When you work and pay FICA taxes, you earn credits toward Social Security retirement benefits. You can earn up to four credits per year and the credits are based on your annual earnings. Once you have acquired forty credits you are considered fully insured and eligible to receive benefits. Full retirement age depends on your year of birth and ranges from 65 to 67. Benefits are based on your primary insurance amount (PIA) which is calculated using your best 35 years of employment.
You don’t have to wait to start collecting benefits until your full retirement age. You could begin collecting as early as 62. However, collecting early does have some significant consequences which ought to be seriously considered. Depending on your full retirement age, collecting at 62 could result in a reduction of up to 30% of your monthly benefit amount. In addition, if you are still earning salary and wages when you begin benefits, the amount of your monthly benefit could also be reduced or withheld if your earnings exceed a certain threshold. For 2012 the threshold is $14,640. However, your benefit amount at full retirement age will be adjusted to account for withheld benefits. This earnings reduction only considers the individual’s salary and wages, not other types of income.
The Social Security Administration (SSA) rewards those who wait to begin collection of benefits. For every month you defer benefits after your full retirement age, up to age 70, you could be eligible for an up to 8% annual increase in benefits. The amount of an individual’s increase depends on their year of birth.
The SSA isn’t totally unforgiving. If you begin taking benefits and then decide you have made a mistake you can request to withdraw your application for benefits. The SSA will review your application and if approved it would be as if you had never started collecting. Of course there is a catch, you have to repay all of the benefits received to date, you must request your withdrawal within twelve months of collecting benefits and you can only request withdrawal once.
For most people the decision of when to collect benefits isn’t one that can be made in isolation. You should consider your spouse and the impact taking benefits early will have on their maximum benefit amount if they plan to take spousal benefits. Spousal benefits are benefits received based on your spouse’s PIA. You may also apply for benefits and then suspend collecting those benefits until a later date. This would enable you to still collect delayed retirement credits while allowing your spouse to collect spousal benefits. Widows and divorced spouses may be able to collect based on the record of a deceased spouse or an ex-spouse.
In the end the decision boils down to longevity, how long will you live. Since none of us knows the answer to this question you must do your best to guess. The longer you think you will live the more likely it is that delaying benefits will result in the largest total amount of benefits received.
If you have any questions regarding beginning to receive social security benefits, please contact a qualified tax professional or financial advisor/planner.
-Amylynn Johnson, CPA