Last month (see archives Back9Pro.com) we discussed the WHO, as promised this month we’ll discuss the What, in other words how much can I expect to receive and how is it calculated. What many folks don’t understand is that Social Security takes your highest 35 years of earnings, indexes it to inflation to determine your AIME (Average Indexed Monthly Earnings). Once they determine your AIME they then go to the formula below which determines your PIA (Primary Insurance Amount) or in laymen’s term your check at FRA (Full Retirement Age).
Example:
- Individual born in 1962 who turns 62 in 2024
- Maxed out Earnings Subject to FICA every year since age 22 (see attached table on max)
- AIME would be $13,100 per month
Formula:
| On 1st $1,174 | x | .90 | = | $1,056.60 per month |
| On 2nd $5,904 | x | .32 | = | $1,889.28 per month |
| On 3rd $6,011 | x | .15 | = | $ 903.30 per month |
| Equals maximum benefit (PIA) | $3,849.10 | |||
OBSERVATION: You’ll notice that this formula is extremely PROGRESSIVE, which means those who make the least get the biggest bang for their buck as a percentage of what they paid in employment taxes over their lifetimes. Besides that, they will most likely have to pay income taxes on the benefits they receive!
HOW MUCH IS YOUR CHECK?
Now that we’ve determined the PIA which is your check at FRA (Full Retirement Age), we now need to determine what’s your check if you claim before or after your FRA:
Example: If you were born in 1962 your FRA (Full Retirement Age) is 67 which means if you claim at;
| 62 | Lifetime Penalty | 30% | = | $ 2,694.37 check |
| 63 | 25% | = | $ 2,886.82 | |
| 64 | 20% | = | $ 3,079.28 | |
| 65 | 13.3% | = | $ 3,337.16 | |
| 66 | 6.7% | = | $ 3,591.21 | |
| 67 | No Penalty | = | $ 3,849.10 | |
| 68 | Lifetime Bonus | 8% | = | $ 4,157.02 |
| 69 | 16% | = | $ 4,464.95 | |
| 70 | 24% | = | $ 4,772.88 |
NOTE: If you claim benefits prior to your FRA and continue working, you will be subject to the Earnings Test (lose $1 in benefits for every $2 you earn in excess of $22,320). Thus, if you claim at 62 and continue working and for example sake you make $50,000, you will not only be subject to a 30% lifetime penalty, but you’ll have to payback $13,840 in benefits that you’ve received. The benefits you had to payback will recalculate your PIA at FRA, but the bottom line is if your going to keep working or expect to go back to work, don’t claim benefits!
OBSERVATION: When you go into your account at SSA.GOV you’ll see these same numbers, but what they don’t show, because they don’t know any COLA (Cost of Living Adjustments) that will occur annually. The COLA’s have averaged 2.6% since Congress added this feature effective in 1975. This year there was a 3.2% increase, for illustrative purposes I use a 2% annual adjustment.
Look how a 2% COLA affects one’s check over a period of time based upon at what age one files for benefits;
Spousal Benefits
If you have a spouse, they are eligible to receive the greater of their own Social Security benefit (if they have 10 years of significant earnings – see last month’s newsletter) or 50% of your PIA at their FRA once you claim benefits. Several key points;
- They cannot claim spousal benefits until you file on your own record
- If they claim prior to their FRA there will be a similar penalty based upon above chart
- They do not get 50% of age 70 check (delayed credits) they get 50% of PIA
- Upon your death they will be eligible to receive the greater of their own benefits or whatever your check was at the time of death, but not both
- If they were subject to a penalty for claiming early, that penalty will be eliminated should they switch to spousal benefits and they will receive whatever your check was at the time of your death assuming they have reach their FRA
- The earnings test applies to the spouse as well
Divorced Benefits
Pretty much the same as spousal benefits, but there are several differences to keep in mind. Key points to consider;
- Must have been married for 10 consecutive years
- Must be unmarried, when you claim
- Must take the greater of your own benefits or 50% of spousal benefits
- The same rules apply to claiming prior to FRA and the Earnings Test
- If you remarry after reaching age 60 you maybe eligible to receive survivorship benefits even if your ex remarried
Conclusion
What I hoped to achieve in this newsletter is cover the primary claiming provisions YOURS, your SPOUSES and DIVORCED BENEFITS, there are several others that do come into play, such as having minor children who are below age 18 (Maximum Family Benefit). There are also different rules in regards to people who will receive a pension from a job where they did not pay FICA taxes (WEP and GPO) like school teachers, firefighters and police. These are all areas that I can discuss individually.
See the numbers:
CHART – Social Security Maximum Taxable Earnings
CHART – Automatic Cost-Of-Living Adjustments received since 1975
Happy Spring and once again never hesitate reaching out if you think I can be of service to you, your clients, neighbors, family or friends!
