When You Should File for Social Security

During the 1996 presidential campaign, MTV asked both candidates whether they favored boxers or briefs. Bob Dole, as legend has it, answered “Depends”, as in he was so old he needed their incontinence protection. My answer for when you should take Social Security benefits is the same, it depends. Ultimately, when to file depends on what will benefit you the most in the long term, an answer a good financial plan will provide.

When presenting financial plans for clients we review what they can expect to receive in income from Social Security to cover part of their needs during retirement. Almost without exception, our clients joke that Social Security will surely go bankrupt right before they need it. While one can lose a LOT of money betting on what Congress will ever do, I firmly believe Social Security will always exist – maybe in a slightly different form – and will be an important income source for most of during retirement. So, here are some key things you need to know to help you maximize your benefits:

Social Security (SS) wasn’t designed to replace all of your wages:

As a result, Social Security should not be viewed as your primary source of income during retirement. In fact, we often plan that SS essentially be viewed as supplemental payments to your income from investment assets or pension income. A decent rule of thumb is to estimate you will need to replace about 85% of your pre-retirement income during your actual retirement, at least at first. So, plan to save enough to produce most of that from your 401(k), IRA, etc. and supplement that with SS income.

Your benefits are based on your entire earnings history:

Yes, that 6.2% you pay each pay period to Social Security is what funds most of our benefits. So, your benefit is calculated on your highest 35 years of earnings. If you don’t have 35 years of earnings, your monthly benefit will be reduced.

Do you know your full retirement age for social security?

You can receive Social Security as young as age 62 but you will only receive 75% of your monthly benefit at that age. At what age you can receive 100% of your SS benefit depends on when you were born. For instance, if you were born in, say, 1955 your full retirement age is 66 and 2 months. If you were born in 1960 and later, your full retirement age is 67.

You can benefit by delaying taking Social Security:

Starting at full retirement age, you will earn delayed retirement credits that will increase your benefit by 8% per year up to age 70. For example, if your full retirement age is 66, you can earn credits for a maximum of four years. At age 70, your benefit will then be 32% higher than it would have been at full retirement age – 8% times 4 years.

Social Security benefits may be taxable:

When you begin taking SS may depend, in part, if you are still working because, believe it or not, your Social Security benefits may be taxable at the federal and/or state level. If your adjusted gross income plus half of your Social Security income totals more than $25,000 as a single filer, 50% of your Social Security benefits are taxable at federal ordinary income tax rates. For couples filing jointly, this figure is $32,000. If a couple filing jointly earn more than $44,000, up to 85% of your benefits may be taxable.

Can retired teachers receive their deceased spouse’s Social Security benefit?

As Kentucky is one of the 14 states in the country that do not provide Social Security coverage for teachers, spousal benefits of retired teachers can be impacted. The Government Pension Offset, the GPO, reduces Social Security spousal benefits by two-thirds of the monthly benefit from any government pension the spouse receives for work not covered by Social Security. For example, suppose a teacher receives a $1,000-per-month KTRS pension benefit and is also eligible for $600 per month in Social Security spousal benefits based on her husband’s employment. Under the GPO requirement, the pension offset amount is $660 (two-thirds of $1,000) per month. Since the offset is greater than the Social Security spousal benefit, the teacher receives no Social Security.

A thorough financial plan will examine these factors and more and, ultimately, help us guide you to determine when the best time will be for you to file for Social Security.