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Social Security Archives - Pinnacle Investment Management, Inc.

How Much Will I Get From Social Security?

October 9, 2017 / Blog


Your Social Security benefit is determined by 2 things: your earnings history and the age when you begin to collect your benefit.

Earnings History For Social Security

Your Social Security benefit at your Full Retirement Age (defined below) is known as your Primary Insurance Amount (PIA).

Your Primary Insurance amount is based on a calculation that takes into account your 35 highest years of earnings. Earnings for Social Security only pertains to wages on which you paid Social Security tax. Some jobs, such as teachers in Connecticut,  may not pay into Social Security. In this case their Social Security calculation could be different. (This will be discussed in a future post). For the rest of the article we will assume that you worked at a job where you paid into Social Security. 

So what happens if you didn’t work for 35 years? Social Security still bases the calculation on a 35 year time frame, but for any year that you didn’t have earnings they will input $0 into the calculation. For example, if you worked 30 years, they will put the 30 years of earnings into the calculation along with 5 years of $0 earnings.

As part of the calculation, Social Security adjusts your previous years wages by inflation. So for example, the wages you made in 1990, will be adjusted by inflation so they are reflective of what those same earnings would be today. Social Security will make this calculation for all previous years wages up until the year you turn 60.

The calculation for Social Security is progressive in nature, however, in general terms, the more money you made throughout your career (and thus paid in Social Security tax) the higher your Social Security benefit will be.

In 2017, the maximum Social Security benefit at someone’s Full Retirement Age is $2,687/m.

The breakdown of how to calculate your Social Security benefit is beyond the scope of this post, but if interested I would direct you to:  https://www.ssa.gov/OACT/COLA/piaformula.html

You can get an estimate of your benefit by checking your Social Security statement, which can be accessed online at ssa.gov. On the statement you will see your projected monthly benefit at a few different ages.

A quick note on the Social Security benefits statement for those still working:

• The benefits that are listed for each age make the assumption that you continue working until that age. For instance, your benefit at your full retirement age assumes that you continue working and making the same amount until then. Same with the benefit at 70: it assumes you continue working until age 70. So if you retire earlier than the age you collect, your benefit may be a bit lower than the amount listed on your statement. You can run a calculation of your benefit online at ssa.gov

• Also on the Social Security statement will be your “Earnings Record.” This page outlines each year you worked alongside your “taxed Social Security Earnings” for that year. It’s worthwhile reviewing this page to see if anything looks incorrect. You may see a year when the report shows you earning less than you believe you did. If that is the case, contact Social Security. https://www.ssa.gov/pubs/EN-05-10081.pdf


How Age Impacts Your Social Security Benefit

On top of the benefit calculation based on your earnings history, the amount of your Social Security benefit will also be impacted by the age you start collecting benefits. The earliest you can collect Social Security retirement benefits is age 62. The latest is 70. (You can collect survivor benefits as early as 60, or collect as early as 50 if you are disabled).


Full Retirement Age (FRA)

The age when you can collect your full or unreduced retirement benefit is known as your Full Retirement Age (FRA).

The Following Table shows what your Full Retirement Age is based on the year you were born:


Joe was born in 1953 so his Full Retirement Age is 66. At Full Retirement age he can collect 100% of his benefit. If he collects his benefit earlier than 66, the benefit is reduced. If he collects later than 66, it is increased.


Starting Benefits Earlier Than FRA

If you collect Social Security before your FRA, your benefit will be permanently reduced. If your FRA is 66, your benefit will be reduced accordingly:


Bob is 66 and has a PIA of $2,500/m.
If Bob collects his benefit at 62, his benefit is reduced by 25%, so he would collect $1,875/m.
If Bob collects instead at 63, his benefit would be reduced by 20% and so his benefit would be $2,000/m.

The reduction is a monthly reduction. When you claim your benefits early, for the first 36 months your benefit is reduced by 5/9th per month (6.67% per year), and 5/12 (5% per year) per month for the remaining time after 36 months.


Starting Benefits After FRA

If you delay collecting your benefits past FRA then your benefit will increase 8% per year. These increases are known as delayed retirement credits. If your FRA is 66 and you delay benefits until 70 your Social Security benefit will increase 32%.


Bob, from above, has decided to delay his benefit until 70. By delaying, his Social Security benefit will be 32% higher, at $3,300/m.
If Bob decided to collect at 68, his benefit would be 16% higher, at $2,900/m.

Delayed retirement credits stop once you reach age 70, so there is no point in deferring your benefit past that age.


The following chart depicts what Bob’s monthly benefit would for each age he could begin collecting benefits:

An important decision point for retirees is deciding on when to collect Social Security. As the example with Bob shows, he can collect benefits at 62 and receive $1,875/m or he can defer until 70, when he would be eligible to collect $3,300/m. In a future post we will examine ways to approach this claiming decision.


All of the above calculations are made assuming that you are collecting a benefit on your own receord. However you may be entitled to benefits on someone elses record. This can included divorced spousal benefits, spousal benefits, or widower benefits.

How Much Will Health Care Cost in Retirement?

June 26, 2017 / Blog

Most know that healthcare can be a big expense in retirement. But what is hard to figure out is just how “big” of an expense we are talking about. Luckily, ever year HealthView Services (a leading producer of health care cost projection software) releases a report analyzing current and future health care costs in retirement. They just recently released their 2017 edition and below I outline some of their findings and our views.


Before we dig in I wanted to share two quick thoughts:

First, it is extremely hard to predict what health care costs will be 10, 20, 30+ years into the future. While the report is very well done and is consistent with present data, they are still making assumptions about the future and so is their obviously quite a bit of room for error. With that said, I think these numbers are useful in serving as a baseline.

Second, the numbers reported are averages. Your experience may differ from the average, and quite possibly by a lot.


The HealthView report is pretty extensive. Their projections include costs for Medicare Parts B and D, supplemental insurance, out of pocket costs, and dental premiums. For supplemental insurance they used a national average. The actual costs for Part D and supplemental policies will differ by state and by the plan you choose. More on this below.

Now to some of their findings:



Health Care Costs For Average American Retiree

“Total Projected lifetime health care premiums for a healthy 65 year old couple retiring this year are expected to be $321,994. Adding deductibles, copays, hearing vision, and dental cost sharing, that number grows to $404,253.


I know what you’re thinking: Wow that’s a lot of money! And it is. But don’t panic just yet. Let’s unpack the costs of Medicare so that you can see where these numbers come from.

In 2017, the Medicare Part B base premium is $134/m.

Part D (prescription drugs) premium will vary based upon the plan you choose. The national average premium is $35.63/m. In Connecticut, it looks to be closer to $50/m.

Medicare supplement policies (MediGap) are important as they pick up a lot of the gaps in coverage with original Medicare (Parts A & B). However, there are various types of supplemental plans and their premiums can vary substantially. So take these averages with a grain of salt. The national average premium for Medigap is $183/m. In Connecticut they look a bit higher, so lets just assume $250/m.

With these numbers in hand we can calculate a rough estimate of what a 65 year old retiree in Connecticut may pay in Medicare Premiums.

• Part B: $134/m
Part D: $50/m
Supplemental: $250/m

TOTAL: $434/m.

For a couple that equals $868/m.

This rough estimate is JUST for Medicare premiums. It does not include dental or out of pocket costs. Many retirees don’t realize that Medicare Parts A, B and supplemental policies do not provide dental coverage, and dental can be a very expensive. However some Medicare Advantage plans may cover dental.


The HealthView Services Report has a great chart which looks at retiree health care costs by age and these numbers include estimates for dental and out of pocket costs:

HealthView Services

*These are future dollars

As the chart highlights, a 65 year old couple can expect to pay on average about $950/m for medical costs (that is a combined cost).


Retirement Health Care Cost Inflation


“HealthView Services’ 2017 Retirement Health Care Cost Data Report shows retiree health care expenses will rise at an average annual rate of 5.47% for the foreseeable future… As this Report details, the compounding impact of health care inflation means that health care costs will be one of the most significant expenses in retirement.”

A challenge with financing health care in retirement isn’t just that it is expensive, but also that it will most likely get more expensive as one ages. Over time the percentage of your budget that is used for health care costs increases. Inflation at 5.5% is substantial and one needs to look at how they can grow their money so that it keeps pace with those costs in the future.


Ways to Plan for and Manage Health Care Costs in Retirement

“Americans are not powerless when it comes to reducing costs… At an individual level, behavior modification and a long term savings plan will reduce the impact of retirement health care costs.”

As I have mentioned a few times in this post, your costs can vary a great deal from the average. Your personal health will dictate how much you are spending on out of pocket costs and should also be considered when determining what policies are the correct ones to purchase. If you are going to choose a supplemental policy, take a long look at what each type of policy covers and doesn’t cover. For instance, MediGap Plan F can be purchased as a high deductible plan, which has lower monthly premiums with high deductibles. If you are in good health this can be an option worth exploring.

Some people will use a Medicare Advantage plan rather than a Medicare Supplement plan. These plans also require a good bit of due diligence as they carry their own design and costs. Many Advantage plans will bundle in prescription drug coverage as well. Whether you are going to go with a supplemental policy or Medicare Advantage, it pays to do your homework.

Another way to help manage your costs is by revisiting your plans each year. During Open Enrollment (October 15 – December 7) you should take a look at your Part D coverage to see if you still have the right plan at the right cost. Plan formularies (the list of drugs that are covered) can change yearly, so it’s worth taking the time to understand what drugs you may need (if any) and what plan best suites you. Medicare Plan Finder is a good tool to help you with this.


One final way to help manage drug costs is by managing your income. Why does your your income have anything to do with your health insurance? It is because of a Social Security Provision known as “hold harmless.” This rule states that the premium increases on Medicare Part B can not be greater than the Cost of Living (COLA) for Social Security. What this rule does is prevent your Social Security payments from being reduced due to large increases in Part B Premiums.  We have talked about this in a previous post, as can be seen here.

In order to qualify for the hold harmless provision you must be collecting Social Security, paying your Part B premium out of your Social Security check, and your income must be below $85,000 for singles or $170,000 for couples.

The hold harmless provision was applied for a majority of retirees in 2016. Medicare Part B premiums increased from $121.80/m in 2016 to $134/m in 2017, a 10% increase. However, because the COLA on Social Security was very low (.3%) many retirees were held harmless and paid a Part B premium of just $109/m.

Importantly, hold harmless only applies to Part B, and just because you are held harmless today doesn’t mean that the cost increases in Part B premiums won’t eventually come around to impact you in the future.




What all of the above probably showed you is that health insurance in retirement can be expensive. It can also seem a bit daunting to get a grasp of at first. But taking the time to understand your options and doing a bit of homework can pay off. By looking at your health needs, talking with your doctors, and doing some research you can potentially save on costs and, more importantly, get the right type of coverage you need.  I would recommend that you work with a Medicare Specialist to help you find the correct plan and help you understand what it entails.

As a final point, the numbers above do not include any costs for long term care. That is a topic for another day.


Sources & Further Reading
HealthView Services: 2017 Retirement Health Care Costs Data Report©
HealthView Services Website
Medicare Plan Finder
Medicare Interactive

Will my Social Security Benefits be Taxed?

June 8, 2017 / Blog

Like most things with Social Security, this answer isn’t always straightforward. Your Social Security benefit may not be taxed at all or, up to 85% of it may be taxed.

The determination of it being taxable or not depends upon what other sources of income you have. If the only income you have is Social Security then your benefit will not be taxed.

If you have other income then you need to do some calculations. I would recommend you use a calculator (such as this one) to do this for you, however I also believe it is worth understanding the basics of how it is determined, which is what I explore below.

The first step in figuring out if your Social Security benefit is taxable is calculating your “combined income.” Combined income is defined as adjusted gross income + nontaxable interest + ½ of your Social Security benefits.

Pretty much all income you can think of (wages, IRA distributions, pensions, dividends, capital gains) is considered as part of your AGI. One income item that wouldn’t be included are withdrawals from a Roth IRA or Roth 401(k).



Teresa is 66 and collecting a Social Security benefit of $15,000/year. Her other income includes a pension of $10,000 and municipal bond interest (tax free interest) of $3,000. Teresa’s combined income is

               $10,000 (pension)
               $3,000 (tax free interest)
               $7,500 (1/2 of Social Security benefit)
               $20,500 (combined income)

Once you have figured your combined income, you can then determine how much of your benefit is taxable. There are two thresholds (based on your filing status) that determine the amount:

To help understand the chart, for a single filer:

  • If your combined income is below $25,000 then none of your Social Security benefits are taxable
  • If your combined income is between $25,000 and $34,000, then up to 50% of your benefit may be taxable
  • If your combined income is more than $34,000 then up to 85% of your benefits may be taxable.

The same reasoning goes for married couples, however the thresholds are higher.

So, from the example above, Teresa’s Social Security benefits would not be taxable since her combined income is below $25,000.

It is also important to know that its only the portion of your combined income above these thresholds that is taxed.  For instance, if you have combined income of $26,000, that doesn’t mean that all of your Social Security benefits are now taxable. Rather, $500 of your benefit ($1,000 above the $25,000 level x 50%) would be taxable.

Another example to help clarify:

Jake has income from his IRA of $20,000 and Social Security benefits of $15,000. His combined income is $27,500,000 ($20,000 + $7,500), which means he has $2,500 of income over the first threshold $27,500-$25,000). Half of this amount, so $1,250, of his Social Security benefit is subject to tax. The rest of his benefit will be non—taxable.

As your income rises, the amount of your Social Security subject to tax rises. The highest amount of Social Security that can be subject to tax is 85%.

An important note: this does not mean that 50% or 85% of your Social Security benefit will disappear. It just means that 50% or 85% of your Social Security benefit will be taxable. The rate that your benefit will be taxed at depends on your tax situation. Some states, Connecticut being one, also tax (or partially tax) Social Security.


Planning Points

• This is a yearly calculation, so the amount of your Social Security subject to tax can change as your income changes in retirement.

• The income thresholds that are listed above are not adjusted for inflation. So as your income rises, you may quickly surpass these thresholds.

• There is only so much that can be done to plan around this Social Security tax. However, having money in Roth accounts or taxable accounts can help by giving you the ability to manage your income streams throughout retirement. It can be worth exploring tax planning opportunities such as Roth conversions as your prepare for retirement.

If you are interested in learning more about Social Security, download a free copy of our eBook “Social Security: How to Make it Work For You” which you can find on the top right of this page.


Sources & Further Reading
SocialSecurity.gov: Income Taxes and Your Social Security Benefits

Social Security and Spousal Benefits

December 14, 2016 / Blog


One of the most misunderstood (or unknown) areas of Social Security is spousal benefits. According to a survey by AARP, only 48% of more than 2,000 respondents aged 52-70 knew that they could collect Social Security benefits based on their living spouse’s record.


Spousal Social Security Benefits

If you have been married for at least 1 year, then you may be eligible to collect Social Security benefits based on the work record of your spouse. Spousal benefits can be a great benefit for someone who never worked or who didn’t work many years, such as stay-at-home parents.


So how much is the Spousal benefit? If you collect your spousal benefit at your Full Retirement Age (FRA), then you are eligible to collect 50% of your spouse’s benefit (otherwise known as Primary Insurance Amount).


Ryan and Amy are both 66 and have just retired. Ryan has a benefit of $2,000/m and Amy does not have a benefit of her own, as she stayed at home to raise their kids.

If Ryan collects his benefit now, Amy will be eligible to collect her spousal benefit, which is $1,000/m (50% of Ryan’s PIA).


If you collect your spousal benefit earlier than your Full Retirement Age, then your benefit will be reduced. If your FRA is 66, then the reduction of your spousal benefit would be as follows:



Joe is 62 years old and his wife Melissa is 66. They are both retired and their FRA is 66. Melissa is eligible for a benefit of $2,000/m while Joe isn’t eligible for a benefit on his own record, as he was a stay at home dad.

If Joe collects his spousal benefit now, at 62, he will get $700/m. That is Melissa’s benefit of $2,000/m reduced by 50% for the spousal benefit and then reduced 30% because Joe is collecting early.


While both examples above show spouses who didn’t work and thus had no Social Security benefit of their own, you can still take advantage of spousal benefits if you worked and are entitled to your own benefit. In this case, you will be eligible to collect the higher of the two benefits, but not both.


Brittney and Tom are both 66 years old. Tom has a benefit of $2,500/m. Brittney worked part time while raising their kids, and has a benefit of $800/m. Brittney is entitled to a spousal benefit of $1,250/m (50% of $2,500). Since the spousal benefit is higher, she will collect this benefit rather than her own benefit of $800.


Importantly, in order to collect a spousal benefit, your spouse must have filed for their benefit already. You cannot collect a benefit before they have done so.


Another point regarding Spousal benefits is that there is generally no benefit in delaying Spousal benefits past your Full Retirement Age, as the amount will not increase.

So while retirement benefits will increase the longer someone waits to collect them, the spousal benefit will not increase after someone reaches their FRA.


Anne and Victor are 66 and 70, respectively. Victor’s Social Security benefit was $2,000/m at 66, his Full Retirement Age. However, he decided to wait until 70 to start collecting his benefit, which would have grown to $2,640/m.

Anne is eligible to collect a spousal benefit of $1,000/m (50% of Victor’s benefit at his FRA). There is no benefit to Anne waiting to collect the benefit like Victor did. Her spousal benefit will not increase.



One final point regarding Spousal Benefits is the potential benefit of a strategy known as “restricted application.” Recent changes to Social Security has eliminated “restricted application” for future retirees, however if you were 62 by December 31st, 2015 then you may be able to still take advantage of it. To understand how restricted application works, see our previous post on “Important Social Security Changes.”


Sources & Further Reading
Social Security, Retirement Planner: Benefits for Your Spouse
AARP Research


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5 Questions to Ask Yourself Before You Retire

November 1, 2016 / Blog


Any new chapter or transition in life can be both exciting and nerve racking. Retirement is a perfect case in point. After working and saving for most of your life, how do you know if you are prepared to retire? Below are categories of questions you should ask yourself before determining whether you are prepared to retire.


How do you envision your retirement?

There’s a common saying that most retirees know what they are retiring from, but not what they are retiring to. Work offers structure and a design to most people’s everyday life. Transitioning from that type of schedule to retirement can be challenging if you haven’t mapped what you want your retirement lifestyle to look like.

In order to make the most of retirement, you need to define retirement for yourself. What will you do with your time? What do you want each day to look like? What goals would you like to accomplish? From traveling, spending time with family, volunteering, consulting, or writing that book you’ve always wanted, retirees have the opportunity to craft their path and spend their time the way they want.

Answering these questions is one of the most, if not the most, important pieces of retirement planning. As Rick Ferri, author and retired investment advisor, recently stated:


“Having money to retire is over emphasized in the financial press. What matters more is having a purpose. That’s where happiness comes from.”


What Health Insurance will I have?

Health insurance is a big cost for retirees. Understanding what options are available may not be easy, but it is important. Start by asking yourself these questions:

If you are retired and under age 65, will you have continuing health insurance from your previous employer? Will you have to use COBRA? Or will you have to purchase a health insurance policy from the Exchange?

If you are over 65, have you figured out when you should sign up for Medicare? Will you use a Medigap or Medicare Advantage Plan? What will you do for drug coverage?

An area that causes some confusion is when a couple retires and one is over 65 and the other is younger than 65. Medicare is not a family policy. So while the spouse over 65 can have Medicare, the younger spouse cannot. That spouse will need to find health insurance from another source.


How much do I plan on spending in retirement?

How much will I need to live the lifestyle I desire?

A common way to estimate retirement expenses is to look at your current budget and then subtract out areas that will no longer apply (i.e. work expenses) and add areas that will (i.e. added health care costs).

When looking at your expenses make sure to account for your discretionary expenses. That includes things like travel, entertainment and gifts. For many retirees, these discretionary expenses are what help define their quality of life and are essential to a fulfilling retirement.

If you plan on moving, you should also note how your cost of living may change.

Most likely, your expenses will be a moving target, rather than a static figure from year to year. Research has shown that spending tends to decline throughout retirement, so the first few years may have higher expenses as you are traveling and doing more.


What Income will I have?

After you have figured out how much you would like to spend in retirement, you then need to look at what sources of income you will have. These can include Social Security, pensions, annuities, and your savings (401k, IRA, investment accounts, etc.). If you will be pulling money from your savings, what account will you take it from? Your retirement accounts or taxable accounts? Also, how will you manage the tax impact of those different accounts?

There are a number of strategies to craft how you will pull income from your portfolio in retirement. Some people like to take a set static amount (e.g. 4% rule) every year, while others like to target more dynamic approaches that may react to how the market performs. The question isn’t about which strategy is the best, but which strategy is better for you.


When Will I collect Social Security?

An important piece of income for most retirees is Social Security. As of 2013, Social Security accounted for an average 52% of household income for those age 65 and older.

You shouldn’t start collecting Social Security until you understand where it fits into your overall retirement plan. Have you weighed the benefits of waiting to collect Social Security? If you are married, how will you coordinate your benefits with those of your spouse?


Final Thoughts

These questions aren’t the only ones to think about, but they are very important and apply to almost all retirees. If you can answer these questions, you are heading in the right direction for retirement. If you cannot, it is time to start thinking about them and creating a plan.


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Social Security & Divorce

September 20, 2016 / Blog

There can be a lot of confusion around the benefits for Divorced Spouses and Social Security. In this post, we will cover the eligibility rules, what a divorced spouse may be entitled to, and also tackle some common misconceptions.

The information below applies to divorced spouses whose ex is still alive. If their ex-spouse is deceased, then the rules change.



For a divorced spouse to qualify for benefits based on their ex-spouse they must meet certain criteria:

You must have been married for at least 10 years.
You must not be currently remarried.
You and your ex spouse must be at least 62 years old.

In order to collect benefits, your ex-spouse does not have to be collecting benefits themselves as long as you have been divorced for over two years and your ex-spouse is at least 62 years old.


Jeremy and Dawn, both age 62, were married for 20 years before getting divorced 5 years ago. Jeremy worked while Dawn stayed at home to raise their kids. Jeremy would like to wait until 70 to collect his benefit. Even though Jeremy is not currently collecting benefits, Dawn is eligible to collect a divorced spouse’s benefit.

For divorced individuals like Dawn who may have never worked or may have only worked for a short period of time, the divorced spousal benefit is extremely important. Without that benefit, those individuals would either have a very small Social Security benefit or none at all.


How Much are Ex-Spousal Benefits?

In general terms, divorced spousal benefits work as such:

If you claim divorced benefits at your Full Retirement Age, you can collect 50% of your Ex’s benefit.
If you claim benefits earlier than your Full Retirement Age, your benefit will be reduced.
There is no advantage to waiting to collect your divorced benefit past your Full Retirement Age, as the benefit will not grow.

To see how this may work, let’s continue our example of Jeremy and Dawn:

Jeremy and Dawn have a Full Retirement Age (FRA) of 66. That is the age that they can collect their Social Security benefit without any reduction. Jeremy will have a benefit of $2,400/m at FRA while Dawn isn’t eligible for a benefit because she didn’t work. If Dawn waits until 66 (her FRA) she can collect $1,200/m (50% of Jeremy’s benefit). If she decides to collect earlier than 66, her benefit will be reduced. Dawn should not wait past than 66 to collect her benefit, as it will not increase above $1,200/m.


Common Misconceptions

If you are eligible for a divorced spousal benefit and a benefit from your own work, you cannot collect both of the benefits together. Rather, you collect whichever is highest.

Even if your ex-spouse remarried, you can still collect divorced spousal benefits (In the example, if Jeremy re-married, Dawn is still eligible for her divorced spousal benefit).

Collecting a divorced spouse’s benefit will not affect the benefit of your ex-spouse. Further, if your ex-spouse remarried and his/her spouse is taking spousal benefits that benefit will not be affected either.

Social Security will not notify your ex that you are collecting benefits on his/her record.

If you worked and have a benefit of your own, your ex-spouse may also be able to collect an ex-spousal benefit on your record.


Restricted Application

If you were 62 by the beginning of 2016 you may be able to take advantage of a Social Security claiming strategy known as “restricted application.”

A restricted application would apply if you are eligible for a benefit on your own record along with a divorced benefit. With this strategy, you would collect the divorced spousal benefit at your Full Retirement Age and then your own benefit at age 70. By not touching your own benefit, it can grow by as much as 32%. An example should offer some clarity:

Betty and Mark are both 66 years old.  They were married for 15 years before divorcing 3 years ago. They each worked and so are eligible for their own retirement benefits. Mark’s benefit is $2,500/m and Betty’s is $1,300/m.

With Restricted Application, Betty will collect her divorced spousal benefit of $1,250/m (50% of $2,500) from now until age 70. At age 70 she can switch to her own benefit, which would have grown to $1,716/m. Mark can do the same thing, collecting a divorced benefit of $650/m now and switching to his own benefit at 70, which would have increased to $3,300/m.

Unfortunately, restricted application is no longer available for anyone that wasn’t 62 by the beginning of 2016.


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The Vocabulary of Social Security

June 23, 2016 / Blog


Social Security is an integral part of most American’s retirements. However, its importance is not to be outdone by its complexity. With hundreds of different rules and regulations it’s easy to get lost in the details of how Social Security works. Luckily, having a basic knowledge of some of the key features and terms should give you a baseline of which you can work. In this post we will cover those basics and introduce the words and phrases that are the cornerstones of Social Security.

I would recommend you review your Social Security statement (this can be obtained at ssa.gov) if you have not done so already.

Key Terms and Features


Full Retirement Age: The age when you can collect your “full or unreduced” Social Security benefit. The Full Retirement Age changes based upon your date of birth. Below is a chart from Social Security indicating your Full Retirement Age (FRA).

ss fra chart


PIA (Primary insurance amount): Your PIA is the monthly benefit you will receive if you elect to collect benefits at your Full Retirement Age. For instance, if your Primary Insurance amount is $2,000/m and your FRA is 66, you will receive $2,000/m if you decide to start benefits at 66. There are reductions for collecting benefits earlier than FRA and credits for collecting benefits after FRA. The reductions and credits are percentages based upon your PIA.


Delayed Retirement Credits: By waiting to collect your social security benefit past your Full Retirement Age, you gain delayed retirement credits. These credits allow your benefit to grow. Each month you delay, your benefit will grow by 2/3%, which equates to 8% per year. If your FRA is 66 and you delay benefits until 70 (which is the latest age you can defer to) your PIA will grow by 32%.


Bob is 66 and has a PIA of $2,500/m. If Bob delayed his benefit until 70, his Social Security benefit would be 32% higher, $3,300/m.

If Bob decided to collect at 68, his benefit would be 16% higher, at $2,900/m.

There can be numerous benefits to deferring, especially for couples.

Also, delayed retirement credits stop once you reach age 70, so there is no point in deferring your benefit past that age.


Reduction Factor: Just as there are benefits to delaying, there are reductions for claiming your benefit early. The math behind the reduction isn’t as straight forward as the credits we mentioned above. We will review the calculation below, but the main takeaway is that collecting early will permanently reduce your benefits.


Your benefit is first reduced by 5/9ths of 1% for each month you collect early up to 36 months before full retirement age.

If you start more than 36 months before your FRA, the benefit is reduced further by 5/12ths of 1% per month.

So your benefit is reduced by 6.67% for each of the first 3 years before your FRA and then 5% for the last year.


If Bob from above collects his benefit at 62, his benefit is reduced by 25%, so he would collect $1875/m.

If Bob collects instead at 63, his benefit would be reduced by 20% (6.667 * 3). Thus his benefit would be $2000/m.


COLA (cost of living adjustment): Your Social Security benefit will increase with inflation. It is important to consider that your living costs may rise faster than the cost of living adjustment on Social Security. In addition, there are years where there may be no cost of living adjustment, like 2015, and thus your benefit wont grow from one year to the next.


Earnings Test: The earnings test applies to people who:

1. Collect their Social Security benefit early (before FRA) AND
2. Are still working.

If those stipulations apply, then part or all of your Social Security benefits will be withheld. For 2016, your benefit will be reduced by $1 for each $2 you earn above $15,720. The reduction is not permanently lost, however, as it is added back to your benefit at Full Retirement Age

Again, you must be working and collecting benefits earlier than FRA for the Earning’s Test to impact you. If you collect your benefit at Full Retirement Age and are still working, your benefit will not be reduced. Similarly, if you collect early but are no longer working, your benefit will not be reduced.


Dual Entitlement: This refers to the fact that you may be able to eligible for benefits based on someone else’s earnings record. This can include spousal, divorced, and widower benefits.

Importantly, you can not collect both benefits at the same time. Generally you will collect the highest benefit for which you are eligible.

It is in this area of dual entitlement where the greatest planning opportunities come into play. By looking at the different options available, you can choose the right benefit at the right time.


Sally and Mark are married and have recently retired. Mark’s Primary Insurance Amount (PIA) is $2,400/m at 66. Sally, who didn’t work for a number of years as she was raising their kids, has a PIA of $600/m. With dual entitlement Sally will be eligible for a “spousal benefit.” The spousal benefit is 50% of Mark’s PIA. Sally can collect the higher of her benefit or the spousal benefit. Since the spousal benefit is higher, Sally will collect a benefit of $1,200/m


Taxes: Your Social Security benefits may be taxable. The taxation of your benefits depends upon your Provisional Income (which is your Modified Adjusted Gross Income Plus ½ of your social security benefits).

If the only income you have is Social Security, then your benefit will not be taxable. However, if you have other income (i.e. withdrawals from IRA or 401k, pension income or wages) than 50% to 85% of your benefits may be taxable.


These terms and features are just a few of the many that apply to Social Security. Having a good grasp of these basic terms should help in understanding what benefits are available to you and your family.


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