The major factors to consider when taking Social Security are your life expectancy, taxes, marital status, when you plan on retiring, and will you or your spouse receive a government pension. Like most pensions, Social Security Administration (SSA) has actuarially determined to give you different amounts based on when you commence payments. Taking it before the current full retirement age (FRA) of 66 reduces payments and delaying it past FRA increases your payments.

The SSA calculates your payment for your full retirement age based on your highest 35 years of paying into the system. They index your earnings for inflation when making their calculations. For example if you were born in 1951 and made $7,087 in 1973, Social Security would count that as $40,183 in today's dollars.

If you don't have 35 years of work history, SSA will average in those years with zeros. If some of your 35 years were part-time jobs, it may be very beneficial for you to work longer to average in some higher earnings and erase the low years.

Working and Taking Benefits

Social Security was originally designed for the destitute as a stop gap from when they were too sick to work and when they died fairly quickly after that. It is important to remember this as you think about the system. Because of this, they don't pay benefits early for people still earning decent incomes. The following applies to your own, spousal, and survivor benefits:

  • In 2013, they take away $1 for every $2 you earn over $15,120 if you begin payments before your full retirement age.
  • In the year you reach full retirement age, they take away $1 for every $3 you earn over $40,080 before the month you reach FRA.
  • Once you reach Full Retirement Age, there are no restrictions on how much money you earn.

In addition to actually losing some of your benefits, you can also be taxed on some of your Social Security payments. Since it is the government, they decided to make this more complicated than it should be. The SSA and the IRS created a special number that has absolutely no use in the real world; it is called “combined income.”

The formula for determining this mythical number is:

Adjusted Gross Income (last line of page one of your 1040)

+ non-taxable interest (muni bond interest)

+ 1/2 of your Social Security Benefits

= your combined income

For people who file single or head of household, the IRS will tax their Social Security as follows based on their combined income:

< $25,000 = no taxes on Social Security

$25,000 to $34,000 = up to 50% is taxable

>$34,000 = up to 85% taxable

Married people get robbed by the IRS according to the following combined income table:

< $32,000 = no taxes on Social Security

$32,000 to $44,000 = up to 50% is taxable >$44,000 = up to 85% taxable.

Let's put some numbers to this to make more sense of this. A single person who has reached his full retirement age of 66 and is still making an Adjusted Gross Income of $50,000 and has $10,000 per year in muni bond interest may consider delaying his application for Social Security when he sees the tax bill. We must first determine his combined income by:

$50,000 AGI

+$10,000 muni bond interest

+ $12,000 1/2 of a $24,000 per year Social Security benefit


= $72,000

Since $72,000 puts his combined income over $34,000, let's assume that 85% of his Social Security benefit is taxable. A person with an AGI of $50,000 is likely to be in the 25% tax bracket. If the above were the case, this person may pay taxes of $5,100 (($24k x.85) x.25)) on a $24,000 Social Security benefit. You don't ever get the taxes back. If this hypothetical person were to retire at 70 and commence Social Security Benefits at that time, their payment would be increased forever by 32% to $31,680 per year (plus the increases for working longer) and it is possible that his combined income would be low enough where only a small percentage of Social Security is taxed at a Federal Tax Bracket of only 15%, instead of today's 25%.

A Home Run for Divorcees

One of the many reasons that Social Security is underfunded is because of this sweetheart deal. If someone is divorced and not remarried, was married for ten years, and they are both over 62, they can collect on the spouses benefit.

The difference between the divorce rules and the rules for married couples is that the ex spouse does not have to have applied for their benefits for the other person to qualify for divorced spouse benefits.

To apply for divorced spouse benefits, you need to take your marriage certificate, divorce decree, and ex spouse's Social Security number into a SSA office. Once they have verified the documents, they can tell you what you are eligible for. There need not be fear of retribution. Your ex spouse will not know that you are claiming this benefit and it does not affect their benefit by one penny. Once the ex spouse dies, you could then be eligible for a survivor benefit. It could make sense to start collecting 1/2 of your ex spouse's benefit and allowing your own benefit to grow by obtaining the deferred credits.

File and Suspend – Married Couples Need to Know This

Your spouse is allowed to collect a spousal benefit which is equal to half of your benefit at full retirement age. Using the File and suspend strategy, the wife collects half of her spouse's Social Security for four years (at age 66) allowing her own benefit to grow by 8% each year until she starts collecting her own benefit at age 70. The husband's benefit was not affected at all by his spouse claiming on his benefit during those four years and his benefit also increased 8% each year as he delayed commencing benefits until his age 70.

It is also important to note that there is no reason to delay taking spousal benefits past your full retirement age. Worth noting though, you are penalized at a greater pace for taking spousal benefits early versus taking your own benefit early.

The only way to let your benefits continue to grow is for you to file for spousal benefits and let your own benefit grow until age 70. To apply for spousal only benefits you must have attained your full retirement age (66 for current retires).

Widows/Survivor Benefits

Even if you don't have all of your 40 quarters of paying into Social Security, you may be eligible for survivor benefits. Here you could take reduced benefits as early as age 60 (instead of 62). If the widow remarries after age 60, the remarriage will not affect survivor benefits.

A smart strategy for widows could be to take survivor benefits and allow their own benefit to grow until age 70 and switch to it. These calculations get very complicated depending on when the spouse died, the age of the widow, and when the deceased spouse began taking benefits.

For couples where one spouse gets significantly more from Social Security, it is important to be aware that taking Social Security early could permanently reduce the survivor's benefit. The survivor could lose up to 17.5% of the monthly benefit available for the spouse's full retirement age and in some cases the survivor could get a raise. The flip side is also true. If the higher earner waits to take Social Security past full retirement age, the delayed credits will be passed onto the survivor. The higher earner needs to look at their collection strategy as a joint life decision because their surviving spouse's benefit will be based on when they take Social Security.


There are many intricasies that I don't have time to address. Social Security can reduce how much they pay you if you receive a government pension and you need to be aware of the Government Pension Offset and the Windfall Elimination Provision. There is also a little known provision that allows some people a do over when it comes to their decision. I hope this paper made you aware of some of the issues to think about and if you would like specific advise related to your own strategy, please call me and we can set up an appointment or web meeting.