Washington, DC - Social Security Matters by Association of Mature American Citizens' Certified Social Security Advisor C.J. Miles:
QUESTION: I made a very good living all my life and expect to retire in a few years. I just assumed that since I paid a percentage of my salary in Social Security taxes, that it would be enough money for me to live off of when it came time for me to retire. Now I hear that there's a maximum benefit. Is that true?
ANSWER: As you may know, your salary is taxed at a rate of 6.2% to pay for Social Security (NOTE: this does not include Medicare). In 2014, the maximum benefit a person can receive at full retirement age (FRA) is $2,642/month. This means that the maximum benefit in 2014 for a 62-year-old is $1,992/month and for a 70-year-old the maximum benefit in 2014 is $3,425/month. This may seem frustrating; however, there is a good reason for it. The Social Security Administration (SSA) has also set maximum contribution amounts every year since 1937. For example, in 1937, only $3,000 of your salary was taxed; in 1985, only $39,600 of your annual salary could be taxed; and in 2014 a maximum salary of $117,000 can be taxed for Social Security. The SSA increases the maximum salary that is taxable every year for inflation (the 2015 maximum is slightly higher at $118,500); however, this also increases the maximum benefit every year.
There are some cases where people are taxed over the salary limit for Social Security. If you have more than one job and your total annual salary is over the maximum, you will likely over pay. This is because all your employers will withhold Social Security tax regardless of what another employer is doing and what your total salary is. The good news is that when you file your annual tax return, you will receive a refund for this overpayment.
So just remember, regardless of how much money you make now, you will still have to consider a maximum Social Security benefit in the future.
QUESTION: I see a lot of advice out there about waiting until you’re 70 years old to file for Social Security benefits. Is there any reason NOT to do that?
ANSWER: Previously, and still sometimes now, the common advice was to file at the age of 62 just because they are eligible; therefore, people may not be looking at their other options or may not realize the reductions in their benefit amounts by filing at the age of 62. As people become more aware, they want to know how to maximize their monthly benefit amount. Waiting until age 70 to file increases your benefit rate because you earn delayed retirement credits – specifically 8% per year after full retirement age.
Even though your benefit amount will increase until the age of 70, this may not be the best plan for you personally. For example, you may not be able to afford to wait that long. Maybe you expected to retire at a later age and were forced into early retirement. Maybe you lost your pension. A lot of factors could cause someone to not have the financial stability to wait for the Social Security income to start coming into the household. Another potential issue is illness. If you do not have a life expectancy past 70 (or even 75) there may not be much point in waiting. You may prefer to just start your benefits right away or at any age earlier than 70. Just remember that whatever benefits you do take will affect your surviving spouse – if you take higher benefits, your surviving spouse will receive higher benefits.
Of course, due to these issues, many people choose “maximizing strategies” where a spouse can take benefits while the other spouse suspends benefits until a later age. This way the couple will have some benefits coming into the household, while the other person’s benefits will be earning delayed retirement credits.
So the short answer to your question is yes, there are reasons to NOT file at age 70. The recent advice you have seen is how to maximize your benefit. However, you still have to look at your personal financial situation and decide what is best for you. Also remember that you do not have to file at ages 62, 66, or 70 – you can file at any age in between. The longer you wait, the higher your benefit amount.
The information contained in this article is for general information purposes only. Every individual’s situation is unique and you should make your benefit choices according to your personal needs. Furthermore, AMAC and its affiliates do not provide legal or accounting services. Please contact a licensed professional for such advice.