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Social Security: Overview

Social Security: Overview

Social Security was created to provide economic stability for workers and their families when income may be lost upon retirement, disability, or even death. Employees pay into the system during their working years and earn "credits" to be able to receive benefits during their retirement. Social security taxes paid by current workers fund the benefits of current retirees.

What’s Involved in Calculating Your Benefits?

Have you ever wondered where the Social Security and Medicare deductions went from your payroll checks? For those born after the year 1929, there is an acronym AIME which stands for Average Indexed Monthly Earnings. Your AIME value represents contributions from the highest grossing 35 years of work performed during your lifetime. For those who didn’t work at least 35 years, years not worked will be calculated as 0. From these calculations, we get the Primary Insurance Amount or PIA. Those who delay retirement can get up to 8% more benefits per year of delay until age 70. If you cannot delay your retirement, you’ll get the lesser of the benefits.

How are Taxes Applied to Social Security Benefits?

Social Security benefits are taxed based on combined income. The Federal Government defines this combined income as:

  1. The sum of adjusted gross income for married couples or adjusted gross income for singles.
  2. Any non-taxable interest.
  3. Half of your combined Social Security benefits (50%).

After you have added up the above three factors to determine your combined income, you can use the chart below to see what portion of your Social Security benefits will get taxed.


*Disclaimer: The figures in the table represent the amount of your social security income to which taxes can be applied. These percentages ARE NOT the amount of taxes owed. Please see your tax forms for the correct income

How Pensions Affect Social Security:

Social security is expected to supplement approximately 40% of your livelihood in retirement. Ideally, you will have other sources of retirement income besides social security, such as pensions and retirement accounts.

You may be wondering how your pension will affect your social security benefits. If the source of your pension is where you paid social security taxes, then your social security benefits should not be reduced. If you did not pay social security taxes, however, your pension could cause your social security allotments to decrease. Many federal, state and local government jobs, as well as many non-profit retirement plans fall into the category of pensions that did not pay social security taxes. You can visit the SSA website to help you find out how much of a reduction in benefits you can expect, if any.

6 Disastrous Mistakes to Avoid with Social Security:

1. Moving Forward at the Wrong Age

Social security benefits can be claimed after the age of 62 up until age 70. Many Americans may choose to prolong claiming their benefits, as waiting longer to claim after age 62 can result in a higher payout known as delayed retirement credits. The SSA has now raised delayed credits up to an 8% increase for every year you choose to wait after 62. While it may be tempting to sign up for your social security benefits as soon as you qualify at age 62, there are a few things you need to know before you make that decision. 

Did you know that if you choose to take your benefits at age 62 this could cost you a 30% reduction each month in your social security checks? Waiting until full retirement age to receive your social security benefits could be beneficial, but you also need to consider your health, your spouse's health, if you will continue working, and changes or potential changes in social security laws and policies. 

Talking with a social security expert is advised to help determine when to file based upon your individual circumstances. This is a decision that needs to be carefully planned and executed. Making the right move at the right time can significantly enhance your quality of life and protect your financial well-being for years to come.  

2. Receiving Incorrect or Poor Advice

When it comes to social security, there truly is a lot of advice out there. Unfortunately, many of these sources prove unreliable. For example, books or online articles are often lengthy and hard to navigate. In addition, these text sources may contain outdated information. Many people also consider talking to friends and relatives about what decisions they made when applying for social security. Although these individuals may be well-intentioned, their advice comes from the lens of their personal experience and financial situation; the decision that was best for them may not be ideal for your family. 

Other social security applicants may consider asking the personnel at the social security filing office for their input. However, these employees are typically clerical and not trained to give advice regarding what social security options would be in your best interest. With all the complexities of applying for social security benefits, one of the most reliable sources you can turn to is a team of estate, tax and financial professionals. These professionals stay up to date on regulations from the Social Security Administration and will customize their advice to best suit your family’s situation.

3. Waiting Too Long to File 

With all the recent changes being made to the social security system, you will not want to wait until 62 to begin the planning process. It is important to remember everyone's situation is unique and will require proper preparation to devise the best strategy. In general, allowing yourself a few years to start the process provides you with better success and an improved plan of action. Now more than ever, it is essential to speak with a professional to determine the best age for you, to ensure you are not missing out on any possible benefits.

4. Overlooking Income Tax

As important as timing your social security benefits is, it is equally important to plan for social security taxes. Retirement means little to the IRS and so you will likely be required to pay income tax on your monthly allotment. Unfortunately, like many other social security formulas, the calculations for these tax rates are long and cumbersome and can result in ranges from 0% to a whopping 85% of your benefits being taxable. Determining where your income tax rate will fall and planning accordingly with a trusted Social Security Advisor can prevent your finances from crashing.  

5. Working During Retirement

Deciding to work during your retirement could negatively affect your social security benefits. Timing is everything when it comes to social security, and it is the critical factor when making this decision. If you work after you have reached your full retirement age, you don’t need to worry about the SSA taking or decreasing your benefits. However, if you choose to work while receiving social security benefits and you haven’t reached your full retirement age, the SSA will reduce your benefits. 

The reduction of benefits is calculated based on your earnings (your spouse’s earnings aren’t factored into this amount). By waiting until full retirement age (FRA) to collect your social security benefits, you will receive greater returns than if you started collecting benefits while working before full retirement age. See the chart below for a breakdown of how your earnings will impact your social security benefits prior to your FRA.

Age in 2020

  • Between age 62 and your full retirement age (FRA)
  • In the year you obtain your FRA up to the month of your birthday
  • FRA and older

Impact of earnings on benefit

  • Your benefit reduced by $1 for every $2 you earn above $18,240/year.
  • Your benefit is reduced by $1 for every $3 you earn above $48,600/year
  • No limit on earnings

6. Failing to Maximize Spousal Benefits

A considerable benefit to filing as a couple is that more benefits are available to you and your spouse, rather than if you were to just file alone. With longevity rates increasing, there are numerous aspects to take into consideration to ensure your benefits will last throughout your retirement. Circumstances will require adequate planning and strategy to maximize your benefit. Major decisions that need to be made include the age at which you and your spouse will both file, how to maximize survivor benefits, and the need to file early due to health concerns. Unfortunately, if you were like many Americans relying on strategies such as file and suspend or restricted application, you will come to find new regulations have now been put in place to eliminate and control these strategies (if you file after April 26, 2016). Essentially, if you were intending on going the file and suspend application route, it is crucial to discuss a new plan for you and your spouse with a professional.

How to Maximize Your Retirement Income:

Ideally, as a retiree, you should have at least three sources of income to last throughout retirement. Relying on Social Security benefits should not be your only planned source of income. You should also consider options such as tax-deferred investments and taxable assets to increase overall capital.

Tax-deferred money refers to investments that generally include 401(k) accounts and other IRA contributions.These are investments in which you will not be forced to pay taxes on either contributions or gains until you withdraw funds. Once you withdraw, the balance taken out will be treated as taxable income.The benefit of using these types of investments is the interest you can accrue before you make withdrawals after full retirement age. When you do withdraw after retirement, you will likely end up paying a lower tax rate because at this age, you are typically in a lower tax bracket. In the case of ROTH accounts, taxes will no longer be applied to withdrawals after you reach the age of 59 ½ .

You will also want to take advantage of any investments on which your employers will match contributions. By investing in full or even partial contributions, you are signing up for an easy way to gain free capital. Clearly tax-deferred investments are an integral part of maximizing your overall retirement income. At the end of the day, however, it is key to remember that all options are governed by law as well as strict time frames. Therefore, consulting a professional is vital.

To learn more about the various retirement account options, explore our Retirement Accounts course.

Understanding Recent Social Security Changes:

New Rules

It has been said that change is the only constant in life. This is especially true when considering the laws and regulations adjusted by our government every year. On November 2, 2015, the Bipartisan Budget Act was passed and changed how couples plan and apply for their Social Security benefits. This change is being phased in and significantly impacts people born after January 2, 1954. Deadlines changed and new restrictions were added; options that were once the go-to plan--such as the file-and-suspend method-- are no longer available or are not as beneficial. Relying on past financial information and advice from people who haven’t stayed on top of all of the new rules could be a costly mistake. It is highly recommended that you find a competent financial professional and seek help before you file for your Social Security benefits.

Major Changes to a Common Filing Strategy

For several years it has been common practice for spouses to use a file-and-suspend restricted application strategy to receive their Social Security benefits. This allowed the higher-earner to file for benefits at full retirement age, while the spouse filed for only spousal benefits. For each year past full retirement (until age 70) that the spouse did not file for full benefits, their monthly allotment increased by 8% permanently. By waiting the few extra years, the couple would ultimately enjoy a significantly higher payment for the rest of their lives. With the passage of the Bipartisan Budget Act the SSA closed this loophole for anyone born after January 2, 1954.

Suspending Benefits

You are still able to file for individual benefits at your Full Retirement Age (FRA), then suspend. However, if you suspend, spousal benefits based on your earnings will also be suspended. Suspending benefits gives retirees the option to change their mind about their retirement timing to increase overall funds they will receive. This option is typically used in the event you retire and begin to claim your Social Security benefits, then decide you want to go back to work. Therefore, you would suspend your benefits and go back to work all while increasing your suspended benefits by 8% per year.

Restricted Applications

Now when you submit your application, you will be required to apply for all benefits that you are eligible for at the same time (both individual and spousal). Although the Social Security Administration will provide you with the greater benefit of both, there will be few options to increase capital by using this process.

Important Time Constraints

Although the actual Social Security application process is relatively short (approximately 15-20 minutes), planning and preparing for this process should be done at least three to five years in advance. Rushing into the Social Security decision can have significant negative financial repercussions. Your Social Security plan should work in conjunction with your retirement plan. Consequently, it is important to make and take time with a professional retirement or financial planner to work through the ins and outs of your retirement and Social Security objectives. Social Security guidelines tend to go against conventional wisdom and therefore making decisions of when and how to file for your benefits can often be difficult or confusing. Setting time aside to work with a financial strategist on these matters can help you get the greatest possible returns based on your current situation.


Your retirement age will directly correlate with your Social Security benefits. FRA or Full Retirement Age is the time at which a person first becomes able to receive their unreduced retirement benefits.For individuals born between 1943 and 1954, the FRA is 66. For individuals born after 1954, FRA will be after age 66. Keep in mind; you can collect Social Security at age 62. However, benefits become reduced when you claim before you reach FRA.

How to enroll

To enroll for Social Security benefits, you can complete an online application. You can also use the assistance of a financial advisor or visit your local Social Security office.

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