Ask Rusty - Should I Claim Social Security at 68, or Wait Until I'm 70?
Dear Rusty: I have a question regarding my SS benefits. I turned 68 this month and work part time. I earned $28,000 last year but will probably gross $36,000 to $38,000 this year. My husband collects his SS, and he earned $25,000 last year. I was told by a financial planner that I should apply for my benefits now, instead of waiting until I'm 70. I would collect $1700/month at 68 and $1944/month if I wait. Which is the smarter move? Signed: Seeking Answers
Dear Seeking: I'm sure your financial advisor would agree that your decision on when to claim your Social Security comes down to just a few basic things - 1) how badly you need the money, 2) your life expectancy, and 3) whether you will receive a spousal boost from your husband when you claim.
Because you have already passed your full retirement age (FRA) of 66 years and 4 months, your work earnings won't negatively affect your monthly SS benefit amount. If you claim now, however, your work earnings will affect how much of your SS benefits will be subject to income tax. Assuming you file your income tax as "married/filing jointly," up to 85% of the Social Security benefits you receive during the tax year will become part of your income taxable by the IRS. If you do not urgently need the extra money that your SS will provide, then waiting longer to claim will also postpone paying income tax on your received benefits, and that may be a consideration.
Your life expectancy is key in making your decision on when to claim. You already know that your benefit will be $244 per month more if you wait until you are 70 to claim. If you claim at 68 (e.g., this month), you will collect about $40,800 by the time you reach 70. If you, instead, wait until age 70 to get that extra $244/month benefit, it will take you about 14 years collecting at the higher rate to offset the $40,800 you would have received had you claimed now (in other words, you would break even moneywise at about age 84). If your life expectancy is longer, then waiting to claim may be the better choice. Of course, no one knows how long they will live but, for general guidance, average life expectancy for a woman your current age is about 87. Family history and your current health are obviously influencing factors as well. If you wish to get a more personal estimate of your life expectancy, I suggest using this tool:
In the end, if you believe you will attain at least average life expectancy and you don't urgently need the money now, waiting longer will not only give you a higher monthly benefit in your later years, but also the most in cumulative lifetime benefits. If, however, you have reason to suspect you won't achieve at least average life expectancy, or you need the SS money sooner, claiming before age 70 is likely the better move.
One other thing to consider: If your benefit as your husband's spouse will be more than your own earned maximum SS retirement benefit, then you should claim your SS benefit now. Your maximum benefit as a spouse would be 50% of your husband's full retirement age entitlement and, if that is more than your own benefit will be at age 70, then claiming now to get your maximum spousal benefit would be your best choice. To get a spousal benefit from your husband, your personal FRA entitlement (not your age 68 amount) would need to be less than half of his FRA entitlement. If that isn't the case, then you should make your decision based only on your own Social Security entitlement, as described above.
Ask Rusty - How is my Social Security Benefit Calculated?
Dear Rusty: I appreciate your recent article dispelling the myth that politicians have stolen Social Security money. As a CPA, I dispel this myth repeatedly to clients who falsely claim SS funds have been raided. But another thing I deal with often is how SS benefits are calculated. I know the formula for determining each person's benefit amount is complex, but I have had to explain numerous times that those who put the most into Social Security get the lowest rate of return and those who put the least in get the highest return based on the way the benefit formula is structured. I get tired of people complaining that monthly Social Security payments are higher for retired doctors and other highly paid individuals. Can you please explain how Social Security is weighted in favor of lower income workers? Signed: Tired of the Misunderstandings
Dear Tired: Please don't be frustrated. Because of the program's complexity, Social Security is prone to misunderstanding, and educating the misinformed is an important professional duty we share. Here's how each person's SS benefit is determined:
The first thing to know is that each person's SS retirement benefit is not based on their financial contributions to the program. Social Security's purpose is to provide a benefit which replaces a portion of the person's pre-retirement income, so the SS benefit is based on actual lifetime earnings, not on the payroll taxes withheld from those earnings.
Social Security has your lifetime earnings record (obtained annually from the IRS) and that record determines your "primary insurance amount" or "PIA." Your "PIA" is initially determined in your eligibility year (usually age 62) and is the amount you will get if you claim for benefits to start exactly at your full retirement age (FRA).
To develop your PIA, Social Security first adjusts (indexes) each year of your lifetime earnings (up to the annual payroll tax cap) to account for inflation. They then select the 35 inflation-adjusted years in which you earned the most, from which they compute your average monthly earnings over your lifetime (this is called your Average Indexed Monthly Earnings, or "AIME"). They then break your AIME into three segments, the first of which includes a majority of - and possibly all of - your AIME. They then take a percentage of each segment and total those three amounts to determine your PIA. The first segment is the largest and 90% of that first segment contributes most of your PIA. Smaller percentages of the other two segments (32% and 15% respectively if your AIME is higher), are then added to the first computation to arrive at your full PIA - the amount you get if you start benefits in the month you reach your FRA. Note that since most of the PIA comes from the first large segment of each person's AIME, lower income workers get a higher percentage of their lifetime average monthly amount.
Since benefits are based on earnings, those with lower lifetime earnings do, indeed, get a smaller benefit than those with higher average lifetime earnings, but the percentage of pre-retirement replacement income lower income workers receive is higher than for those with higher monthly average lifetime earnings. The Social Security benefit for lower income workers is typically about 40% of their pre-retirement average monthly income, while those with higher lifetime average earnings may get a benefit as little as 20% of their average monthly pre-retirement earnings. In that sense, the Social Security benefit formula is progressive and weighted in favor of lower income workers. Nevertheless, albeit a smaller replacement percentage, higher income workers receive a higher monthly SS benefit because of their higher lifetime earnings. Even so, those higher earners did, indeed, contribute more payroll taxes from their higher earnings.
So, each person's SS retirement benefit amount is a percentage of their pre-retirement income. Coincidently, those with higher pre-retirement income also contributed more to the Social Security program than did those with lower earnings. But their higher SS benefit amount is based on their higher pre-retirement earnings, not on payroll taxes paid from those higher earnings.
Ask Rusty - Will my WEP Reduction Go Away if I Continue Working?
Dear Rusty: I'm 63 years old and have not yet started my Social Security. I now work for the State of Illinois and will draw a pension from that state's university system. I don't pay into Social Security from this position and, as a result, my Social Security payment will be reduced. But I have also worked elsewhere and contributed to Social Security for 26 years.
If I retire from the state university and begin drawing my reduced Social Security payment, and then work in a different job which does contribute to SS, will the reduction to my Social Security payment ever be eliminated? Or will I be permanently stuck with the smaller Social Security payment? Signed: Curious Educator
Dear Curious: A rule called the Windfall Elimination Provision (WEP) will apply to your Social Security benefit because your IL state pension was earned without paying into the Social Security program. The basic rule is that anyone with a pension earned without contributing to Social Security, and who is also entitled to Social Security benefits, is subject to WEP, which reduces that person's Social Security retirement benefit. It's a law enacted many years ago to equalize how SS benefits are paid to all Social Security beneficiaries. However, the WEP rules also provide relief for those who have only a small non-covered pension, and for those who have separately contributed to Social Security for a lot of years. For example:
• The WEP reduction to your SS benefit cannot be more than 50% of your non-covered (IL) pension
• The WEP reduction is smaller for each year over 20 years contributing to Social Security from substantial earnings
• WEP does not apply to those who have at least 30 years contributing to SS from substantial earnings
Although you could retire at 63 and collect your pension from the university and also collect your WEP-reduced Social Security, you have something else to consider if you take another job which pays into Social Security.
Social Security has an annual "earnings test" for those who collect benefits before their full retirement age (FRA). The earnings test limits how much you can earn while collecting early SS before they take away some of your benefits. The earnings limit for 2024 is $22,320 and, if that is exceeded, you will lose $1 in benefits for every $2 you are over the limit. If your work earnings substantially exceed the earnings limit, you would likely be temporarily ineligible to receive Social Security benefits. FYI, the earnings test no longer applies once you reach your full retirement age, which for you is 67.
Without knowing your expected income from a new job, I can't say how much of your SS you would be able to receive, but you can use this as a guide: Social Security will take away benefits equal to half of what you exceed the annual earnings limit by, and they typically recover by withholding future benefits. If 12 months or more of benefits are withheld, you will be temporarily ineligible to receive benefits until your earnings are less, or you reach your full retirement age (the earnings test no longer applies once you reach your FRA). So, depending on your expected annual work earnings, you may wish to defer claiming your Social Security until you either earn less or reach 67 years of age.
If you already have 26 years contributing to Social Security from "substantial earnings," your WEP reduction will already be mitigated, and any additional years of substantial earnings from which SS payroll taxes are deducted will result in an even smaller WEP reduction. If you can achieve 30 years of SS contributions from substantial work earnings, WEP will no longer apply. So, you may not be "stuck with" the WEP reduction permanently, but you will need to contact Social Security to request that your WEP reduction amount be reviewed in light of any additional years of SS-covered earnings (this should be done after you submit your income taxes each year you have additional SS-covered earnings).
Ask Rusty - Will Withdrawing from 401(k) Affect My Social Security?
Dear Rusty: My full retirement age (FRA) is 66 and 8 months, which I'll reach in September 2024. I'm still working 3 days a week. I want to cash in my 401K and want to know if I have to wait until my FRA for IRS purposes or can cash it in anytime in 2024. I don't want to affect my Social Security or end up paying taxes on my benefits. Signed: Seeking to Avoid Taxes
Dear Seeking: We're not experts on IRS matters here at the AMAC Foundation so I can't address 401(k) questions, but we can provide information on your Social Security circumstances and how 401(k) withdrawals may affect your SS. I assume from your question that you are now receiving early Social Security and wish to avoid any tax consequences thereto by cashing in your 401(k), as well as from working. Here's what you need to know:
• Since you will reach your full retirement age (FRA) in 2024, your 2024 work earnings limit will be $59,520 up to the month you reach FRA. If you were born in January 1958, you'll attain FRA in September 2024. After you have reached your FRA there is no longer a Social Security limit to how much you can earn from working, so your work earnings thereafter will not affect your monthly Social Security benefit regardless of how much you earn. If your part time work between January and August 2024 won't put you over the $59,520 limit, your work earnings will not negatively affect your gross monthly Social Security benefit.
• Assuming you are on Medicare, the premium for which is deducted from your Social Security payment, withdrawals from your 401(k) might affect your net monthly Social Security payment in two years hence. Medicare premiums are based upon your combined income from all sources, including 50% of the SS benefits you received during the tax year. If your 401(k) withdrawal(s) put you over an income threshold for your tax filing status, you may be required to pay an "IRMAA" (Income Related Monthly Adjustment Amount) on top of the standard Medicare premium. That IRMAA supplement would be deducted from your Social Security, which would affect the net amount of your Social Security payment. Your Medicare premium for each coming year is determined by your combined income from two years prior, so if you "cash in" your 401(K) in 2024, it would affect your net Social Security payments in 2026.
• Whether you will pay income tax on your Social Security benefits is determined by your combined income from everywhere, which the IRS calls your "Modified Adjusted Gross Income" or "MAGI." MAGI is your income from all sources (except ROTH IRA withdrawals) and includes half of the SS benefits you received during the tax year. If you file your taxes as a single, and your MAGI is over $25,000 - or if you file your taxes as "married-jointly" and your MAGI is over $32,000 - then 50% of the Social Security benefits received during the tax year becomes part of your overall income taxed by the IRS (at your normal IRS tax rate). But if your MAGI as a single filer is more than $34,000 - or as a married/jointly filer over $44,000 - then up to 85% of the SS benefits received during the tax year becomes part of your overall income taxed by the IRS.
So, to recap:
1. Your part time work earnings in 2024 won't affect your monthly Social Security benefit, unless your 2024 work earnings prior to September 2024 exceed $59,520.
2. Depending on the amount of your 401(k) withdrawals, your 2026 net Social Security payments may be impacted by Medicare's IRMAA provision. But your 401(k) withdrawals will not affect your gross Social Security payments.
3. Depending on the amount of your 401(k) withdrawals, some of the Social Security benefits received during the 2024 tax year will likely be subject to income tax. That is, if your annual total income, including your 401(k) withdrawals, exceeds the MAGI thresholds described above.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation's staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at firstname.lastname@example.org.