Because tax/estate planning and Social Security retirement benefits are generally considered closely related, it is helpful for a person to understand these benefits when making decisions about his/her tax and estate plans.
The calculations involved in determining the amount of Social Security retirement benefits to which a person is entitled can be complex. However, there are three concepts that can make these calculations easier to understand: (1) early retirement, (2) late retirement, and (2) spousal benefits.
Early Retirement
Electing to receive Social Security retirement benefits early can substantially decrease the monthly payment to which a person is entitled. In addition, when a person does elect to receive benefits early and continues to work after he/she has begun to receive those benefits, the amount of those benefits will further be reduced by the amount of money that he/she earns through employment.
For example, if Carol elects to receive benefits before the age at which she is eligible for full benefits (Full Retirement Age), she will only receive a percentage of her full benefits per month for the rest of her life. Further, she must also pay back $1 of Social Security retirement benefits for every $2 that she earns via employment above $14,160. However, for the year in which she reaches Full Retirement Age, she will only be required to pay back $1 for every $3 she earns until the month she reaches Full Retirement Age. In years subsequent to the year in which she reaches Full Retirement Age, Carol will no longer be required to pay back any part of her benefits.
Late Retirement
Just as a person's monthly benefit payments will be reduced if he/she begins to receive benefits prior to reaching Full Retirement Age, if a person chooses to defer receipt of benefits, until the age (70 for those retiring in 2010) at which the benefits are capped (Capped Benefit Age), he/she can receive monthly benefits at a level up to 132% of the benefits to which he/she would have been entitled if he/she began to receive benefits at Full Retirement Age.
Spousal Benefits
When only one person in a married couple is retired, that person will receive receive benefits based upon his/her own Social Security contributions. Once that person's spouse retires, however, that person may elect to receive benefits based upon his/her spouse's Social Security contributions rather than based upon his/her own personal contributions.
For example, in 2010, Wendy's husband begins to receive Social Security benefits at age 70. Wendy elects to receive benefits based upon her husband's Social Security contributions. She will receive 75% of 50% of her husband's Social Security benefits.
This brief overview of some important considerations inherent in planning for Social Security retirement benefits is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.
