration will recalculate the client’s benefit amount to give credit for any months in which he or she did not receive benefits due to earnings, which may increase the benefit amount.
Benefits are calculated based on the amount of money earned over one’s lifetime. Specifically, the Social Security Administration adjusts a person’s income to account for changes in average wages over the years worked. Then, average indexed monthly earnings are used to determine a primary insurance amount (PIA). This is the amount a person receives each month if he or she starts benefits at full retirement age.
While a person can start benefits as early as age 62, deferring can result in higher monthly checks.
|If a client starts benefits at:||Monthly checks equal:
|Age 62||70%–75% of the PIA
|Full retirement age (FRA)
||100% of the PIA|
|After FRA||The PIA plus an 8% credit for each year deferred, up to age 70.
(At age 70, monthly checks can equal up to 132% of PIA.)
Let’s look at an example of how delaying benefits could affect a couple’s income. We’ll assume:
Note: When a spouse dies, the surviving spouse inherits the larger of the two retirement benefits.
|Age||Action Taken||Monthly Benefit
|62||Claim at 62||$750||$1,500|
|66||Wait until FRA
|70||Capture delayed retirement credit||$1,320 or $2,640 if husband dies
and he delayed benefits until age
Total difference in combined benefits by delaying until age 70 instead of starting at age 62:
$1,710/month or $20,520/year.
While delaying Social Security benefits can increase the amount clients receive each month, it’s not for everyone. Your client’s current need for income, family situation, and health should all be considered before making a decision.
There are only three sources of retirement income that are designed to last for a client’s entire life:
Whether or not a client decides to delay taking Social Security benefits, he or she will want to ensure there is enough income throughout their retirement years to cover essential expenses. Social Security benefits alone may not be enough, and few workers today have defined-benefit plans that guarantee lifetime income.
Annuities can be purchased as a source of lifetime income that will supplement Social Security benefits. Depending on the type of annuity, it can provide:
Guarantees are subject to the claims paying ability of the issuing insurance company.
Deciding when to start benefits—and calculating whether a client has enough lifetime income for his or her needs—are important steps in planning for a secure retirement. Once a client is ready to apply, he or she can either:
To collect the full benefit, make sure your client applies three months before he or she wants to receive the first payment.
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