What You Need to Know About Taking Social Security

I’ve been on a marriage kick lately in anticipation of the Obergefell decision coming out very soon. And when I reviewed my prior posts on the financial advantages of getting married, I realized that I’ve neglected to explain one of the biggest pluses – spousal social security benefits.

Spousal benefits can help a married couple in multiple ways. The couple can forgo some benefits in order to obtain a higher amount later on. In addition, a spouse who didn’t contribute to the social security system can still receive monthly income.

To get the most out of your social security benefits, you need to know how the system works. So today I’ll cover the fundamentals of the system, and Friday I’ll give tips on how to maximize your spousal benefits.

The Fundamentals

You’ve been contributing towards your retirement ever since you started working, even if you don’t participate in a 401k, 403b, or other type of defined-contribution plan. The money that you’ve been paying in social security tax, either out of your pay stub or at tax time through self-employment tax, provides the basis of the social security benefits you will receive when you reach your retirement age.

The amount of benefits depends on your “averaged indexed monthly earnings.” The Social Security Administration (SSA) averages up to 35 years of work and then applies a formula to compute your primary insurance amount  (i.e., the amount of money you receive every month).  If you’ve worked over 35 years, only the highest 35 count. If you’ve worked under 35 years, then you receive $0 for the missing years. While the formula itself isn’t needed for our purposes, if you’re interested, you can find it here.

Social security tax is a flat tax of 12.4%. As an employee, you only pay 6.2% up to $118,500 of your income in 2015 (known as the maximum wage base). Self-employed individuals have to pay the entire 12.4%, as employer and employee, but receive an above-the-line adjustment for half of the amount.

In short, the more you’ve earned and put into the system, the more you will get out. However, even if you pay the maximum amount in tax for all 35 years, your monthly benefit likely won’t meet all of your retirement expenses. So make sure to save in your employer-provided, individual, or self-employment retirement plans.

Retirement Age and Your Benefits

Everyone has a different retirement age in order to receive full benefits from the SSA. That age is 66 for people born between 1943 and 1954, 66 and a few months for those born between 1955 and 1959 (the amount of months vary based on what year you were born) and 67 for everyone else born 1960 and later.

Even though there’s a full retirement age, anyone can start collecting social security at 62 (60 if widowed). The earlier you start, however, the more your benefits are reduced. For instance, your monthly income could be cut up to 30% for those who start taking benefits at 62 even though their retirement age is 67. On the other hand, your benefits can grow 8% if you delay in collecting until age 70.

Spousal Benefits

As I mentioned, special rules apply to the married, divorced, or widowed. You can claim a benefit based off of your spouses and exes work history rather than your own, which is good if your spouse earns a lot more money than you.

  • If married, you may claim a full spousal benefit, which equals one half of your spouse’s retirement benefit.
  • If divorced, you may receive income based on your spouse’s retirement benefit, assuming you were married for at least 10 years. Note: your ex can do the same with your benefits as well.
  • If widowed, you can claim up to 100% of your deceased spouse’s full retirement benefit (known as survivor benefits). But just like with your own benefits taken early, your survivor benefit may get reduced, depending on when you take it.

Those are the fundamentals that you need to know about our social security system. Tune in on Friday to learn more about how you and your spouse can take advantage of your benefits.