Street$marts: Navigating Social Security – 3 things to know

Billy Cooper, CFP®, Financial Planner

As many of our clients are either nearing retirement or are already in retirement, Social Security is a topic we get questions on all the time. So, in today’s episode of Street$marts I am going to share with you three highlights to keep in mind when navigating Social Security.

The first is how retirement benefits are calculated, which is an important thing to keep in mind when asking yourself questions like, “will working with a reduced salary lower my benefits?” or “what happens to my benefits if I stop working?” So, how does the Social Security Administration calculate benefits? First, they take your lifetime earnings and adjust or “index” your actual earnings to account for changes in the average wages since the year the earnings were recorded. They then take the average of your highest 35 working years and apply a formula to arrive at your primary insurance amount. This is the amount that you will often hear referred to as your full retirement age benefit, which is either age 66 or 67 depending on the year you were born. Now I want to refer to the previous two questions and give them a little more context. The first question asked, “will working with a reduced salary reduce my benefits?” The answer is it depends. If you have recorded 35 years of significant earnings, then it likely will not – as lets say this would be your 36th and 37th year, it likely wouldn’t be a part of the calculation. Now if you have not recorded 35 years of significant earnings, then it very well might have an impact on your benefits by dragging down your average earnings. This leads me to the next question, which is really a variation of the first, “what happens to my benefits if I stop working?” Well if you have recorded 35 years of earnings, nothing will happen. They will stay the same. However, if you have recorded say 30 years and stop working, you will then have a zero recorded for years 31 through 35, which will drag down your average earnings. Naturally some will say, “well what if I don’t know if I have worked 35 years?” If you’re not sure, we always suggest double checking your record at

The next important point I would like to discuss takes a deeper dive into the calculation. Assuming 35 years of earnings have been satisfied, the final component to the calculation is the age at which you begin collecting benefits. While I briefly noted earlier that you may begin collecting your full retirement age benefit at either age 66 or 67 depending on the year you were born, the earliest you may begin collecting is age 62. However, you will incur a penalty for collecting before your full retirement age ranging anywhere from a 7% reduction all the way up to a 30% reduction. And this reduction is permanent. On the other hand, if you defer collecting benefits until after your full retirement age, you will receive an 8% credit for each year past full retirement age. In essence, the later you claim, the more you get. However, no additional credit is given after age 69, so the largest benefit you may receive is for retirement at age 70.

Lastly, let’s talk about the spousal benefit. A spouse is eligible to collect the greater of either the benefits they would earn on their own or 50% of their spouse’s benefit at full retirement age. To become eligible to collect spousal benefits, they must be at least 62 years old and so must their spouse – meaning you can’t collect spousal benefits if your spouse isn’t age 62 yet. And just as it goes for normal benefits, a spouse will be penalized if they begin to collect before full retirement age.

Now those were just three important aspects to understand about Social Security, so some of you may have questions that I have not answered today. If you do have any questions about Social Security, I would urge you reach out to your portfolio manager or our financial planning team and we would be happy to address any questions you might have. 

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