Jonathan Peterson

Cheat Sheet / Updated 09-16-2024

Social Security is part of nearly every American’s life in retirement, if not sooner. If you’re like most people, you’re aware that when you start collecting retirement benefits affects how much money you get, but you’re not sure what that means for you. Armed with answers to some key questions, you can get the most out of your Social Security retirement benefits. As you plan for retirement, you need to know how much Social Security retirement income you can expect. Finally, If you’ve applied for Social Security disability benefits, your initial application may be denied, but you’re not out of options: You can appeal Social Security’s decision through a multi-phase process. Copyright © 2024 by AARP. All rights reserved. AARP is a registered trademark. Published by John Wiley & Sons, Inc., Hoboken, New Jersey

Article / Updated 07-19-2022

Copyright © 2015 AARP After you figure out your full retirement age, you can get a ballpark idea of your monthly benefit. Currently, the average retirement benefit is about $1,328 per month (in January 2015), but benefits go much higher, depending on your earnings history and when you begin collecting. It’s easy to get at least a rough estimate of your retirement benefits. Just use one of the SSA’s online calculators — the Social Security Quick Calculator or the Retirement Estimator. The Retirement Estimator is especially useful, because it also gives you projected amounts for retiring early at 62, waiting for the full retirement age, or delaying all the way until 70. (You also can get estimates customized to your personal situation by using AARP’s Social Security Benefits Calculator.) If you use the SSA’s Retirement Estimator, you’ll see roughly how much Social Security you could get, especially if your earnings don’t skyrocket or crash between now and the time you retire. If you haven’t yet done so, you can use the Retirement Estimator as a starting point to think about how much money you can count on in retirement. Whether the Social Security numbers look small, large, or in between, remember that Social Security is meant to be just one part of your financial foundation. You stand to get much more money if you can delay collecting Social Security past your full retirement age. For example, if you were born between 1943 and 1954, your Social Security payment at 62 is 25percent lower than if you wait until 66 (your full retirement age). If you hold off to age 70 — four years past your full retirement age — the benefit balloons by 32 percent. These differences can add up to real money over the years — or decades. Consider the following example: Elisa was born in 1953 and wants to know how she would be affected by choosing different dates to retire. She goes to the Retirement Estimator tool and quickly types in some basic information, including her name, Social Security number, state of birth, and mother’s maiden name. She also plugs in the $160,000 she earned last year. The Retirement Estimator lists the estimated payments she would get for retiring at three different ages. If Elisa waits until her full retirement age of 66, she’ll get about $2,615 per month. If she waits until 70 to collect benefits, she’ll get about $3,512 per month. And if she wants to start as soon as possible, at 62, she’ll get a more modest $1,930 per month. Elisa knows that longevity runs in her family, so she wants to find out how much she’ll collect from Social Security if she lives to 90. To get the answer, she calculates the number of months she would receive benefits in three different cases — starting at 62 (336 months), starting at 66 (288 months), and starting at 70 (240 months). Then she multiplies the number of months by the estimated benefit provided by the online tool. If Elisa starts the benefit at 62 and lives to 90, she could end up with more than $648,000 over her lifetime, not even counting increases for inflation (336 months between 62 and 90, multiplied by the estimated benefit of $1,930 per month for benefits starting at 62). If she starts at 66, her lifetime collection would exceed $753,000. And if she starts the benefit at 70, she ends up with more than $842,880. The difference between starting benefits at 62 and at 70 comes to $194,400 for Elisa. Your decision on when to begin retirement benefits makes a real difference in your monthly income. The numbers here are based on a retirement age of 66 and a monthly benefit of $1,000. They may differ based on your year of birth and other factors. Credit: Source: Social Security Administration Waiting to take retirement benefits beyond your full retirement age could prove especially important for Baby Boomers and, right behind them on the age ladder, members of Generation X. For people born in 1943 or later, the retirement benefit expands at a rate of 8 percent per year (or 2⁄3 of 1 percent per month) for each year you delay claiming (up to age 70) after reaching full retirement age. Year of Birth Yearly Rate of Increase Monthly Rate of Increase 1933–1934 5.5 percent 11⁄24 of 1% 1935–1936 6.0 percent 1⁄2 of 1% 1937–1938 6.5 percent 13⁄24 of 1% 1939–1940 7.0 percent 7⁄12 of 1% 1941–1942 7.5 percent 5⁄8 of 1% 1943 or later 8.0 percent 2⁄3 of 1% If you were born on January 1, refer to the previous year.

Article / Updated 11-05-2021

Copyright © 2020 AARP Social Security faces a shortfall. To pay benefits, Social Security will increasingly rely on its trust funds because revenues from the payroll tax aren’t sufficient. After about 2035, when the trust funds are exhausted, the program is projected to have enough income to cover about 80 percent of promised benefits. That means the country faces choices about how to close the gap. Social Security issues aren’t limited to its solvency, however. Changes in lifestyle since the 1930s have prompted other ideas to make the program more fair and helpful in the 21st century. This article outlines ten major policy options the nation may consider for the future of Social Security. The menu of changes is potentially larger. But these are among the most prominent approaches that have been debated for years by experts of varying political views. Millions of people will be affected by how these issues play out. Whether to Increase the Earnings Base You make payroll tax contributions to Social Security on earnings up to a limit ($137,700 in 2020). This cap is known variously as the wage base, contribution and benefit base, and taxable earnings base. It has historically served as a limit on the payroll taxes that you and your employer each pay to the program. Most workers (more than nine out of ten) earn less than the cap. But in recent decades, a small percentage of workers has been receiving a growing share of total U.S. earnings. If you think about all earnings as a pie, the slice that goes untaxed for Social Security has been getting bigger. Raising the earnings base is a way to make the pie look more like it used to and boost revenues for Social Security. For example, increasing the earnings base such that 90 percent of earnings would be subject to the payroll tax would reduce Social Security’s shortfall by 26 percent (if higher earners got somewhat higher benefits) or by 35 percent (if additional taxed earnings weren’t included in the benefit calculation), according to 2019 projections by the Social Security Administration (SSA). To bring in more or less money, the earnings base could be increased by a higher or lower amount. Eliminating the cap altogether is a way to greatly decrease the shortfall, but such a measure could weaken the link between contributions and benefits if the additional taxed earnings aren’t used in the benefit calculation. The argument against increasing the earnings base is that high earners already get less of a return on their contributions than lower-income workers get, because Social Security benefits are progressive by design. Also, raising the earnings base amounts to a big tax hike on high earners. But supporters say an increase goes a long way toward fixing the problem, and the burden on high earners wouldn’t be onerous. Whether to Cover More Workers You and the people you know probably are covered by Social Security. Most workers are. The largest group outside the system is about 25 percent of state and local government employees who rely on separate pension systems and don’t pay Social Security taxes. Bringing newly hired state and local government workers into Social Security would raise enough revenue to solve about 6 percent of the long-term shortfall. State and local governments may oppose such a measure since it could adversely affect the financial stability of their pension systems. The federal government would have to provide a large cash infusion to those pensions if Social Security siphoned off new public employees who aren’t now covered. Such a proposal, however, could bolster Social Security’s finances and simplify administration of benefits. That’s because the way the program is set up today, Social Security must adjust payments for former government workers who spent part of their working lives contributing to public pension plans but not to Social Security. In addition, newly covered public employees would benefit from disability and survivor insurance that is either weak or nonexistent in some state and local plans. Whether to Raise Taxes Raising Social Security payroll taxes is one way to address the financial shortfall head-on. Even small increases in tax rates go a long way toward shoring up the program’s finances over time. For most recent years, wage earners have paid a Social Security tax of 6.2 percent up to a certain threshold of income ($137,700 in 2020). Employers have paid the same rate as wage earners. The self-employed have paid 12.4 percent (both the employer and employee share). Raising the Social Security payroll tax from 6.2 percent to 6.5 percent would eliminate about 20 percent of the shortfall; raising it to 7.2 percent could close just more than half the gap. A higher increase would have a bigger impact, and a smaller increase would do less. Any increase could be phased in. This approach would eliminate much of the problem, and it polls well with the public. But it also raises questions. Critics voice concerns about the economic impact of higher payroll taxes and the possibility that employers may respond to a higher tax by cutting other payroll costs, such as jobs. Tax revenues for Social Security could be raised in other ways, such as by dedicating revenue from the estate tax or increasing income taxation of Social Security benefits. Neither, however, would generate enough revenue to make a significant dent in the problem. Another approach would be to tax contributions to all salary reduction plans (arrangements in which you’re able to divert some of your pretax income to certain areas, such as transit, flexible spending, dependent care, and health-care accounts). Extending the Social Security payroll tax to all such areas could reduce the shortfall by 9 percent (but such a move would hit consumers who use such accounts to help cover necessities). Whether to Cut Benefits Benefit cuts are nothing to cheer about, but they would save money. Further, they could be structured in a way that doesn’t hurt current retirees, soon-to-be retirees, and low-income individuals. Any changes could be phased in after a long lead time, giving younger workers years to adjust their plans for the future. The formula that calculates benefits could be altered in a manner that protects individuals who depend most heavily on benefits, while landing hardest on those who can afford the change. But of course, the fine print would determine the impact. And the more people who are protected, the less savings are achieved. Note: Policymakers usually include some combination of benefit cuts and tax hikes when they devise plans to strengthen Social Security. Still, a targeted reduction in benefits could undermine the broad public support for Social Security as a program in which everyone pays in and everyone gets benefits. The more cuts fall on the middle class, the more they erode retirement security for people already facing a squeeze. The more cuts fall on high earners, the less support high earners may have for Social Security. Whether to Modify the Inflation Formula Social Security benefits are adjusted to keep up with the cost of living. This protection is extremely valuable to beneficiaries and becomes even more so the longer you live. Without the annual cost-of-living adjustment (COLA), the purchasing power of your benefits shrinks over time. Private pensions usually lack this protection. The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used as the guide in adjusting Social Security benefits to rising prices. One proposal to save money would be to use a different measure known as the chained CPI. The chained CPI builds in the idea that consumers switch their purchases if the price of a particular good goes up too much. The notion is that if the price of ice cream soars, you may switch from eating Fudge Ripple to munching on cookies. If filet mignon is getting too pricey, maybe you’ll reach for pork chops. The chained CPI rises about 0.3 percentage points less each year than the CPI-W. That means a chained CPI would save the Social Security program a lot of money — reducing the shortfall by about 20 percent because of slower-growing benefits. Unlike most savings proposals, an index that brings smaller inflation increases would affect current beneficiaries, albeit gradually, as well as future ones. Those receiving benefits for many years would eventually be hit the hardest. For example, you would see your benefit reduced by a bit less than 1.5 percent after 5 years, 3 percent after 10 years, and 6 percent after 20 years under a COLA based on the chained CPI. Opponents say a chained CPI may not reflect the reality of older consumers. They spend a lot more on health care than young people do, and health care costs are rising fast. Older consumers also may rely on various services that may be hard to substitute for. These reductions would mean a larger benefit cut over time. As a result, some proponents would cushion such reductions with a special boost in benefits for the oldest beneficiaries. Whether to Raise the Full Retirement Age The age you can get full Social Security benefits is gradually rising. One proposal to save money is to raise the full retirement age even further. This proposal saves a lot of money for the system while providing an incentive for people to keep working. Pushing the full retirement age to 68 could reduce the shortfall by about 17 percent. Raising it higher, as some suggest, would save even more. Such increases can be implemented very gradually to protect older workers. Proponents say this approach makes sense in an era of increased longevity. A 65-year-old man, for example, is expected to live on average to 84 — and many will live longer than that. This issue, however, is more nuanced than some people realize. It’s true that when Social Security was created, a newborn male wasn’t expected to reach 65. But for those who survived to adulthood, many lived into their late 70s and beyond — fewer than today, to be sure, but the gap isn’t as wide as some imagine. Nor has everyone benefited equally from increases in longevity. Many lower-income, less-educated workers haven’t enjoyed the same gains in life expectancy as their more affluent, more-educated counterparts, and by some gauges have suffered actual declines. Also, a later age for full retirement benefits could prove onerous for older workers with health problems or in physically demanding jobs. A related proposal would index Social Security benefits to increases in life expectancy (such as by linking the full retirement age to advances in longevity). This would put the Social Security program on sounder footing by providing lower monthly benefits to compensate for the fact that people are generally living longer. How to Treat Women More Fairly Social Security was designed with a 1930s-era vision of the family with a male breadwinner and a stay-at-home mom. Of course, many households no longer fit that model. The result is that some of Social Security’s benefit rules raise issues of fairness — issues that often affect women. For example, Social Security provides a nonworking spouse a benefit of up to 50 percent of the breadwinner’s benefit. Yet a working, nonmarried woman potentially gets a smaller benefit (depending on her earnings history) because she can’t rely on a higher-earning spouse for benefits. Benefits that go to single women, such as working moms, also may be reduced because of time spent outside the paid workforce, such as to raise a young child or take care of an ailing parent. One way to make Social Security fairer for working women would be to provide earnings credits for at least some of the time spent caregiving and raising children. For example, a worker might be awarded a year’s worth of Social Security credits for a year’s worth of such work, up to a certain limit. (Such a measure would be gender neutral and would also help some men, but it would primarily affect women.) The argument in favor of such a reform is that it would make Social Security more responsive to modern realities and support women who may have low benefits. It could be expensive, however. For example, providing annual earnings credits for five years of child-rearing could increase the long-term funding gap by 8 percent. Plus, offering credits for caregiving may be hard to administer. The cost of such credits could be adjusted up or down, based on their size and the number allowed. Another proposal would credit each spouse in a two-earner couple with 50 percent of their combined earnings during their marriage. This approach, known as earnings sharing, attempts to equalize the treatment of two-earner couples with those of more traditional, single-earner couples. (Under a growing number of circumstances, a working wife gets no more Social Security than if she had never worked outside the home.) Earnings sharing, however, could create new problems. Benefits for many widows could be reduced, unless such a proposal were designed to prevent that, adding to its cost. Whether to Divert People’s Taxes to Private Accounts Free-market advocates have long pushed to make Social Security more of a private program, in which some of your payroll taxes go into a personal account that would rise and fall with financial markets. Supporters believe that your returns in the stock market would make up for cuts in your benefits. You would own the assets in your personal account and could pass them on to your heirs. Historically, the stock market has produced solid, positive returns when measured over long periods of time. Personal accounts could be introduced gradually, so that they would become a choice for younger workers while retirees and near-retirees wouldn’t be affected. The argument against this strategy is that it would erode the basic strength of Social Security, which is a guaranteed benefit you can count on, and replace it with the uncertainties of Wall Street and other investments. Social Security was created as social insurance that protects workers and their families when they no longer can work because of death, disability, or retirement. Private accounts have no such mission, and workers couldn’t rely on the same protections for themselves or their dependents. Whether to Create a Minimum Benefit Social Security no longer has a real minimum benefit. Even with Social Security’s progressive benefit formula, low wage earners may end up with benefits insufficient to cover basic living costs. A higher minimum benefit can be achieved through various means. For example, a minimum benefit may be set at 125 percent of the poverty line (or some other percentage), targeting workers who have worked fewer than the 35 years that go into benefit calculations. In theory, the Social Security Administration could set a higher floor for benefits or include credits for unpaid work, such as for caregiving (see the earlier section “How to Treat Women More Fairly”). Also, a minimum benefit could be indexed to wage increases, keeping the minimum benefit adequate over time. The problem is that a minimum benefit would cost money at a time when Social Security needs more of it. Further, it would weaken the relationship between contributions and benefits that has been so important to the program’s success. The total cost of a minimum benefit depends on the particulars, but by some estimates it could increase the shortfall by 2 percent to 13 percent. Whether to Give a Bonus for Longevity The oldest Americans are often the poorest. They may have little savings. Usually, they no longer work, they face significant health challenges, and if they have pensions, such income is usually eroded by inflation. Hiking their benefits through a longevity bonus is one idea for how to help them. For example, a 5 percent benefit increase could be targeted to individuals above a certain age, such as 85. Like other proposals, the longevity bonus could be phased in and fine-tuned. It would directly help a segment of older Americans who have the greatest need for adequate benefits and have little or no way to strengthen their finances. This proposal isn’t about saving money. For example, if a longevity bonus were offered 20 years after eligibility (which is age 62 for most people), it could increase the long-term Social Security shortfall by 9 percent. That’s the argument against the bonus or to limit its size.

Article / Updated 11-05-2021

Copyright © 2020 AARP. A growing number of Americans owe income tax on part of their Social Security benefits. You typically won’t owe income taxes on your benefits if they represent all of your income. But significant income from work, investments or a pension — on top of Social Security — could be an income-tax liability. In addition to the feds, some states — predominately in the Midwest — tax Social Security benefits. (The states have a hodgepodge of tax rules and exclusions for Social Security, so check with your own state tax agency or accountant to figure out whether that applies to you.) The state tax agencies go by different names, but you can find contact information for yours at the Federation of Tax Administrators. Whatever your income, however, at least 15 percent of your Social Security benefit is protected from the tax collector. No one pays income tax on more than 85 percent of his or her benefits. Importantly, single filers are treated differently than married couples filing a joint return. You can go through a few steps to get a rough idea of how taxation of benefits may affect you: 1. Get a rough idea of your provisional income, or what Social Security calls your combined income. Your provisional income is the sum of wages, interest (taxable and nontaxable), dividends, pensions, self-employment income, other taxable income, and half of your Social Security benefits, less certain deductions you may take when determining your adjusted gross income. 2. See where your provisional income level fits into the tax rules. Say you file as an individual, and your combined income is under $25,000. If so, you owe no taxes on your Social Security. If your provisional income level is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. If your combined income is above $34,000, you may have to pay income tax on as much as 85 percent of your Social Security benefit. For married couples, the levels are different. If a couple has provisional income of less than $32,000, you’re in the clear. If provisional income comes in between $32,000 and $44,000 on your joint return, you may owe income tax on up to 50 percent of your Social Security benefits. Couples who earn more than $44,000 may have to pay taxes on as much as 85 percent of their benefits. Married people who file separate tax returns and receive Social Security typically have to pay some tax on their benefits. This is because for people in this category, the limits are zero, meaning that up to 85 percent of Social Security benefits may be subject to the income tax. 3. Determine exactly how much of your benefit may be taxed. This can get complicated, depending on your personal situation, especially if you have to include 85 percent of your benefits as part of income for tax purposes. To do it right, you need to fill out a step-by-step worksheet, or rely on tax software or your accountant. You can find a worksheet at the IRS website. Every January, you should receive a Form SSA-1099 that tells you your total Social Security benefits for the prior year. You need this information for your federal tax return. Here’s an example: Tom and Carol are a married couple who file jointly. Tom’s Social Security benefit comes to $7,500, and Carol’s spousal benefit adds another $3,500. Tom also gets a taxable pension of $22,000 from his former job with an automaker and interest income of $500 from some certificates of deposit. Tom and Carol figure out their provisional income by adding $22,000 plus $500 plus $3,750 (half of Tom’s benefit) plus $1,750 (half of Carol’s benefit) for a total of $28,000. Tom and Carol pay no federal income tax on their Social Security benefits, because their provisional income of $28,000 comes in below the $32,000 threshold for a married couple filing jointly. But suppose they had more income. What if Tom’s pension came to $30,000? That extra $8,000 would boost the couple’s provisional income to $36,000 — well above the $32,000 threshold for married couples. In this case, Tom and Carol would owe income tax on about 18 percent of their Social Security benefits. As of this writing, U.S. citizens who live in certain countries, including Canada, Chile, Germany, Greece, Ireland, Italy, Japan, Switzerland, and the United Kingdom, don’t have to pay income tax on Social Security or are subject to low rates, no matter how big their income. This is because of tax treaties between the United States and those nations. (The list may change over time.) Paying your taxes ahead of time You may be required to send quarterly estimated payments to the IRS if you have tax liability that isn’t handled through withholding from an employer. Separately, you may request to have federal taxes withheld from your Social Security payments. You can get the IRS Form W-4V to request voluntary withholding or call the IRS at 800-829-3676 (TTY 800-829-4059). There’s also a link to the form through the Social Security Administration (SSA). If you choose to withhold federal income taxes, you can select only among certain percentages: 7 percent, 10 percent, 12 percent, or 22 percent of your monthly benefit. You should return the signed form to your local SSA office.

Article / Updated 07-01-2021

In the course of a year, the Social Security Administration (SSA) has tens of millions of direct contacts with the public, in field offices and over the phone. These contacts range from simple queries for information to emotionally charged concerns about benefits that can have a huge impact on a person’s monthly income. So, it isn’t surprising that people sometimes aren’t satisfied with the process or outcome. You have options for registering your complaint, and they vary depending on how serious your complaint is. You also can fill out a comment card to rate your experience at your local SSA office. This card, which should be available at your local SSA office, isn’t an official complaint form. It’s more like the little cards you may see at restaurants, asking what you thought of the service. You can even use this card to say something nice if you’re so inclined. Contacting the right offices If you have a more serious grievance with the SSA, you need more than a comment card or online feedback form. Here are your options: Contact your local SSA office in person or in writing. You can get the address of your local SSA office by plugging in your zip code at the Office Locator link or by calling 800‐772‐1213 (TTY 800‐325‐0778). Write to the national office of the SSA. You can write a letter to the following address, detailing your complaint: Social Security Administration Office of Public Inquiries 1100 West High Rise 6401 Security Blvd. Baltimore, MD 21235 Contact your elected representatives in Congress. You can contact your congressperson here. Check here if you need to contact your senators. For discrimination issues and unfair treatment If your complaint specifically has to do with discrimination or unfair treatment by an administrative law judge, the SSA has specific forms you can fill out. Here’s the information you need: Complaints of discrimination: If you feel you were unfairly treated on the basis of your race, color, national origin, lack of proficiency in English, religion, gender, sexual orientation, age, or disability, you may file a formal complaint with the SSA. Such complaints should be registered within 180 days of the action you’re complaining about. Mail the signed, dated discrimination complaint form, along with your written consent to let the SSA reveal your name in the course of its investigation, to the following address: Social Security Administration Civil Rights Complaint Adjudication Office P.O. Box 17788 Baltimore, MD 21235‐7788 Complaints of unfair treatment by administrative law judges: If you’re fighting the SSA over benefit decisions, the hearing before an administrative law judge is a critical moment in your appeal. The appeals system depends on such hearings being fair, and the SSA provides guidelines on how to complain if you feel that you were treated unjustly. You may express yourself verbally, but you’re better off writing down the facts and mailing them to the SSA. Your complaint should include All your basic contact information Your Social Security number The name of the administrative law judge you’re complaining about When the incident occurred Names and contact information of any witnesses Your complaint should state your concerns as precisely as possible and what you considered to be unfair. Make clear the actions and words that you object to. The SSA provides some background on complaining about an administrative law judge at the SSA website. Send your written complaint to the following address: Office of Disability Adjudication and Review Division of Quality Service 5107 Leesburg Pike, Suites 1702/1703 Falls Church, VA 22041‐3255 Don’t confuse a complaint of unfair treatment by an administrative law judge with a step in your appeal. If you want to pursue your appeal after an unfavorable finding from an administrative law judge, your next step is to request a review by the Appeals Council. Copyright © 2015 AARP

Article / Updated 04-26-2017

Copyright © 2015 AARP A break‐even analysis compares what you get in your lifetime if you pick different dates to collect Social Security. It’s a way to estimate your total payoff from retiring at an earlier date (with reduced monthly payments) and retiring at a later date (with higher monthly payments). In general, if you die before reaching the break‐even age, and you started collecting benefits at the earlier date, you come out ahead. If you live beyond your break‐even age, and you started benefits at the later date, you also come out ahead, because those bigger payments add up over time. Where you lose out is if you die before reaching the break‐even age (and you started collecting larger benefits at the later date) or if you die after your break‐even age (and you started smaller benefits at the earlier date). You should be aware of the break‐even approach, because it’s a common tool recommended by financial planners, and it can provide perspective. But it’s just one consideration. The more you care about how your benefits add up over a lifetime, the greater weight you may give a break‐even calculation. The more you care about ending up with the biggest monthly benefit, the greater weight you may give to delaying your claim for Social Security. Your break‐even age will vary based on your earnings record and date of birth, but estimating it isn’t too difficult. Here’s how to compare how you’ll come out over your lifetime if you start benefits at age 62 versus your full retirement age: Determine your full retirement age. For example, say your full retirement age is 66. Determine your full retirement benefit at that retirement age by going to the SSA’s Retirement Estimator. For example, say your full retirement benefit at 66 is $1,500 per month. (The estimator assumes you keep working until age 66.) Determine your benefit at 62 by going to the SSA’s Retirement Estimator. In this example, if you claim benefits at 62, your monthly payment is $1,125. Figure out how much you would take home in the 48 months between age 62 and your full retirement age (66) if you start collecting at age62. In this example, you’re taking home $1,125 per month, and you’re doing that for 48 months, so $1,125 48 = $54,000. Now figure out how many months you would have to survive beyond age 66 in order to break even. In this example, the difference in monthly payments taken at age 62 ($1,125 per month) and 66 ($1,500 per month) is $375. So, divide the amount from Step 4 ($54,000, in this example) by the difference in monthly payments ($375, in this example), and you get the number of months you’d have to survive beyond age 66 in order to break even (inthis case, 144 months, or 12 years). So, in this example, if you live past age 78, you come out ahead by starting your benefits at the full retirement age of 66. If doing all that math doesn’t appeal to you, and if you were born between 1943 and 1954, here are some general guidelines: If you’re comparing retirement at 62 with full retirement at 66, your break‐even age is typically around 77 or 78. In other words, if you die earlier, you could end up with more money by claiming early retirement benefits. If you live longer, you could be better off taking your benefits at 66. If you’re comparing full retirement at 66 with delayed retirement at 70, your break‐even age is typically several months after your 82nd birthday. In other words, if you die before 82 or so, you could end up with more money by beginning benefits at 66. If you live past 82, you could be better off delaying your retirement benefits until you turn 70. These numbers are only estimates and do not include cost‐of‐living hikes, which could make the break‐even age come earlier. But they can add perspective to your claims decision. What’s most important is for you to consider how long you may live and how Social Security income will fit into the picture.

Article / Updated 03-26-2016

Copyright © 2015 AARP In business for yourself? The Social Security Administration considers you self‐employed if you operate a trade, business, or profession. You can be a one‐person operation, or maybe you have partners. Either way, you face a particular set of Social Security rules — and realities. Many self‐employed people are admirably independent and thrive on running their own show. The SSA is about rules and documentation. Keeping that in mind may help you have a good relationship with the SSA when the time comes to claim your benefits. Unlike the typical wage earner who earns Social Security coverage, a self‐employed person occupies two roles: employer and employee. Nobody’s going to take care of your deductions for you. You report your own earnings and pay your own taxes to the IRS. You pay a different payroll tax, and you may qualify for Social Security credits through a different calculation than the one used for wage earners. You can read an overview of issues for the self‐employed on the Social Security website. The SSA has certain special requirements when you work for yourself, as well as a level of scrutiny that may exceed the norm. The fine print applies to deductions, earnings credits, and reporting. If you’re self‐employed, keep good financial records — and be prepared to back them up. The SSA may review the earnings information you provide with more care than is applied to the average wage earner. Make sure that you can justify everything you say about your earnings. Tax deductions Self‐employed people pay Social Security taxes on their net earnings from self‐employment. This is basically your net profit from your business, plus or minus some additional adjustments. Because self‐employed people occupy the role of employer and employee, they have to pay both shares. But you can reduce your taxable income by half your Social Security tax on the 1040 IRS form. This is so the self‐employed are treated similarly to employees who don’t pay any income tax on the share of Social Security taxes paid by their employers. Work credits If you’re self‐employed, you may be able to use an optional method to obtain the credits you need to qualify for Social Security benefits. (Individuals typically need to earn 40 credits to be fully insured for retirement benefits. The amount may be lower for disability and survivor benefits.) There are two optional methods: one for earnings from a farming business and one for earnings from a nonfarm business. You may use both methods, if you’re eligible. Under the optional methods, a self‐employed individual with low earnings may be able to obtain credits toward Social Security coverage that otherwise wouldn’t be available. You can use the nonfarm optional method five times in a lifetime. Here are details for how it works for nonfarm businesses. For farm businesses, check out these details. You need to have gross income of not more than $7,200, or net profit of less than $5,198, to use the farm optional method (based on initial IRS guidelines for 2014). You may report two‐thirds of your gross income, up to $4,800, as your net earnings by using this method. Note that using the farm optional method can increase or decrease your net earnings from farm self‐employment, so you want to pay attention to the details if you use this method. For the nonfarm optional method, you need to have net profit of less than $5,198 and less than 72.189 percent of your gross nonfarm income. You may report two‐thirds of your gross income, up to $4,800 (less the amount reported, using the farm optional method), as your net earnings by using the nonfarm optional method. Unlike the farm optional method, under this method you can’t report less than your actual net earnings from nonfarm self‐employment. These calculations may sound complicated, but the directions on the IRS 1040 Schedule SE should help you do it without too much trouble. And it may be worth the effort, because even with low earnings, you can potentially get the maximum of four Social Security credits in a year by employing this method. Earnings limit If you’re self‐employed and getting early retirement benefits, the SSA wants to see firm evidence that you reported your income properly. It wants to confirm that you haven’t made your income look like less than it is to evade the earnings limit. The SSA may consider certain details you report to be red flags, worthy of closer scrutiny. For example, if you’re still spending a lot of time on the job, if you remain in control of the business, or if you say you’ve shifted control to a relative, the SSA may take a magnifying glass to your report. Before it’s satisfied, the SSA may take a close look at your previous tax returns and other documents, such as expense records. Reporting requirements If you’re self‐employed, you meet the SSA’s reporting requirements by filing the required tax forms on time with the IRS, if net earnings are $400 or more. These include Form 1040, Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming), and Schedule SE (Self‐Employment Tax). Complete the IRS paperwork regardless of whether you owe any income tax and whether you already get Social Security benefits. If you’re self‐employed, the SSA expects you to fill out forms 1040 and SE. When a married couple is self‐employed in a family enterprise, each spouse qualifies for Social Security earnings credits as a partner. But it’s possible for the SSA to overlook one of the spouses (typically, the wife) unless each partner files a separate Schedule SE. It makes no difference if you file a joint income‐tax return. If just one of you files a Schedule SE, that’s who gets all the Social Security credits.