Understanding the ins and outs of your Social Security benefits is essential for wealth building and retirement planning. In this article, we will examine how your benefits are calculated, when they can be claimed, and the role your spouse plays in your retirement finances.

How Social Security Benefits are Calculated

In order to qualify for Social Security benefits, you must have a minimum of a ten-year work history. The Social Security Administration (SSA) takes the average of your 35 highest-earning years (adjusted to account for inflation) in order to calculate your primary insurance amount (PIA.) If you have fewer than 35 years of work history, non-working years will be calculated at 0. This being the case, earning higher wages before retirement age increases your Social Security benefits when you choose to claim.

Your PIA may change depending on when you start receiving benefits. For example, if you choose to take benefits before reaching full retirement age (FRA,) the amount you receive will be lower. If you do not take benefits until after reaching FRA, you will be eligible for higher payouts. Once you reach 62 years of age, you will begin receiving cost of living adjustments as well.

When to Claim Social Security Benefits

According to Dorsey Wealth Management, it is possible to start claiming social security benefits as early as age 62 or as late as age 70. However, as we’ve mentioned above, claiming your benefits prior to reaching the FRA will reduce the amount you receive. The FRA is variable based on the year in which you were born. If you were born in 1943-1957, the FRA is 66 years old. The FRA then increases by 2 months for every birth year after 1954, capping at 67 for those born in 1960 or later. For every month before your FRA date that you claim Social Security, your benefits amount are lowered by a small percentage, permanently reducing your payment amounts by up to 30%. As such, it is generally best to wait until you reach the FRA to claim if you are able.

Conversely, you may delay your benefits after reaching the FRA and receive an 8% bonus to your payments for each year you wait (with a maximum 32% increase.) You are required to file for benefits by age 70.

Spousal Benefits

There are several ways to maximize your benefits as a married couple. Married people are eligible to receive benefits based on their spouse’s work history. These benefits are calculated at 50% of the working spouse’s benefit. If your marriage lasted for ten or more years and you have been divorced for at least two years but are still single, you may be eligible for the same benefits.

If you are married, you may want to consider having the lower-earning spouse collect benefits earlier than the higher-earning spouse, who may wish to wait as long as possible in order to maximize their payout amount. This way, the lower-earning spouse’s benefits are accessible more quickly, and if the higher-earning spouse passes away, the survivor benefit for his or her husband or wife is maximized.

Because understanding your Social Security benefits and making the right decisions about claiming is so important for your overall retirement plan, you should speak with your financial advisor before making your final choices.

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