Understanding Social Security - 2007:
| John Rukosky of Rukosky & Associates |
We believe there is a critical difference
between our firm and others that
perform only financial planning: while
others will refer you to a tax advisor
after having designed a financial plan
for you, at Rukosky & Associates
Financial Group Inc. you are
consulting with a tax accountant, so
we know your plan will succeed.
between our firm and others that
perform only financial planning: while
others will refer you to a tax advisor
after having designed a financial plan
for you, at Rukosky & Associates
Financial Group Inc. you are
consulting with a tax accountant, so
we know your plan will succeed.
Contact us:
508 Driewood Court
Raleigh, NC 27609
Office: 919.781.9319
Mobile: 919.906.4234
Fax: 919.791.0990
Email: john@rafginc.com
Raleigh, NC 27609
Office: 919.781.9319
Mobile: 919.906.4234
Fax: 919.791.0990
Email: john@rafginc.com
Enacted in 1935, Social Security was designed to alleviate the poverty
and despair that so many elderly experienced during and after the Great
Depression. In 1940, approximately 220,000 people received benefits
from Social Security. Today, more than 47 million people in the United
States receive benefits.
and despair that so many elderly experienced during and after the Great
Depression. In 1940, approximately 220,000 people received benefits
from Social Security. Today, more than 47 million people in the United
States receive benefits.
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To receive Social Security retirement, survivors, or disability benefits, a
person must be “insured” under the Social Security program. Once a
person is deemed to be “fully insured,” insurance benefits can be paid to
the person or the person’s family. Whether a person is fully insured is
based on credits. The credits indicate how long a person has
participated in the program and, therefore, how much one has
contributed to the system. To qualify for retirement benefits, an individual
needs approximately 40 credits, which is the equivalent of about ten
years of work under the program.
The primary factors that establish a worker’s retirement benefits under
Social Security are his or her earnings and the age at which he or she
elects to receive benefits.
Earnings and The Primary Insurance Amount
A worker’s primary insurance amount (PIA) is a figure based on an
individual’s taxable earnings, averaged over the person’s working career.
The average taxable earnings yield a monthly benefit that partially
replaces a person’s earned income due to retirement, disability, or
death. The PIA is also used to calculate benefits for the worker’s spouse
and dependents should the worker become disabled or pass away.
The monthly Social Security benefit (the PIA) is based on the average
indexed monthly earnings (AIME), which are based on a lifetime
earnings history. The AIME accounts for wages on which FICA taxes
(Social Security and Medicare payroll taxes) have been paid and adds a
weighting factor for inflation and cost–of-living increases over those
years. From the AIME, the primary insurance amount (the monthly
Social Security benefit) that a worker would receive at his or her full age
is determined. In general, the higher the AIME, the greater the monthly
benefit.
Even if one person in the household is receiving benefits, it should be
noted that a spouse can receive benefits at the same time by virtue of
their own earnings history or under the spousal benefit. Under the
spousal benefit, the spouse of a fully insured worker who elects to take
benefits at full retirement age is entitled to a benefit equal to 50 percent
of the worker’s monthly benefit. Unmarried, dependent children under the
age of 18 can also receive a benefit based on 50 percent of the greater of
either parent’s PIA.
The Full Retirement Age
The second controlling factor that sets a person’s retirement benefit is
the age at which the benefit begins. Receiving benefits can begin as
early as age 62, or can be delayed until age 70. By electing to take
benefits as early as age 62, a person is electing to receive decreased
Social Security benefits. On the other hand, if a person delays taking
benefits until after the person’s Full Retirement Age (FRA), benefits
increase (see the second Social Security page on this website, “Social
Security Strategy,” for how married couples can maximize their Social
Security benefits).
I mentioned the Full Retirement Age (FRA) above. The FRA is the age at
which a worker can expect to receive full Social Security benefits as
calculated from their taxable earnings. Until the year 2000, the FRA was
age 65. In the year 2000, Congress enacted legislation that has
scheduled the FRA to gradually increase for those born in 1938 and
later. Scheduled full retirement ages are shown below.
Scheduled Full Retirement Ages
It is important to note that if a worker elects to begin Social Security
benefits before his or her FRA, the benefit they would have received at
their FRA is reduced by a fraction of a percent: 5/9 of 1 percent for each
of the first 36 months, plus 5/12 of 1 percent for each month beyond 36
months. For example, if an individual was born in January, 1944, and
they would have reached their Full Retirement Age on November 1, 2010,
but that person begins taking Social Security benefits at age 62 (48
months before their FRA), their benefit would be reduced by 25 percent.
And, even more important to consider is that their benefits will not
increase to the full FRA levels when the individual finally reaches their
FRA.
Conversely, if an individual delays claiming his or her Social Security
benefits beyond his or her FRA (up to age 70), that person can receive
an increase in their monthly benefit. These increases are called “delayed
retirement credits” and are scheduled as follows:
Schedule of Delayed Retirement Credits
Spouses are also allowed to take reduced benefits as early as age 62.
Congress, in the year 2000, added a provision to the Social Security
regulations that allows a worker to file for Social Security at age 66 (so
his spouse can collect benefits) and then “suspend” his own benefits. By
delaying his own benefits past his FRA, the worker’s benefits increase.
The decision to opt for (1) reduced benefits at an earlier age, (2) normal
benefits at the FRA, or (3) increased benefits by delaying your claim
beyond your FRA is a personal decision. For your consideration, the age
at which the accumulated value of the higher benefits begins to exceed
the accumulated value of the reduced benefits taken at an earlier age
occurs at some point in a person’s mid-70’s. Review the next topic, “The
Social Security Earnings Test,” to help you make a decision.
The Social Security Earnings Test
When considering whether to take early benefits, people should address
whether they will continue to work and earn an income. Those who
collect Social Security benefits before their FRA are subject to an
earnings test: for every $2 in wages an individual earns above a specific
limit, his or her Social Security benefits are reduced by $11. For the
month in which a worker reaches their FRA and thereafter, no earnings
limit is applied; an individual can earn any amount with no effect on his
or her benefits.
The Social Security earnings limit does not apply to the following income:
If you are considering taking early benefits (prior to your FRA) and you
are considering working after you take benefits, review the table below to
see how taking your benefits prior to your FRA may cause a reduction in
your Social Security benefits.
Example #1: Worker Born in 1943
– Currently Age 62 – FRA of 66 Years Old
Example #2: Worker Born in 1943
– Currently Age 62 –FRA of 66 Years Old
1 In 2007, this limit was $12,960 up until the year of one’s FRA. During
the FRA year, the limit increased to $34,440. For every $3 earned over
this limit, Social Security benefits were reduced by $1. These limits are
subject to COLA adjustments every year.
Note: 2007 figures ($12,960 and $34,440) are being used to arrive
at the results in the table. COLA adjustments in years beyond 2007
will increase the earned income limitation figures and, therefore,
the amount of the Social Security Benefit Reduction.
The Moral of The Story: Planning is key here. A lack of planning could
result in a significant reduction of your Social Security benefits and your
income as a whole. And, your decision isn’t correctable – you have to
live with it throughout all of your retirement years. Please consult your
financial or tax advisor prior to filing a claim for Social Security benefits
to see how it might impact your income and your retirement plans.
A Strategy for Claiming Social Security Benefits
person must be “insured” under the Social Security program. Once a
person is deemed to be “fully insured,” insurance benefits can be paid to
the person or the person’s family. Whether a person is fully insured is
based on credits. The credits indicate how long a person has
participated in the program and, therefore, how much one has
contributed to the system. To qualify for retirement benefits, an individual
needs approximately 40 credits, which is the equivalent of about ten
years of work under the program.
The primary factors that establish a worker’s retirement benefits under
Social Security are his or her earnings and the age at which he or she
elects to receive benefits.
Earnings and The Primary Insurance Amount
A worker’s primary insurance amount (PIA) is a figure based on an
individual’s taxable earnings, averaged over the person’s working career.
The average taxable earnings yield a monthly benefit that partially
replaces a person’s earned income due to retirement, disability, or
death. The PIA is also used to calculate benefits for the worker’s spouse
and dependents should the worker become disabled or pass away.
The monthly Social Security benefit (the PIA) is based on the average
indexed monthly earnings (AIME), which are based on a lifetime
earnings history. The AIME accounts for wages on which FICA taxes
(Social Security and Medicare payroll taxes) have been paid and adds a
weighting factor for inflation and cost–of-living increases over those
years. From the AIME, the primary insurance amount (the monthly
Social Security benefit) that a worker would receive at his or her full age
is determined. In general, the higher the AIME, the greater the monthly
benefit.
Even if one person in the household is receiving benefits, it should be
noted that a spouse can receive benefits at the same time by virtue of
their own earnings history or under the spousal benefit. Under the
spousal benefit, the spouse of a fully insured worker who elects to take
benefits at full retirement age is entitled to a benefit equal to 50 percent
of the worker’s monthly benefit. Unmarried, dependent children under the
age of 18 can also receive a benefit based on 50 percent of the greater of
either parent’s PIA.
The Full Retirement Age
The second controlling factor that sets a person’s retirement benefit is
the age at which the benefit begins. Receiving benefits can begin as
early as age 62, or can be delayed until age 70. By electing to take
benefits as early as age 62, a person is electing to receive decreased
Social Security benefits. On the other hand, if a person delays taking
benefits until after the person’s Full Retirement Age (FRA), benefits
increase (see the second Social Security page on this website, “Social
Security Strategy,” for how married couples can maximize their Social
Security benefits).
I mentioned the Full Retirement Age (FRA) above. The FRA is the age at
which a worker can expect to receive full Social Security benefits as
calculated from their taxable earnings. Until the year 2000, the FRA was
age 65. In the year 2000, Congress enacted legislation that has
scheduled the FRA to gradually increase for those born in 1938 and
later. Scheduled full retirement ages are shown below.
Scheduled Full Retirement Ages
It is important to note that if a worker elects to begin Social Security
benefits before his or her FRA, the benefit they would have received at
their FRA is reduced by a fraction of a percent: 5/9 of 1 percent for each
of the first 36 months, plus 5/12 of 1 percent for each month beyond 36
months. For example, if an individual was born in January, 1944, and
they would have reached their Full Retirement Age on November 1, 2010,
but that person begins taking Social Security benefits at age 62 (48
months before their FRA), their benefit would be reduced by 25 percent.
And, even more important to consider is that their benefits will not
increase to the full FRA levels when the individual finally reaches their
FRA.
Conversely, if an individual delays claiming his or her Social Security
benefits beyond his or her FRA (up to age 70), that person can receive
an increase in their monthly benefit. These increases are called “delayed
retirement credits” and are scheduled as follows:
Schedule of Delayed Retirement Credits
Spouses are also allowed to take reduced benefits as early as age 62.
Congress, in the year 2000, added a provision to the Social Security
regulations that allows a worker to file for Social Security at age 66 (so
his spouse can collect benefits) and then “suspend” his own benefits. By
delaying his own benefits past his FRA, the worker’s benefits increase.
The decision to opt for (1) reduced benefits at an earlier age, (2) normal
benefits at the FRA, or (3) increased benefits by delaying your claim
beyond your FRA is a personal decision. For your consideration, the age
at which the accumulated value of the higher benefits begins to exceed
the accumulated value of the reduced benefits taken at an earlier age
occurs at some point in a person’s mid-70’s. Review the next topic, “The
Social Security Earnings Test,” to help you make a decision.
The Social Security Earnings Test
When considering whether to take early benefits, people should address
whether they will continue to work and earn an income. Those who
collect Social Security benefits before their FRA are subject to an
earnings test: for every $2 in wages an individual earns above a specific
limit, his or her Social Security benefits are reduced by $11. For the
month in which a worker reaches their FRA and thereafter, no earnings
limit is applied; an individual can earn any amount with no effect on his
or her benefits.
The Social Security earnings limit does not apply to the following income:
- Pensions and retirement pay (including Social Security benefits);
- 401(k) and IRA withdrawals;
- Dividends and interest from investments;
- Capital gains;
- Rental income (unless the worker is in the real estate business);
- Workers Compensation benefits;
- Unemployment Compensation benefits
- Employee contributions to a Section 125 plan; and
- Sick pay paid more than six months after the month last worked
If you are considering taking early benefits (prior to your FRA) and you
are considering working after you take benefits, review the table below to
see how taking your benefits prior to your FRA may cause a reduction in
your Social Security benefits.
Example #1: Worker Born in 1943
– Currently Age 62 – FRA of 66 Years Old
Example #2: Worker Born in 1943
– Currently Age 62 –FRA of 66 Years Old
1 In 2007, this limit was $12,960 up until the year of one’s FRA. During
the FRA year, the limit increased to $34,440. For every $3 earned over
this limit, Social Security benefits were reduced by $1. These limits are
subject to COLA adjustments every year.
Note: 2007 figures ($12,960 and $34,440) are being used to arrive
at the results in the table. COLA adjustments in years beyond 2007
will increase the earned income limitation figures and, therefore,
the amount of the Social Security Benefit Reduction.
The Moral of The Story: Planning is key here. A lack of planning could
result in a significant reduction of your Social Security benefits and your
income as a whole. And, your decision isn’t correctable – you have to
live with it throughout all of your retirement years. Please consult your
financial or tax advisor prior to filing a claim for Social Security benefits
to see how it might impact your income and your retirement plans.
A Strategy for Claiming Social Security Benefits
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