As with any program that administers payments to tens of millions of citizens, Social Security's book of rules can -- at times -- read like a copy of War & Peace. But you shouldn't let that intimidate you. In the end, I believe there are three simple rules that every citizen of the United States needs to know by heart.
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1) When you decide to claim Social Security makes a difference
For those born from 1943 to 1954, the full retirement age is 66, and it's easy to get an idea of what your expected benefit at full retirement age is: just visit this site on the Social Security Administration's website.
But you can start claiming Social Security as early as 62, or wait as late as your 70th birthday. The longer you wait, the more your monthly benefit check will be. Of course, the trade-off is that those who start receiving benefits sooner will collect them for longer than their more patient counterparts.
To illustrate how the breakdown of benefits goes, let's assume a retiree has a benefit at full retirement age of $1,000 per month. Here's how those benefits could change, based on when they are claimed.
Data source: Social Security Administration. Author's illustration
It's also worth noting that starting with those born in 1955, "full retirement age" will start slowly making its way to 67. Here's what the phase-out looks like.
Data source: Social Security Administration
2) How Social Security spousal benefits are calculated
The size of your Social Security check is based on your 35 highest-earning years as a worker. In most households, one partner "out-earns" the other. This presents a myriad of choices for when and how to file for benefits.
In general, if the lower-earning spouse has a full benefit -- based on his/her own earnings history -- that's over 50% of the higher-earning spouse's benefit, each person should claim Social Security based on his/her own individual work records.
However, there are situations where one partner's earnings history is significantly lower than the other's. When this is the case, you will file for spousal benefits. In the simplest sense, this entitles you to a monthly benefit that is 50% of what your spouse is getting.
One caveat that's worth noting is that the maximum spousal benefit is 50% of the other's monthly check at full retirement age. In other words, if your spouse waits until 70 to claim Social Security, your check will be less than 50% of this benefit, as it maxes out at age 66.
Further, you can only claim spousal benefits after your spouse has filed for his/her own benefits.
3) What happens when one spouse dies?
Morbid as it is, we need to acknowledge that often one partner will outlive another. As far as Social Security benefits are concerned, when that happens, the formula is simple: the surviving spouse will assume whichever is higher -- their own benefit or the deceased's benefit.
This can also play a role in how couples plan to approach Social Security. For instance, if the husband out-earned the wife and he wants to make sure he leaves his wife the maximum possible benefit upon his passing, it makes the most sense for him to wait as long as possible to claim Social Security. If he waits until 70, his wife's benefit after his passing will be 76% higher!
Of course, there are as many combinations of scenarios as there are couples who file for Social Security, so your own situation will be unique. The takeaway is that there are lots of variables to consider before filing for Social Security, and understanding these three basic rules will help you make the best decision possible.
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