Each day I receive more and more questions from my baby boomer clients who are confused about Social Security benefits and taxation. Social Security benefits come in three flavors: Retirement benefits, survivor benefits and disability benefits. The questions I receive primarily involve questions regarding the retirement benefits area. With 365 baby boomers turning 62 each hour, since January 1st 2008, I have no doubt that the frequency and diversity of these questions will grow. Fortunately, most of the questions are very similar and I will address, in this article, the most common issues I am regularly confronted with.

When can I retire and collect benefits?
You have three choices as to when you can begin collecting retirement benefits:
Age 62 or
Normal Retirement Age or
Later than Normal Retirement Age

Normal Retirement Age refers to the age you need to be in order to receive your Primary Insurance Amount (“PIA”). PIA is the full, normal retirement benefit you are entitled to. When you retire early (i.e. at age 62), your full retirement benefit is reduced to an amount equal to 75%. This means if you retire at age 62 you will receive 75% of what you would normally receive if you waited until you hit your normal retirement age. If you retire later than your Normal Retirement Age, your future retirement benefits grow by 8% per year until you reach age 70. After age 70 the Social Security Administration will not increase your benefit amount one red penny.

Normal retirement age varies according to your year of birth:
Born 1937 and earlier = 65
Born in 1938 = 65 + 2 months
Born in 1939 = 65 + 4 months
Born in 1940 = 65 + 6 months
Born in 1941 = 65 + 8 months
Born in 1942 = 65 + 10 months
Born in 1943 to 1954 = 66
Born in 1955 = 66 + 2 months
Born in 1956 = 66 + 4 months
Born in 1957 = 66 + 6 months
Born in 1958 = 66 + 8 months
Born in 1959 = 66 + 10 months
Born in 1960 and later = 67

How are my Social Security retirement benefits determined?
The calculation of retirement benefits is based on earnings over a forty year period. The lowest five years are dropped and the remaining earnings are averaged over this thirty-five year period.

Am I eligible to collect Social Security retirement benefits? I did not work that much during my life.
In order to qualify for Social Security retirement benefits you need to have worked forty quarters and earned a specified minimum amount during each quarter, in order for the quarter to qualify. A quarter is a three month period.

My wife was a homemaker and has never worked. Is she eligible for any Social Security retirement benefits?
If a spouse did not work they are still eligible for Social Security benefits equal to 50% of their working spouse’s PIA (full retirement amount). When the working spouse dies, the surviving, nonworking spouse, is entitled to 100% of their deceased working spouse’s retirement benefits.

Should I begin collecting benefits at age 62 (early retirement)?
If you are hell-bent on early retirement and need the retirement benefits to survive, then the answer is an obvious yes. If you do not need the benefits to survive and there is longevity in your family, then waiting until full retirement age is probably the best option as your increased benefits will begin paying off after age seventy-six.

What if I retire early, collect retirement benefits at age 62, and soon after realize I need to work because I am not making ends meet?
In this case the amount of earnings you make during the year cannot exceed $ 14,160 (2009). If your earnings exceed this amount you will be required to pay back one dollar in Social Security retirement benefits for every two dollars of earnings that exceed this $ 14,160 (2009) amount. You can find yourself in a financial mess when this happens so you must consult your CPA if you are thinking of returning to the workforce, even part-time.

I am divorced and I did not work much during my life. Am I eligible for Social Security benefits?
A divorced spouse who does not meet the forty quarter minimum requirement and who was married for ten years to the same spouse, is entitled to 50% of their ex-spouse’s PIA (full retirement benefit) if they wait until their full retirement age. If they want to collect at age 62, then they are eligible for 37.5 % of their ex-spouse’s PIA (full retirement benefit).

When should I apply for retirement benefits?
The earliest you can apply for benefits is three months prior to turning age 62.

I never worked but want to apply for early retirement benefits (age 62) on my husband’s account. My husband says he is going to continue working. Is this a problem?
Yes. Generally, a spouse cannot collect on their spouse’s account until their spouse begins collecting. There is an exception, however. The working spouse can “file and suspend” (apply for Social Security benefits and then immediately apply to suspend collecting benefits).

I intend on applying for early retirement (age 62) but I will work part-time. Do I have to pay Social Security tax on my earnings?
Yes. Everyone who works, even those collecting Social Security benefits, must pay Social Security tax on their earnings.

How much of my Social Security benefits will be taxed?
The maximum amount of your benefits subject to income tax is 85%. It may be lower, depending on your Modified Adjusted Gross Income.

Tom is a Certified Public Accountant, a Certified Financial Planner, CLTC (Certified Long-Term Care) and President of Cerefice & Company, the largest CPA firm in Rahway, New Jersey. Tom works with clients helping them manage their money, retirement planning, college savings, life insurance needs, IRAs and qualified plan rollovers with an eye towards maximizing tax benefits and minimizing taxes. Tom is founder of the Rich Habits Institute and author of “Rich Habits”.

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