social security basics

Social Security Part 1: The Basics

Social Security Basics are important to know as we approach retirement. When to take Social Security is a difficult decision that most Americans will have to make. In Part 1 of our Social Security Series, Kim Scott, FSA’s Director of Financial Planning, explains the basic rules of Social Security.

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Social Security Basics Transcript

Welcome to Technical Tuesday with Financial Services Advisory. My name is Kim Scott and I’m your host today. Today we’re going to talk about the basic rules of Social Security: first, when to file.

Social security basics: filing early (age 62 – before full retirement age)

There are three ages we would like to highlight for when to file. The first being age 62, which generally is the earliest which you can file. But one thing to note, is that if you do [file at age 62], you’re going to take a reduced benefit. And keep in mind this is a reduced benefit for the rest of your lifetime.

So how much is it reduced? Well it’s reduced by a fraction of a percentage for every month that you file early. So let’s say, for example, your Full Retirement Age is 67, but you decide to file at age 62. Now you’re filing sixty months early, which essentially would be a 30% reduction, and again a 30% reduction for the rest of your life.

Another thing to keep in mind, is that if you file early, before your Full Retirement Age, and you also continue to work, your benefits could be reduced. If you’re working and it’s any of the years prior to your full retirement year age, then your benefits could be reduced up to $1 for every $2 you earn above an annual limit.

The year you turn your Full Retirement Age, that actually changes to a reduction of $1 for every $3 you earn above that same limit. For example, let’s say your Full Retirement Age is 67, and you’re currently 65. Let’s also say that the annual limit is $14,000, and you’re currently earning $28,000. So you’re $14,000 above the annual earning limit.

So in this case, your Social Security benefit is reduced by $1 for every $2 you’re earning above. So in this case a $7,000 reduction in your annual Social Security benefit.

Social security basics: filing at full retirement age

The second time frame or age to highlight is your Full Retirement Age. Now I already mentioned it several times in this video, but what is your Full Retirement Age? The IRS defines it based on the year in which you were born.

If you were born before 1954, your Full Retirement Age is 66. And if you were born in 1960 or after, your Full Retirement Age is 67. Anywhere between those years, your Full Retirement Age is somewhere between age 66 and 67.

The main thing to note with your Full Retirement Age is that at that point your benefits are no longer reduced. You get your full retirement benefit. And also it doesn’t matter if you continue working and earning income. Your benefits will not be reduced because of it.

Social security basics: filing after full retirement age – age 70

Now the third age range to highlight is between your Full Retirement Age and age 70. So between those two points, for every year that you wait and delay taking your retirement benefit, your benefit grows by 8% per year.

Now similarly to taking it early, if you delay taking it, that increase is increased for the rest of your lifetime. And if you delay all the way to age 70, you maximize your benefit. And there’s really not a benefit to waiting beyond age 70, since the benefits stops growing at that point.

Now let me give you an example of if you were to delay. Let’s say your Full Retirement Age is 67, and your full retirement benefit is $2,000 a month. But if you wait to age 70, that benefit increases to $2,480 a month. That’s an increase of almost $500 a month, again, for the rest of your lifetime.

One thing to keep in mind, is that if you receive a pension based on work not covered by Social Security, then that could impact your Social Security benefits.

Social security basics: when should i file?

Now when it comes to when to file and how to maximize your Social Security benefit, it really depends on a few things. First, your life expectancy and your family’s general health history. It also depends on your specific situation – whether you’re single, married, divorced, or widowed.

If you have any questions based on your specific situation, feel free to give us a call or email us. For now, I’m Kim Scott and this has been Technical Tuesday!

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