Hi. Dave Piatkowski here with Dickinson Investment Advisors. Recently, we’ve been getting a lot of questions regarding Social Security, partly due to the fact that Congress made some changes to Social Security at the end of last year that are going to take effect at the end of April.
In general, we want people to realize a few basics on Social Security. First, Social Security is not a savings account; it’s a pay-as-you-go system. So the people that are currently working are paying into the Social Security system, and those that are retired are taking the money out. But nobody has an account similar to an IRA or a defined contribution plan, 401(k), or anything like that with a pot of money in it. It’s a pay-as-you-go system and that’s all there is. When you’ve passed away, in most cases the payments stop – except if they’re going to a spouse or something of that nature.
Second, in order to qualify for Social Security, you need 10 years of working history just to qualify and you need four quarters to earn one year. The way that Social Security currently gives you credit is you need $1,250 in a quarter to earn a credit, and then as I said, you have to have 10 years just to qualify for anything on your earnings record.
Even with the file-and-suspend filing option going away, we want to reiterate that spouses do still get benefits. A spousal benefit is still available typically even if you’re divorced – so long as you had been married for ten years or longer and you do not remarry. Even a divorced spouse can receive benefits. And current spouses obviously still get a benefit, but they no longer have file-and-suspend. Spouses definitely still get benefits.
Most people realize that you can take early Social Security at age 62. Your benefit stops accruing or getting larger once you reach age 70, so obviously most people are between and 62 and age 70 when they apply for benefits. Everyone’s situation is going to be different.
In general, the longer you wait to file for benefits, the more income you will receive from Social Security. Currently there are two exact ages to be considered, and there is a transition period for those who are a little bit older. Age 66 is full retirement age, but this is transitioning to age 67. So some people we get to work with will have an age of 66 and 2 months or 66 and 4 months for full retirement age. But in this situation, if someone whose full retirement age is 66 and they take their benefit at 62, that will hurt them by about 25% on their payments – so they would get 75% of what they would have gotten otherwise.
If their full retirement age (FRA) is age 67, they’ll get a 30% haircut on that payment if they take it at age 62. So in general, if you enjoy your work and you have longevity in your family and you are healthy, it’s in your best interest to work longer if you can. But at I said, each situation is different. It’s not always terrible to take benefits early if your family situation or personal situation dictates that.
Furthermore, Social Security uses your best 35 years for your earnings record. So like most of us, when you are in high school or college or graduate school or sometime along the way, there might be some years of zero or some very low earnings. One thing to keep in mind though is even some of those earnings when you are in your 20’s when you didn’t think you earned much, Social Security does attach a lot of inflation factors to that. So, sometimes you may have thought “Geez, I did not earn much of anything back when I was 24 or 26” – but because of the inflation factor added to it, it may actually beat out some of your more recent earnings in some situations.
The other thing to keep in mind is that because Social Security is using your top 35 years of earnings, if you only work 32 years, you got 3 years worth of zeros in there, so just working a few more years might make a big difference to your personal earnings record. Then the payments that you receive and what your spouse could possibly receive may be affected, so it’s best to sit down and go over that and see how that can make a difference for you.
The other thing to keep in mind is just like Congress did back at the end of last year, the new president and the new Congress will likely initiate further changes. The only thing that we know is going to happen is that there will probably be changes coming in the near future in order to keep Social Security solvent. It’s never as bad as people say it is on the news – and it’s probably never as good either. The truth lies somewhere in between.
Just be aware that no major changes will typically take effect for those that are either receiving benefits or for some of those who are 55 and older. Any major changes to Social Security will almost exclusively be for those that are under age 50 or so.
We want you to be aware of some of these basics about Social Security. Changes will occur and as they do, we’ll try to keep you abreast of the issues.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]