The Social Security Guide

As you toil away at your job in your 20s, 30s and 40s, you may not be thinking about the financial safety net you're quietly building for your retirement years. Thanks to Social Security, nearly all Americans are assured a guaranteed monthly income after they reach retirement age—no matter how long they live.

Knowing when to take Social Security just might be the most important decision you'll make in retirement. Claim benefits early and you and your spouse will face a steep and permanent cut in monthly income. Waiting until later, however, and you'll collect a payout that's as much as 50 percent higher. The more you know about Social Security, the more likely you'll be able to maximize the benefits you've earned over a lifetime of working.

Your Social Security retirement benefit is based on your lifetime earnings. The higher your earnings, up to a maximum taxable amount of $137,700 a year, the higher your benefit.

When you are employed and pay Social Security payroll taxes, you can earn up to a maximum of four work "credits" a year by making at least $5,640. You must earn at least 40 credits over 10 years to qualify for a retirement benefit. Your benefit is based on the 35 years in which you earned the most money. If you haven't worked for some of those 35 years, zeros for those non-working years are averaged into the calculation, which will lower your payout. Social Security uses a formula, based on your average indexed monthly earnings, to arrive at your basic benefit.

You can increase your benefit by replacing low-earning years or zeros in your record with higher-earning years later in your career, perhaps by working longer than you had anticipated. Also, the age at which you claim benefits can dramatically affect your lifetime payout. For example, you may qualify for benefits at age 62, but the longer you wait to claim your benefit, the higher your monthly payment will be—up to a point. Once you reach 70, the benefit payout no longer rises.

If you don't know what your Social Security retirement benefit might be, now's the time to start looking into it. The Social Security Administration's online Retirement Estimator can provide estimates based on your actual Social Security earnings record.

You can also sign up for an account where you can chart your income and projected benefits estimates.

Deciding when to claim Social Security is extremely important to your overall financial situation in retirement. You might opt for early retirement benefits at age 62, full retirement benefits at age 66 or 67 (depending on when you were born) or late benefits at age 70. (If you were born in 1960 or later, your full retirement age is 67.)

You're probably wondering which approach might be best, but that depends almost entirely on your circumstances, including what your income needs might be in the short term and over your lifespan.

Each year you delay collecting Social Security between ages 62 and 70 increases your payout by about 8 percent.

Here's a short rundown of the pros and cons of various claiming strategies:

To maintain your standard of living in retirement, financial experts say you'll need about 70 percent of your current income. As a result, financial planners have long recommended that Social Security benefits be viewed as just one leg of a "three-legged stool" needed for financial security in retirement. The second leg would be employer-based pensions, 401(k) plans and the like. The third leg would be earnings and asset income.

If you're like many Americans, a single asset—your home—may represent your most important financial resource for retirement, after Social Security. You can sell your home to create an instant nest egg for retirement, for example, or tap its equity through a line of credit or reverse mortgage. Or, by paying off your mortgage and continuing to live in your home, you can dramatically reduce the amount of income you'll need to cover expenses during retirement.

Social Security is perhaps the strongest leg of the stool, providing 37 percent of all income for Americans age 65 and older. It's especially important to older Americans with lower incomes. Nearly a fourth of all Social Security beneficiaries have no other source of retirement income.

Private retirement plans provide 18 percent of all income for older Americans. They include pensions and defined contribution plans such as 401(k)s and Individual Retirement Accounts (IRAs).

Earnings and asset income make up the largest—but not necessarily the most stable—leg of the stool, providing 41 percent of all income of Americans age 65 and older. A generation ago, older Americans relied more on asset income than earnings. But people are staying in the workforce longer than they used to, and the tables have turned. Today, 30 percent of all income for older Americans comes from earnings and just 11 percent from assets (income from savings accounts, investments, or reverse mortgages on homes, for example).

Social Security is vitally important for all Americans, but it's especially critical to the financial security of women. Here are just some of the reasons why:

Women earn less than men
Women who work full-time earn only about 81 cents for every dollar earned by men. They're also more likely than men to have low-wage and part-time jobs. Earning less not only means saving less but also putting less into Social Security, which translates into a smaller benefit.

Women are in and out of the workforce more than men
The typical woman is in the workforce for 32 years; the typical man, 44 years. That's mostly because women are more likely than men to take time out of the workforce for caregiving, such as raising children or taking care of elderly parents. They're hurt by years with no earnings, which results in a smaller retirement benefit.

Women are less likely than men to have pensions and other retirement plans
Only 22 percent of retired women receive income from pensions compared with 28 percent of men. Moreover, the average pension benefit for women is only 64 percent of the average benefit for men. Also, women are more than twice as likely as men to work part-time and are more likely to change jobs. This leaves them less likely to be able to qualify for employer-sponsored pension, 401(k) and other retirement plans.

Women live longer than men
Women today who reach age 65 outlive men, on average, by 2.3 years (86.6 years versus 84.4 years). With their longer lifespans, women tend to live more years in retirement than men, are more likely to be widowed and are at greater risk of exhausting their sources of income.

In certain circumstances, a husband or wife can receive up to 50 percent of a spouse's Social Security benefit. This spousal benefit is available even if one spouse has never worked.

To claim a spousal benefit, the following criteria must be met:

• You must be at least 62, unless you are caring for a spouse's child who is under age 16 or disabled, in which case the age limitation doesn't apply.
• Your spouse must already have filed for Social Security retirement or disability benefits.

There are, however, some wrinkles to consider before you make a decision on the spousal benefit.

Claiming the spousal benefit before your full retirement agewill trigger Social Security's benefit-reduction—or "deeming"—rules. If you retire at age 62, for example, your benefit could be as little as 32.5 percent of your spouse's primary insurance amount. If you wait until full retirement age, your benefit could be 50 percent of your spouse's benefit amount.

If you are divorced, you may be able to claim a spousal benefit based on your ex-spouse's record. There are, however, these limitations:

• You must have been married to your ex-spouse for at least 10 years.
• You must be at least 62 years old.
• You must be unmarried (even if your ex-spouse remarried).
• You must not be eligible for an equal or higher benefit on either your own or someone else's Social Security record.

Here's some good news: you can get Social Security retirement benefits and work at the same time, increasing your household income. Now the not-so-good news: Social Security will reduce your benefits but only if you are younger than your full retirement age and your earnings exceed certain yearly limits.

In 2020, if you're younger than your full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above $18,240. If you reach your full retirement age during the year, Social Security will deduct $1 for every $3 you earn above $48,600 up to that point.

You can also check out SSA's Retirement Earnings Test Calculator to find out how much your benefits will be reduced.

Now back to good news: starting with the month you reach your full retirement age, Social Security won't reduce your benefits no matter how much you earn. But you may have to pay income tax on your benefits—up to 50 percent for individuals earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000, and as much as 85 percent if your earnings are above those amounts.

And there's one other tax issue. As long as you continue to work, you'll have to continue to paying Social Security taxes on your earnings.

If you're a U.S. citizen, you can travel to or live in most foreign countries without affecting your Social Security benefit. But if you're in one of the countries shown below, Social Security may not be able to send your payments there:

• AZERBAIJAN
• BELARUS
• CUBA
• GEORGIA
• KAZAKHSTAN
• KYRGYZSTAN
• MOLDOVA
• NORTH KOREA
• TAJIKISTAN
• TURKMENISTAN
• UKRAINE
• UZBEKISTAN
• VIETNAM

[Note: Social Security may make exceptions, however, for certain eligible beneficiaries in countries other than Cuba and North Korea. Contact your local Social Security office for more information.]

Social Security also pays monthly benefits to people whose disability has lasted or is expected to last at least a year. To qualify, you must have a medical condition that meets the SSA's definition of disability and you must have worked long enough to qualify.

Benefits usually continue until you are able to work again on a regular basis. If you are receiving Social Security disability benefits when you reach full retirement age, your disability benefits automatically convert to retirement benefits and the amount remains the same.

Children also become eligible for monthly benefits when one or both of their parents retire, become disabled or die, but they must meet certain criteria. For example, when a parent retires, the child must be unmarried, under age 18 (or 18 or 19 and in grade 12 or lower) or be disabled from a disability that started before age 22. (A child who is disabled will get his or her own Social Security disability payments after age 18).

Any benefits paid to your children will not decrease your retirement benefit. In fact, the value of the children's benefits, added to your own, may help you decide if taking your retirement benefits sooner may be more advantageous.

Within a family, each qualified child may receive a monthly payment of up to one-half of your full retirement benefit amount, but there is a limit to the total amount paid to family members—generally, 150 to 180 percent of your full retirement benefit.

There are three ways to apply for Social Security benefits:

• Make an appointment at your local Social Security office to visit in person.
• Apply by telephone by calling 1-800-772-1213.
• Apply for Social Security online at www.socialsecurity.gov, a process that typically takes 15 to 30 minutes.

In most cases, once you submit an application online, you're done. There are no forms to sign and usually no documentation is required. Social Security will process your application and contact you if any additional information is needed.

You'll be automatically enrolled in Medicare Part A (Hospital Insurance, which is free) and Medicare Part B (Medical Insurance, which isn't free). Medicare Part B premiums are deducted from Social Security benefit payments. Because you must pay a premium for Part B coverage, you can turn it down. If you decide to enroll in Part B later on, however, you may have to pay a late enrollment penalty for as long as you have coverage. (Your monthly premium will go up 10 percent for each 12-month period you were eligible for Part B, but didn't sign up for it, unless you qualify for a special enrollment period.)`You can also obtain coverage through Medicare Advantage, which covers Part 1 and Part B costs.

Here's a list of websites and other sources of authoritative information about Social Security benefits.

Websites

• Social Security Administration
• My Social Security
• Medicare (Centers for Medicare & Medicaid Services)
• National Committee to Preserve Social Security & Medicare

Online Calculators (Social Security Administration)

• Social Security Quick Calculator
• Social Security Retirement Estimator
• Life Expectancy Calculator
• Retirement Age Calculator
• Earnings Test Calculator
• Early or Late Retirement Calculator
• Benefits for Spouses Calculator

Publications (Social Security Administration)

• Retirement Benefits
• What Every Woman Should Know
• When To Start Receiving Retirement Benefits
• How Work Affects Your Benefits
• Retirement Toolkit

Books

• Get What's Yours: The Secrets to Maxing Our Your Social Security by Laurence J. Kotlikoff, Philip Moeller, and Paul Solman (Simon & Schuster, 2015)
• Social Security for Dummies (3rd Edition) by Jonathan Peterson (Wiley, 2018)