Last Week’s Question of the Week: Typically, the Pension Benefit Guaranty Corporation (PBGC) guarantees protection of what type of retirement plans…Is it 401ks or Pensions?
HOST: Today you are discussing whether it makes sense to delay taking your Social Security benefit until age 70 to take advantage of the 8% credits that take place. What do we need to know?
KLAAS FINANCIAL: Yes, we always come back to this topic because for most people planning for retirement, Social Security remains as an important part of their future income, and for some perhaps their only income (actually for 20% of the population that is the case).
The first question is when can you first take your Social Security benefit versus perhaps when the benefit is most ideal for your situation? You can choose to collect your own benefit starting at age 62 or anytime up until you’re 70. Those who collect early (anything prior to your FRA according to SS, is considered taking it early) and will get a smaller monthly payout because they usually collect benefits over a longer period than those who wait.
What is my FRA? Social Security has identified your FRA as follows: Born between 1943-1954, your full retirement age is age 66; between 1955 and 1959 your FRA is 66 plus some months. Born after 1960, it is age 67.
If I wait to take my benefit, how much more can I receive? Social Security benefits are increased a certain percentage (depending on your date of birth) if you delay receiving benefits until after your full retirement age. DRCs or Delayed Retirement Credits can allow your benefit to increase up to 8% per year until you start taking benefits, or until you reach age 70. Bottom line: If you collect early, your payment will be reduced as much as 30%, but if you wait and apply late, your payment goes up by as much as 32%. Since the 8% DRCs stop at age 70, there is almost no reason to not pull once you reach age 70.
HOST: How can I find out about my own benefit?
KLAAS FINANCIAL: If you have not previously done so, please go to ssa.gov and set up your individual account and login at any time. Please try out some of their benefit calculators so you can see the impact of waiting to take your benefit.
- What’s advisable for when to take my benefit? It’s generally advisable to wait at least until you’ve reached full retirement age to start collecting Social Security because the monthly benefit is so much higher. For example, if you were born in 1955, your full retirement age is 66 years and 2 months. That would be the age at which you can collect 100 percent of your benefit. But is it the highest benefit you could collect? No, it is not. As we just mentioned, you could be collecting the DRC’s which could create a higher benefit.
- What is the actual reduction of benefits if I take my benefit early? And how can I figure out my own breakeven point? Here is an example, if your full retirement age is 66 years and 2 months, and you start receiving retirement benefits early: at 62, you will get only 74.2 percent of the monthly benefit; at 65, you will get only 92.2 percent of the benefit. So, when is the best time for you depends on your situation with regards to other sources of income, spouses benefits etc. It also requires you to bet on your longevity.
- How can I figure out my own breakeven point? First you must calculate what an 8% per month increase would add to your monthly benefit. Then you must figure what amount of monthly benefits you would give up by waiting. Then you would divide that sum by the first one, and you will get the amount of time in months it will take you to break even. Remember that when you choose your benefits, you are making a permanent choice, meaning benefits are reduced over the course of a lifetime, not just until full retirement age.
A real-life example: the break-even point for someone who earned the inflation-adjusted equivalent of $70,000 per year for 35 years is about age 80. If this person waits until 70 to claim Social Security and lives until at least age 90, he’ll accumulate almost $162,000 more in benefits than he would if he had claimed at 62. But there’s a possibility of losing the bet and getting nothing. As such, it may prove helpful to calculate the Social Security breakeven age in an effort to determine when total benefits received equal the same amount under different age elections.
HOST: How is Social Security currently funded? And, how is my future benefit determined?
KLAAS FINANCIAL: Currently Social Security is funded through the collection of payroll taxes. A total of 12.4% is collected from payroll taxes (6.2% of your wages is what you pay; your employer adds another 6.2%; unless you are self-employed and so you are putting in the entire 12.4%. Your Social Security payment is calculated by taking a 35-year average of your covered wages of your highest years. Each year’s wages are adjusted for inflation before being averaged.
Cost-of-living benefit increases start with the year you become age 62. This is true even if you don’t get benefits until your full retirement age or even age 70. The cost of living adjustment for Social Security was 1.6% in 2020 for the nearly 69 million people receiving Social Security benefits.
HOST: How many credits do you need to qualify for to even get Social Security benefits?
KLAAS FINANCIAL: Credits are the “building blocks” Social Security uses to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefit. For most people, the minimum number is 40 credits. If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record. If you return to work later on, more credits will be added. No benefits can be paid if you do not have enough credits.
If you do not have at least 40 credits, you are not currently entitled to a retirement benefit, but you may become entitled with additional work. Go to the ssa.gov website and read their publication, “How You Earn Credits,” for more information.
Also, if you are not entitled to retirement benefits based on your own work record, you may still be entitled to benefits on the work record of a current or divorced spouse. For more information on this you can read a Survivors Benefits or Spouse Benefits page on their website. They also have a variety of calculators you can use to help you plan better.
To qualify for spouse’s benefits, you must be: At least 62 years of age; or Any age and caring for a child entitled to receive benefits on your spouse’s record who is younger than age 16 or disabled. If you start receiving benefits as a spouse at your full retirement age, you will get 50% of the monthly benefit your spouse would receive if their benefits started at full retirement age. Your benefit will be permanently reduced, if you start receiving benefits at an earlier age.
Widow or Widower Benefits: A widow or widower can start collecting Social Security benefits based on their own earnings record, then switch later to survivors’ benefits. Or, they can begin with survivors’ benefits and later switch to benefits based on their own earnings record — even if they are filing before full retirement age. If an ex-spouse dies, you may be able to receive benefits similar to a widow or widower. If you are at least 60, the marriage lasted at least 10 years and you didn’t remarry before age 60, you’ll most likely be able to collect your late spouse’s benefit.
HOST: Scott from our Money in Motion Listener Corner asks: “Where does Social Security keep the funds used in paying our future benefits?”
KLAAS FINANCIAL: Thanks Scott for the question! Social Security keeps the payroll taxes they collect in government bonds, otherwise known as the Social Security Trust Fund. Social Security is currently a “Pay as You Go” program, meaning that today’s benefits are funded primarily by the payroll taxes collected from today’s workers. However, this year (2020) Social Security will begin redeeming some of the $2.9 trillion in trust fund reserves to pay current benefits. Prior to reserves being depleted, law makers will likely re-vamp the system in order to pay future benefits.
This Week’s Question of the Week: How is Social Security funded, is it from a payroll tax of 6.2% or 12.4%?
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.