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Social Security – The Road to Maximizing Benefits

Posted 1:23 PM by

With an aging workforce, drivers may be questioning when to take Social Security benefit payments and how the amounts are calculated. There are two basic steps in determining monthly benefits. The first step is computing the average indexed monthly earnings (AIME). The second step, incorporating AIME, is to determine the primary insurance amount (PIA), which is the basis needed to calculate Social Security benefits that are paid to retirees.  

The AIME calculation takes the highest 35 years of earnings and indexes them to reflect the changes in wage levels, ensuring that benefits will reflect the rise in the standard of living that occurred during a lifetime of working. The sum of those years is divided by 420 to determine the average monthly earnings. If there are less than 35 years of earnings, it may be beneficial to work enough additional years to have a full 35 years. Otherwise, non-earning years will be averaged in and will quickly decrease the AIME – and ultimately the retirement benefits.

Reviewing the annual Social Security statement for errors or omissions, and having them corrected before the statute of limitations runs out, is advised.

Increase for Delayed Retirement
 
Year of Birth*Yearly Rate of IncreaseMonthly Rate of Increase
1933 - 19345.50%11/24 of 1%
1935 - 19366.00%1/2 of 1%
1937 - 19386.50%13/24 of 1%
1939 - 19407.00%7/12 of 1%
1941 - 19427.50%5/8 of 1%
1943 or later8.00%2/3 of 1%
Note: If you were born on Jan. 1, you should refer to the rate of increase for the previous year


Once the AIME is established, the next step in determining the monthly benefit is calculating the PIA. The PIA is the sum of three separate portions of AIME, known as bend points, which depend on the year age 62 is reached. Assuming an individual reaches age 62 in 2015, and their AIME is $5,300, the monthly benefit is calculated as follows:

1.     90% of the first $826 of AIME = $743.40

2.     32% of AIME above $826 and through $4,980 = $1329.28

3.     15% of AIME above $4,980 = $48.00

The sum of the calculation ($2,120.68) is the monthly benefit. The maximum benefit cap is $2,663 in 2015. These benefits were never meant to provide full financial support upon retirement. The result of these bend points is that lower-wage earners receive a larger percentage of their pre-retirement income, while higher-wage earners receive a lower percentage of their pre-retirement income.

The monthly benefit will be affected by whether the retiree opts for early or delayed retirement. Full retirement age is based on the year of birth, which is age 67 for those born after 1959. Benefits can be claimed as early as age 62, but the monthly check will be cut by 25% - 30% for the remaining payment over life. If other income streams are available, a better option is to delay retirement benefits until age 70, when a delayed credit of up to 8% is applied, plus cost-of-living adjustments. It may also make sense to delay retirement if resulting higher income is anticipated to spike in the later years, which will increase the AIME resulting in higher benefits.

Usually, claiming benefits while still working and under the full retirement age is not beneficial. In 2015, the reduction is $1 for every $2 earned over the earnings limit of $15,720. At full retirement age, the reduction is $1 for every $3 in earnings above $41,880 before the birthday month. Also, all benefits received, regardless of early or delayed retirement, may be subject to income taxes. Married taxpayers with combined earnings between $32,000 and $44,000 are subject to as much as 50% of the benefits being taxable. Those with earnings above $44,000 will pay tax on 85% of the benefits received.  

A lower-earning spouse can claim a benefit, based on his or her work record at age 62, or the spouse can claim a “spousal” benefit, as long as the other spouse has started to collect benefits. If the lower earner is at full retirement age, the spousal benefit is 50% of the higher earner’s PIA. A higher earner at full retirement age who wants to maximize benefits by delaying to age 70 should file for benefits while having the spouse apply for a spousal benefit. The higher earning spouse should then request the Social Security Administration to suspend their benefits, while the spouse continues to receive a spousal benefit. The higher earning spouse can then continue to work and accrue delayed credits until reapplying.

About the Author
Troy Hogan is a director in Katz, Sapper & Miller's Business Advisory Group. Troy has extensive experience in tax planning, tax compliance, and financial statement analysis as well as managing business issues specific to the transportation industry. Connect with him on LinkedIn.

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