Ask the Expert: Can You Explain Social Security, please?

Q. I am 62 and getting ready to retire. I am really confused about how Social Security works. Can I start collecting now, or do I need to wait until I am 65? Also, what is all this about credits? I thought Social Security was determined based on the number of hours worked in a lifetime? There is just so much information out there and I want to make sure that I understand what’s to come, before making any decisions. Can you explain Social Security eligibility and how credits work? Thank you for your help!

A. Social Security is the foundation of retirement in America, and it is important to become knowledgeable about how it works because what people don’t know about the system can hurt them financially.

For millions of Americans, Social Security benefits will be their only source of income after they retire. And, for many entering retirement, the knee-jerk reaction is to file for benefits at 62, as soon as they are eligible. However, that decision can cost hundreds of thousands of dollars through their retirement years.

We recently created a Social Security FAQ to help clarify why waiting to take Social Security benefits can be beneficial, and to clear up any areas of confusion when it comes to Social Security and earning credits for single people, spouses, divorcees, disabled people, widows, and widowers. Below are excerpts from our FAQ page that will hopefully help answer your questions:

Q. What are Social Security Credits?

A. Credits are the “building blocks” the Social Security Administration (SSA) uses to find out whether you have the minimum amount of covered work to qualify for each type of Social Security benefit. If you stop working before you have enough credits to qualify for benefits, your credits will stay on your record. If you return to work later on, you can add more credits so that you can qualify. No benefits can be paid if you do not have enough credits. Please see this video for more details.

Q. How are Social Security Credits Earned?

A. When you work and pay Social Security taxes, you earn up to a maximum of four “credits” for each year. The way you earn a credit has changed over the years.

• Before 1978, employers reported your earnings every 3 months and we called credits “quarters of coverage,” or QCs. Back then, you got a QC or credit if you earned at least $50 in a 3-month calendar quarter.
• In 1978, employers started reporting your earnings just once a year. Credits are now based on your total wages and self-employment income during the year, no matter when you did the actual work. You might work all year to earn four credits, or you might earn enough for all four in a much shorter length of time.
• The amount of earnings it takes to earn a credit has changed since 1978. In the year 2014, you must earn $1,200 in covered earnings to get one Social Security work credit and $4,800 to get the maximum four credits for the year. In the year 2015, you will need to earn $1,220 in covered earnings to get one Social Security work credit and $4,880 to get the maximum four credits for the year.

During your lifetime, you probably will earn more credits than the minimum number you need to be eligible for benefits. These extra credits do not increase your benefit amount. Your average earnings over your working years determine how much your monthly payment will be.

Q. When can I begin collecting Social Security benefits?

A. You may claim early benefits starting at age 62, but they will not be the full benefits you would receive by waiting for your full retirement age. The full retirement age (FRA) is 65-67, depending on when you were born. For those born before 1938, the age is 65 and for those born in 1938 or later, the FRA gradually increases by monthly increments. If you were born in 1960 or later, your FRA is 67. To determine your retirement age, visit the Social Security website here.

Q. How can I maximize my benefits when planning for Social Security and retirement?

A. Because your ultimate pay-out is based upon the top 35 years of your earning career, obviously you should try to earn as much as you can. Another way to possibly increase benefits is to wait until you reach your full retirement age before claiming them (I say “possibly increase” because by waiting, you of course take the small risk of dying before you claim your benefits). Another way to possibly increase benefits is to wait even longer to retire – continuing to work after you reach FRA allows you Social Security monthly check to build up, because Social Security retirement benefits are increased (the percentage increase depends on your birth date) if you delay your retirement beyond your FRA (note that this benefit increase does not apply once you turn 70. This won’t be an option for everyone, but if you are able to delay retirement (and don’t die), you can reap the reward of larger monthly checks. However, just because you wait does not necessarily mean that you’ll receive more in retirement benefits over your lifetime; if you live to an average life expectancy for

someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62 or any other age.

For lots of additional details about Social Security, including spousal benefits, please visit our Social Security FAQ page.

In 2015, Social Security recipients will see their benefits rise 1.7%, thanks to annual cost-of-living (COLA) adjustments. Beginning in January 2015, for the average retiree, monthly benefits will rise $20 to $1,310. For more details, please see the Key Elder Law Dollar Amounts on our Website.

What if you are living on social security alone and you or a loved one becomes incapacitated? You must take this into account when planning for retirement.  Every adult over the age of 18 should have an Incapacity Plan that includes a Financial Power of Attorney, an Advance Medical Directive, and an Advance Care Plan.  Just as important is that you get special medical certifications in place in connection with your Power of Attorney so that your Agent under your POA will be able to obtain a Reverse Mortgage for you if you don’t have one in place while you’re still mentally competent.  At the Law Firm of Evan H. Farr, P.C., we provide these special medical certification forms for all of our elderly clients as part of our Level 1 Incapacity Planning.  If you don’t have an Incapacity Plan in place, now is the time to get started.  Call us today at 703-691-1888 in Fairfax, 540-479-1435 in Fredericksburg, or 202-587-2797 in Washington, DC to set up an appointment for a no-cost consultation.