For many Americans Social Security benefits are the essential part of a sound retirement income plan. Maximizing these funds is key to funding a significant portion of your income in retirement and realizing a productive and comfortable retirement. The rules are complex, but the following 12 key points can assist a client in navigating these waters for Social Security planning.

Your Social Security “Full retirement age” plays a big role- Know it.

First things first: Determine your Social Security full retirement age. For people born between 1943 and 1954, the full retirement age is 66. It will gradually climb between the birth years of 1955-1959. If you are born in 1960 or after it is 67. Your monthly benefit will vary based on when you claim.

How your Social Security benefits are earned.

To be eligible for benefits you have to earn 40 credits throughout your career. You can earn as many as four credits a year, so it takes 10 years of work to qualify for Social Security. In 2021, you must earn $1,470 to get one Social Security work credit and $5,880 to get the maximum four credits.

How your Social Security Benefits are Calculated

Your Social Security benefits are based on the 35 calendar years in which you earned the most money. If you have fewer than 35 years of earnings, each year with no earnings will be factored as zero. You can increase your benefits by replacing a zero with earned income. There is a maximum Social Security amount you can receive, depending on the age you retire. For someone retiring in 2021 the max monthly benefit is $3,113. For someone filing at age 70 the maximum monthly benefit is $3,895. You can estimate your Social Security as well.

How your Social Security Benefits are Calculated

The monthly benefit is adjusted every year for inflation. This will help to protect against the rising living expenses during retirement. This is the equivalent of purchasing inflation protection on an annuity. Not to get too technical but it is based on changes in the federal consumer price index, depending on inflation. In 2021 Social Security beneficiaries will see a 1.3% COLA in the monthly benefits.

Your Monthly Social Security Benefits grow the longer you wait to claim them.

You can collect Social Security benefits as soon as you turn 62, but taking benefits before your full retirement age results in a permanent benefits reduction- of as much as 25% to 30%, depending on your full retirement age. If you wait until you hit full retirement age to claim Social Security benefits, you will receive 100% of your earned benefits. Or, you can keep waiting to claim your Social Security benefits- all the way to age 70. By doing this your monthly Social Security benefit will grow by 8% a year until age 70. Any cost-of-living adjustments will be included, too, so you will not forgo those by waiting.

There’s a Social Security Spousal Benefit

The spousal benefit could be up to 50% of the other spouse’s Social Security benefit. Put simply if your monthly benefit is $2,000, but your spouse’s benefit is only $500, your spouse can collect a spousal benefit worth $1,000. The 50% figures is the maximum amount that only a spouse who is at least full retirement ages is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earner’s benefit. If you take your own benefit early and then switch to a spousal benefit, your spousal benefit will be reduced.

Children Can Collect Social Security Benefits, Too

Minor children of Social Security beneficiaries can be eligible for benefits. Children up to age 18(or up to age 19 if they are full-time students who have not graduated from high school) and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit. The disability must have occurred before the age of 22. As long as the disability prevents the person from working, the adult child can continue collecting the benefit even after the parent has died.

There are Social Security Benefits for surviving spouses and children

If your spouse dies before you, you can take a Social Security survivor benefit, but not in addition to your own benefit. You must choose one or the other. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death(or 100% of what your spouse would have been eligible to receive if he or she hadn’t taken benefits). A widow or widower can start taking a survivor benefit at age 60, but the benefit will be reduce because it’s taken before full retirement age. If you remarry before age 60, you cannot get a survivor benefit. But if you remarry after age 60, you may be eligible to receive a survivor benefit based on your former spouse’s earnings record. Eligible children who are under age 18 (up to age 19 if attending high school full time) or were disabled before age 22 can also receive a Social Security benefit, worth up to 75% of the deceased’s benefit.

You can claim Social Security Benefits Earned by your Ex-Spouse

Just because you’re divorced doesn’t mean that you’ve lost the ability to get a Social Security benefit based on your former spouse’s record. You can receive a benefit based on his or her record instead of a benefit based on your own record if you were married at least 10 years, you are 62 or older, and single. Like a regular spousal benefit, you can get up to 50% of an ex-spouse’s benefit-less if you claim before full retirement age. The beauty of it is that your ex never needs to know because you apply for the benefit directly through the Social Security Administration. Taking a benefit on your ex’s record has no effect on his or her benefit or the benefit of your ex’s new spouse. And unlike a regular benefit. If your ex qualifies for benefits but has yet to apply, you can still take a benefit on the ex’s record if you have been divorced for at least two years.  NOTE: Ex-spouses can also take a survivor benefit if their ex has died after the divorce, and, like any survivor benefit, it will be worth up to 100% of what the ex-spouse received. If you remarry after age 60, you are still eligible for the survivor benefit.

You can Undo a Social Security Claiming Decision

There are not many times in life where you can take a mulligan. But Social Security offers the chance for a do-over. Say you claimed your benefit, but soon thereafter wish you had waited to take it. Within the first 12 months of claiming Social Security, you can withdraw the application. You will need to pay back all the benefits you received, including any spousal benefits based on your record. But you can later restart your Social Security benefits at the higher amount you’ll earn by waiting.

Your Social Security Benefits will be taxed

Most people know that you pay tax into the Social Security Trust Fund throughout your career, but did you know that you may also have to pay tax on your Social Security benefits once you start receiving them? Benefits lost their tax-free status in 1984, and the income thresholds for triggering tax on benefits haven’t been increased since then. As a result, it doesn’t take a lot of income for your Social Security benefits to be pinched by Uncle Sam. For example, a married couple with a combined income of more than $32,000 may have to pay income tax on up to 50% of their Social Security benefits. Higher earners may have to pay income tax on up to 85% of their benefits. You may also have to pay state income taxes on your Social Security benefits.

Beware the Social Security Earnings test

Bringing in too much money in earned income can cost you if you continue to work after claiming Social Security benefits early. With what is commonly known as the Social Security earnings test, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which is 2021 is $18,960. Once you are past full retirement age, the earnings test disappears, and you can make as much money as you want with no impact on benefits. Any Social Security benefits forfeited to the earnings test are not lost forever. At your full retirement age, the Social Security administration will recalculate your benefits to take into account benefits lost to the test. For example, if you claim benefits at age 62 and over the next four years lose one full year’s worth of benefits to the earnings test, at full retirement of 66 your benefits wil be recomputed- and increased- as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%. Social Security and the planning for possibly a third of your lifetime in retirement is right now the most important planning strategy for all people considering retirement, or are already retired. There are multiple planning strategies that can be employed to assist clients in realizing the fruitful and productive retirement they desire. Contact the specialist’s at Pinnacle Financial Services to assist with productive solutions to assist your clients in living the type of retirement that they deserve and want.