CHAPTER
4

Qualifying and Calculating Your Benefits

In This Chapter

• How you qualify for Social Security benefits
• How retirement benefits are calculated
• Special strategies for spouses to increase benefits
• How disability benefits are calculated

As we’ve discussed, Social Security was originally created to help fund retirement, but over the years it has grown considerably to provide benefits for you and your family if you become disabled and can’t work, and for your family if you should die. However, before you or anyone else in your family can receive these benefits, you have to qualify for them.

Not everyone who reaches the age of 62 or becomes disabled is automatically qualified to receive Social Security benefits. These benefits are based on how much you earned over your working lifetime. And keep in mind that not all benefits are related to retirement. Some are for disabled workers and others are for families who for one reason or another qualify under special circumstances.

Benefits for Retirees, Disabled, Children, and Survivors

The Social Security Administration (SSA) uses a complex formula to determine the actual benefit you receive. To qualify for retirement benefits you have to earn at least 40 quarterly credits, which equals 10 years’ worth of payroll tax payments. You earn a credit by making at least $1,200 in a three-month period and paying Social Security taxes on that amount. So figure if you earn $4,800 in a year, you get four credits—the maximum number you can earn in one year.

The amount needed to earn a credit goes up each year, but that doesn’t affect previously earned credits; once you earn 40 credits, you are permanently qualified. The level of benefits, however, is determined by your income history.

For those claiming disability, you also have to meet certain earnings credits, but that varies depending on your age at the time you became disabled. Children’s benefits are based on the same formula used to calculate your retirement benefits.

If you qualify for Social Security benefits and you die, your widow or widower, if she or he is full retirement age or older, will get 100 percent of your benefits. He or she can qualify as early as age 60, but benefits would be reduced depending on age.

Survivors benefits are based on the maximum amount the worker would have received if he or she was still alive. If the worker was receiving reduced benefits because he or she took benefits early, survivors benefits would be reduced as well.

The Formula for Calculating Retirement Benefits

When it comes to determining individual benefits, the government decided to come up with one of the most complex formulas ever created. At its base, the formula is tied to your highest earnings over 35 years.

But what if you didn’t work for 35 years, or had periods when you didn’t work at all for a few years? Even for those years when your earnings would have been pretty low, the SSA takes 35 years of wages and creates an index called the Average Indexed Monthly Earnings (AIME).

They do this by adding up what you made each year in your 35 best years, using only those years in which Social Security taxes were paid, and then dividing that total by 420—which is the number of months in 35 years. If you worked fewer than 35 years, the missing years are filled with zeros. If you worked more than 35 years, only the highest-earning years are counted. The resulting figure is your AIME, and that’s what’s used to calculate your Social Security benefits. For example, let’s say over those 35 highest-income years you made a total of $2 million. Divide that $2 million by 420 and you get $4,762. That’s your AIME.

Once you have your AIME, there are four more steps. In 2014, you:

1. Multiply the first $816 by 90 percent
2. Subtract $816 from $4,917 and multiply that number by 32 percent
3. Subtract $4,917 from your AIME and multiply that by 15 percent
4. Total those last three numbers and then round down to the next lowest dollar. This will be your estimated monthly retirement benefit at full retirement age, either 66 or 67.

If you’d like to see what you’d get if you took early retirement at age 62, multiply your full retirement benefit by 75 percent.

What does all of this amount to? To simplify things, let’s look at just three basic numbers. The first one is what is the most common Social Security benefit in 2014? The answer is that the average monthly retirement benefit for Social Security in 2014 was $1,294.

Next is the maximum you could receive if you are a high earner and you wait until your full retirement age to begin claiming your Social Security benefits, so there is no reduction in benefits. The amount of the maximum retirement benefit for a high earner beginning benefits at full retirement age in 2014 was $2,642.

Finally, what could you increase your monthly Social Security benefits to if you delay claiming your benefits until age 70, the last year there is any increase in benefits by delaying? That amount could become as high as $3,425 per month because benefits were accruing additional earning credits to the tune of around 8 percent a year between your full retirement age and age 70.

When Your Monthly Social Security Check Will Arrive/Be Deposited

Maximizing Spousal Benefits

Married people have a distinct advantage over single folks when it comes to maximizing their Social Security benefits. Beyond the fact that they get two payments a month instead of one, there are other strategies they can employ to increase the amount of at least one of those checks.

Under Social Security rules, a spouse has certain benefits, but they are restricted under the following guidelines:

• Dual entitlement, whereby a spouse, upon reaching full retirement age, is entitled to receive either his or her own benefits based on earnings, or 50 percent of the partner’s benefits, depending on which is greater.
• Only one spouse can take advantage of spousal benefits.
• To receive spousal benefits, the other partner has to be already receiving benefits based on his or her own earnings.

The spousal benefit regulations are somewhat different regarding divorced spouses. Here are those rules:

• The marriage had to have lasted at least 10 years.
• The person filing for spousal benefits must still be unmarried.
• The ex-spouse is at least 62 years of age or older.
• The ex-spouse’s benefit based on his or her own work record would be less than the amount he or she could receive based on their ex-spouse’s work record.
• If your ex-spouse is eligible for Social Security benefits, but he or she has not yet applied for it, you can still file for spousal benefits as long as you have been divorced for at least two years.

There is also a provision in the rules to “file a restricted application.” This applies if you’ve been divorced for more than two years. In that case, your ex-spouse is not required to have filed for benefits for you to receive spousal benefits, but he or she does have to be eligible to begin receiving benefits, which means he or she has reached age 62 and one month.

Furthermore, when it comes to divorce, it doesn’t matter if the former spouse remarries. When that happens, both the current spouse and the former divorced and unmarried spouse have spousal benefits privileges related to the former spouse’s work history, as well as survivor benefits for any children.

The “File and Suspend” Strategy

This one is slightly more complicated but could make sense for some couples. Here’s how it works. You file for retirement benefits at the full retirement age so your spouse or dependent children can collect benefits based on your earnings record. Then you suspend your own benefits so the amount by which their benefits are calculated, and your own future benefits, will continue to increase 8 percent per year until you reach age 70.

However, now that you’ve filed for benefits, your spouse can claim spousal benefits, which would be 50 percent of your full retirement benefits. When you turn 70, you will begin receiving benefits as well, but at a higher amount than if you had not suspended them.

What Are Survivors Benefits?

First, reduced survivors benefits can start as early as age 60. Second, a survivors benefit is 100 percent of the deceased spouse’s benefit based on whenever he or she began receiving retirement benefits. If the deceased spouse had filed for Social Security before reaching full retirement, the survivors benefits are tied to the reduced amount.

Another option is to take the survivors benefit at age 60 and then switch over to your own benefits either at full retirement or at age 70 if your retirement benefits amount to more than your deceased spouse’s.

You may be eligible for survivors benefits even if your spouse did not work long enough to earn the necessary 40 credits to be eligible for Social Security benefits. Benefits may be paid to the deceased worker’s children, and the spouse who is caring for those children, as long as the worker had worked for one and one-half years, earning six work credits, in the three years before his or her death.

The One-Time Death Benefit

A surviving spouse can also receive a one-time payment of $225 from the SSA if they apply for it within two years of the qualified worker’s death. Note that the spouse had to be living in the same household at the time of death, or, if they were living apart, the widow or widower has to have been receiving benefits based on the earnings record of the deceased. Contact the local Social Security office to apply if you think you meet the requirements.

WORTH NOTING

For more information on survivors benefits, check out the government publication “Survivors Benefits,” posted at ssa.gov/pubs/EN-05-10084.pdf.

How Are Disability Benefits Calculated?

How much you receive for disability will depend on a variety of factors. The first is whether your claim is being paid by Social Security Disability Insurance (SSDI) or Supplemental Security Income (SSI). Each program uses different methods to calculate benefits. For the purposes of this chapter, we focus on SSDI here. The SSI program is covered in Chapter 9.

Social Security Disability Insurance (SSDI)

Similar to the way retirement benefits are calculated, disability benefits are based on an average of your lifetime earnings up to the point when you became disabled. What it is not tied to is the severity of your disability. On the other hand, if you are receiving payments from other sources because of your disability—such as workers compensation—this will probably reduce the amount of your disability payment.

If you thought the retirement formula was complicated, the disability formula is even more complex! Just as in calculating retirement benefits, the SSA creates an AIME index, along with fixed percentages of different incomes they call “bend points,” which are adjusted each year.

Instead of going into the formula, you can figure you’ll receive somewhere between $300 and $2,600. The average payout for disability in 2014 was $1,148 a month. The maximum you could have received is $2,642 a month.

Meanwhile, when you start receiving monthly disability benefits, members of your family may also be eligible for benefits, including:

• Your spouse
• A divorced spouse
• Dependent children
• A disabled child
• An adult child disabled before age 22

Each family member may qualify for a monthly benefit equal to 50 percent of your disability amount. There’s a limit, however, to the family’s benefit depending on the number of family members who qualify. For 2014, the family maximum ranged from 150 percent to 180 percent of your disability benefit.

How Benefits Can Change

Just because you file for Social Security and begin receiving benefits doesn’t mean your benefits can never change. In fact, what if something miraculous happens and you receive a windfall from an inheritance or win the lottery, or you decide to go back to work and begin earning enough so that you no longer need your monthly Social Security check?

If you’re still under the age of 70, especially if you began getting benefits at 62 at the reduced rate, you can always withdraw your claim and reapply down the road when you have to take it, but it will be at a higher rate—possibly as much as double what you were getting.

There are a couple of stipulations you need to be aware of if you decide to withdraw your application:

• You will have to repay all the benefits you and your family have already received.
• You will have to repay any money withheld to pay for Medicare Part B, C, and D premiums.

If this is something you want to consider, you will need to file form SSA-521, which you can get online at ssa.gov/online/ssa-521.pdf. This is a request to withdraw your Social Security application. Once the SSA processes the form and you repay all your benefits, you can restart them whenever you want to.

Another way benefits can change is when you continue working and your latest year of earnings is one of your highest years. When that happens, SSA recalculates your benefit and increases your monthly payment. Although this is an automatic process, it still takes time for it to go through, typically a year. For example, if you get an increase based on your income in 2014, you wouldn’t see that increase until December 2015, but it would be retroactive to January 2015.

Finally, your benefits will grow each year to keep up with inflation through something called COLA, which stands for Cost of Living Adjustment. For example, in 2015, about 64 million Americans will see a 1.7 percent increase in their monthly Social Security or Supplemental Security Income benefits.

Death of a Breadwinner

Another way your benefits can change is if your spouse dies and they were considered the principal breadwinner because they had earned more in their lifetime, which means their retirement benefit was larger.

If the deceased spouse had a higher benefit, the surviving spouse qualifies for an increase in benefits equal to what the deceased spouse was receiving. For example, let’s say the surviving spouse was getting $1,000 a month, but the deceased spouse had received $2,000 a month. Now the surviving spouse will get $2,000, a $1,000-a-month increase. While that’s still less than the $3,000 they received as a couple, it’s much better than if the surviving spouse had been single and not qualified for any increase.

Difference in Benefits Depending on When You File

By now you realize that when you start receiving Social Security benefits will be a major factor in the size of your monthly benefit check. If you begin receiving payments at age 62, the earliest age you’re allowed to collect benefits, it will be 25 percent less than if you had waited until you reached full retirement age and a whopping 76 percent less than if you had waited until age 70.

So let’s begin in the section that follows with the earliest age you can retire. The SSA has a chart in one of its publications that shows how your benefit would differ depending on which age you began receiving benefits. To simplify things, it uses $1,000 as your monthly benefit at full retirement.

Benefits of Postponing Until Age 70

You can see in the following table even more clearly what a difference there is in the same benefit depending on the age at which it is initially claimed. Factor in that someone might live 20, 30, 40, or more years beyond that initial claim, and you can see the differences can add up.

Difference Age Makes in How Much You Will Receive

Earnings Caps for Those Taking Early Retirement

One thing to consider when taking early retirement benefits, if you plan to continue to work, is that there will be a cap on earnings. If you go over that cap, your retirement benefits will be reduced.

If you were born between January 2, 1943, and January 1, 1955, your full retirement age is 66. If you continue to work and are at full retirement age or older, there are no earnings caps. However, if you retire when younger than 66, the SSA will deduct $1 from your benefits for every $2 you earn (in 2014) above $15,480. (The cap changes each year, usually increasing by a small amount.)

If you reached full retirement age during 2014, during your 65th to 66th year, the income cap was raised to $41,400 and the reduction was lowered to $1 for every $3 you earn.

Another thing to keep in mind is that the way you earn your living is a factor in how these earnings caps are determined. For example, if you work for someone else, it’s your wages that count toward the earnings cap. But if you work for yourself, the SSA only counts your net earnings from self-employment. They don’t count any income you receive in other government benefits, any investment earnings, interest, pensions, annuities, or capital gains.

Also, when you’re working for someone else, your income is calculated when it’s earned, not when it’s paid. That means if you have income such as sick or vacation pay or bonuses that are earned in one year but paid in the next, it’s counted as earnings for the year it was earned, not the year it’s paid.

However, if you’re self-employed, all income counts when you receive it, and not necessarily when you earn it. The one exception is if you’re paid in a year after you become entitled to Social Security and earned the money before you became eligible for those benefits.

The Least You Need to Know

• The SSA determines your benefits using a formula based on your total earnings as long as you meet the minimum of 40 work credits for 10 years of work. In any given year, you can have a maximum of four credits as long as you earn the minimum of $4,800 annually.
• There are minimums and maximums on the monthly benefits paid, based on whether you were a low or high earner, but the average monthly payment from Social Security is $1,294 for an individual.
• The maximum Social Security payment for a high-earning worker retiring at full retirement age is $2,642 a month. By delaying retirement to age 70, the maximum benefit could be as high as $3,425 a month.
• Benefits can change for a variety of reasons including the small annual increase calculated annually known as COLA (Cost of Living Adjustment).
• There’s a significant difference of between several hundred and $2,000 or $3,000 in the payment you receive, depending on the age at which you begin receiving benefits. Those with low earning records who file as early as 62 may receive only $700 a month in benefits, an amount that will increase minimally each year due to COLA.
• There are earnings caps if you begin receiving retirement benefits before reaching full retirement age and you continue to work. In 2015 the earnings cap is $15,720, although it increases to $41,880 during the year you reach full retirement age.