2022 AFBA Financial Planning Guide

For purposes of financial planning, it is important to remember that in the event of your death, your surviving spouse may be entitled to claim benefits as early as age 60. If he or she is severely disabled, reduced benefits may start at age 50. Reduced Benefits. Individuals who qualify as being “fully insured” have the option of applying for a reduced retirement benefit starting at age 62. The permanent reduction is calculated at 5/9 of one percent for each month before your full retirement age up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12 of one percent per month. For example, if your full retirement age is 66 and you begin receiving benefits at age 62, the reduction to your annuity is approximately 25%. If you begin drawing benefits at age 64, the reduction is approximately 13% of your full entitlement. The choice of whether to receive reduced benefits at age 62 versus receiving full benefits at full retirement age is not a simple decision. Factors influencing the decision are your employment status at age 62, the immediate need for funds at the earlier age, and the potential investment opportunities for Social Security benefits that are received early but are not immediately needed to maintain an adequate standard of living. In terms of whole dollars, the individual who begins receiving reduced benefits at age 62 (versus deferring the receipt of benefits until age 66) will have more benefit dollars for the first 12–13 years of retirement. In other words, it takes approximately 12 years for the increased benefit received at a later age to make up the dollars that are lost by not receiving a reduced benefit payment at an earlier age. Spouses. An eligible spouse of a person receiving benefits may also be entitled to a reduced benefit amount when he or she reaches age 62. The percentage reduction is based upon the number of months before the spouse reaches full retirement age (FRA). For example, if your spouse’s FRA is 66 and he or she begins collecting benefits at age 62, the benefit amount would be about 35% of the primary wage earner’s full benefit. If benefits were received starting at age 64, the amount would be about 42% of the primary wage earner’s full benefit. Spouses cannot receive spousal benefits until the primary wage earner files for retirement. If the primary earner is at full retirement age, they can apply for retirement and request that their payments be suspended. This will enable the spouse to immediately receive the spousal retirement benefit while simultaneously allowing the primary wage earner to earn delayed retirement credits until age 70.

Divorced Spouses. A divorced spouse may draw reduced benefits based on the earnings of their former spouse provided the two were married for at least ten years. The divorced individual must be at least age 62, unmarried, and divorced at least two years from the former spouse. (Note: The two year requirement may be waived in certain situations.) The benefits received by a divorced spouse have no impact on the benefits received by either the primary wage earner or other family members. Continued Employment While Drawing Social Security. When individuals receive retirement benefits, there may be an annual limit on the amount they can earn without losing part of their benefits. The annual limit is determined by the annuitant’s age at the time the income was earned. The SSA uses the following formulas to determine benefit reductions: a. Earnings in years before reaching full retirement age. If the annuitant earns income in any year before reaching full retirement age, $1 of benefits will deducted for every $2 earned above the annual limit. For 2022 the annual limit is $19,560. b. Earnings in the year the annuitant reaches full retirement age. Earnings in all months of the year prior to the birth month are subject to a $1 benefit reduction for every $3 earned above the annual limit. However, this annual limit is significantly higher than the limit noted in paragraph “a.” For 2022 this earnings limit is $51,960. c. Earnings in the month and year that the annuitant reaches full retirement age. Earnings made both in the month the annuitant reaches full retirement age and in subsequent periods are NOT subject to an annual limit. In effect, once you reach full retirement age, the earnings test is eliminated and there is no reduction to your retirement benefits. Your Benefits May Be Taxable. About one–half of people who receive Social Security retirement benefits have to pay tax on some portion of the money. The tax treatment of the benefits is determined by your income level and filing status—in the worst case scenario, up to 85% of the benefits may be taxable. If your total income is more than $25,000 for an individual or $32,000 for a married couple filing jointly, you must pay federal income taxes on your Social Security benefits. Below those thresholds, your benefits are not taxed Although you are not required to have federal taxes withheld from your Social Security check, you may find it easier than paying quarterly estimated tax payments. To have federal taxes withheld, you need to complete IRS Form W–4V. You can get this form by visiting the IRS website at www.irs.gov or calling 1–800–829–3676. The completed form must be submitted to the SSA.


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