A Guide On Taking Social Security
Deciding when to take Social Security depends heavily on your circumstances. You can start taking it as early as age 62 , or you can wait until you’ve reached full retirement age or age 70 based on your work history. While there’s no “correct” claiming age for everybody, the rule of thumb is that if you can afford to wait, delaying Social Security can pay off over a long retirement. Here are some guidelines to consider.
How Social Security Is Calculated
The benefits you receive under Social Security differ based on several factors, not least of which include your work history, your collection status, and which type of benefit you collect. Note that, despite the language of retirement, this is the same formula used to calculate SSDI benefits.
As a result, the average disability benefit is less than the average retirement benefit as few disabled workers have as many eligibility years as long as their retired counterparts.
Base benefits are calculated as follows:
Primary Insurance Amount Estimation
After your average indexed monthly earnings are calculated, your Primary Insurance Amount can then be estimated using a formula. This formula is also known as Social Security bend points. It was created to replace the higher proportion of income for low-income workers, which benefits them more compared to high-income workers. The bend points are estimated from the year that you turn 62. It is calculated using 90% of the first $960 of AIME, 32% of the next $5,785 of AIME, and 15% of any remaining amount over that of $5,785 of AIME. These three estimates are totaled and rounded to the lowest dime amount to determine the primary insurance amount you can receive in benefits. The benefit amount is rounded to the next lowest dollar.
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How Do You Report Earnings During Early Retirement
The SSA bases its retirement benefit calculations on earnings reported on W-2 forms and on self-employment tax payments. Most individuals are not required to send in an estimate of earnings.
But Social Security does request earnings estimates from some recipients: those with substantial self-employment income or those whose reported earnings have varied widely from month to month, including people who work on commission. Toward the end of each year, Social Security sends these people a form asking for an earnings estimate for the following year. The agency uses the information to calculate benefits for the first months of the following year. The SSA will then adjust the amounts, if necessary, after it receives actual W-2 or self-employment tax information in the current year.
Once retirees reach full retirement age, Social Security will no longer check their income. Because there is no Social Security limit on how much a person can earn after reaching full retirement age, there is nothing to report.
Are Social Security Benefits Taxable
If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.
If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.
That covers federal income taxes. What about state income taxes? That depends. In 12 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.
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Your Spouse Can Impact Your Benefit Amount
Thompson said it’s important to understand how benefits are calculated when you are the surviving spouse.
“When a spouse dies, the higher Social Security amount remains for the spouse, assuming they were married for at least nine months,” he said. “Not half. Not both. The higher remains. Widows and widowers can claim as early as age 60.”
And if you are divorced, you may be able to claim your ex-spouse’s benefits.
“A divorcee can still claim on an ex-spouse’s record if: The individual is at least 62, they were married for at least 10 years, the individual is currently unmarried and the ex-spouse is receiving a benefit or has been divorced for at least two years,” Thompson said.
Costs Of Living Adjustment
The COLA is an annual adjustment to your Social Security benefits based on inflation. It changes each year based on the Consumer Price Index for Urban Workers and Clerical Workers . For workers who do not retire at their earliest retirement age, it is applied cumulatively to the PIA.
For example, the COLA in 2018 was set at 2%. If the worker from our example above chooses not to retire at 62, his PIA will still be adjusted upward to a resulting PIA of 2,339.40.
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Should You Wait Until You’re Older To Get A Bigger Payout Or Retire Early With A Smaller Payout
“Social Security can act as insurance against living longer than you anticipate, and it provides some inflation protection since your benefit is adjusted for cost-of-living increases,” Tierney said. “The longer you or your spouse expect to live, the more it may make sense to wait to claim your Social Security benefit.”
But just because you decide to wait to claim your benefits doesn’t mean you have to delay your retirement, she explained. However, you should make sure you’ve got income coming in from your 401 or other investments so you can afford your living expenses if you delay claiming your benefit.
However, if you’re solely relying on Social Security benefits to pay for your expenses in retirement, waiting to retire and claiming your benefits at a later date could be a better choice. You’ll receive more money each month and you’ll have more time to save for retirement.
Also, if you choose to retire early, your benefits will be reduced for each month before full retirement age. For instance, if you were born in 1960 or later and retire at age 62 with a retirement benefit of $1,000 per month, your payment would be reduced to $700 .
On the plus side, that’s still $700 you would otherwise not receive during that time if you didn’t draw your Social Security benefits. So you might benefit from collecting payments over a longer period of time.
Is it possible to run out of money after retiring early?
Find Your Social Security Full Retirement Age
You can claim your Social Security benefits a few years before or after your full retirement age, and your monthly benefit amount will vary as a result. But first you have to know what it is.
Also known as normal retirement age, your Social Security Full Retirement age is the age at which youre entitled to 100% of the Social Security benefits youve earned. FRA is 66 for beneficiaries born between 1943 and 1954 it gradually increases to 67 for beneficiaries born in 1960 or later. If you take benefits before FRA, your benefits will be reduced. If you file at age 62, for example, benefits will be as much as 30% lower. More on that in a moment.
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You Shouldn’t Rely On Social Security To Fund Your Whole Retirement
If you’re expecting Social Security to fully fund your retirement, you could be in for a rude awakening. The average monthly benefit is $1,542.22 as of June 2022.
“Social Security today only covers a portion of the average American’s expected income needs in retirement,” said Henry Yoshida, CFP and CEO of Rocket Dollar, an investment platform that allows individual investors to use tax-advantaged funds for alternative investing.
If you’re in that 23% of Americans who have nothing saved, start saving ASAP so that you’ll be in better financial standing when you reach retirement age.
What Is The Future Of Social Security
As of June 2022, the Social Security Trust Fund is projected to have enough resources to cover all promised benefits until 2035 when, absent a change from Congress, benefits would need to be cut for all current and future beneficiaries to about 80% of scheduled benefits.2 Over the longer term, changes to the full retirement age or means testingâwhich could reduce or eliminate benefits based on your other income sourcesâmay also be considered.
If you’re skeptical about the future of Social Security or wary of potential changes, you may be tempted to start benefits early, assuming that it’s better to have something than nothing. Regardless of your situation, if you are concerned about the future prospects for Social Security, then that’s a good reason to save moreâand earlierâfor your retirement.
Learn The Claiming Strategies That Yield The Highest Income
For millions of Americans, the most anticipated upcoming birthdays aren’t whole numbers but fractions, like 66 and 2 months, or 66 and 4 months. That’s because, for Americans born between 1955 and 1959, full retirement age occurs sometime between their 66th and 67th birthdays. At that point, people can start claiming their full Social Security benefits.
How, exactly, does Social Security work after you reach that magical full retirement age? Here are a few important facts to bear in mind.
What’s Full Retirement Age
Full retirement age is when you’re eligible to receive full Social Security benefits. Your full retirement age depends on your birth year: For anyone born in 1960 or later, full retirement age is 67. For those born in 1955 through to the end of 1959 , full retirement age ranges between 66 and 2 months and 66 and 10 months. If you were born before 1955, you’ve already reached age 66 and full retirement age.
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Are You Eligible For Social Security
To be eligible for Social Security benefits, you must earn at least 40 credits over your working career. How those credits are calculated is complex, but you will likely qualify if you have worked for at least 10 years.
You may be entitled to a spousal benefit because of your partner’s work history. If your spouse, ex-spouse, or deceased spouse has earned 40 credits, you may qualify. The Social Security Administration provides more info about this option.
But your work history is not only used as part of the qualification criteria it is also used to figure out the amount of your payment. In calculating your monthly retirement benefit, the SSA considers your highest-earning 35 years of work history. If you worked for less than 35 years, the SSA will use zero for some years.
The higher your earnings over those 35 years, the greater your contribution to the program through FICA taxes, and the higher your benefit will be.
The same threshold applies to both your earnings and your benefits. This amount is $142,800 in 2021, and it will raise to $147,000 for the 2022 tax year.
How Much Does Social Security Pay
The maximum monthly Social Security benefit for workers retiring at full retirement age in 2018 was $2,788, which amounts to less than $34,000 a year. The average monthly benefit for retirees in June of 2019 was $1,471 or less than $18,000 a year.
In addition to your yearly income prior to retiring, your benefit amount is determined by the age at which you begin collecting. In general, the older you are when you start receiving Social Security, the higher your monthly benefit will be.
Social Security is even more important for low-income retirees and those with low levels of education.
People with lower income have a greater percentage of their pre-retirement income replaced by Social Security, as compared with high-income earners.
You can estimate your benefits using this calculator from Social Security.
Beginning Benefits Before Fra
If you choose to begin to receive benefits before you reach your full retirement age, one or both of the following calculations will apply:
- 5/9 of 1%: Your benefits are reduced by 5/9 of 1% per month, up to a maximum of 36 months, depending on how many months you have until you reach FRA.
- 5/12 of 1%: If you are more than 36 months away from reaching FRA, the reduction above is applied, and then for the number of months greater than 36, the benefit is further reduced by 5/12 of 1% per month.
Therefore, if your FRA is age 66, your benefits would be reduced by 25% if you begin taking them at age 62. Find that figure by taking 5/9 of 1%, or 0.56 multiply by 36 months to get 20%. Then, 5/12, or 0.42, multiplied by the remaining 12 months, is 5% for a total of 25%.
Social Security Service Around The World
Click this panel’s title to take you to the SSAs Office of Earnings & International Operations home page. The purpose of this site is to assist Social Security customers who are outside the U.S. or planning to leave the U.S.
OEIO is responsible for administering the Social Security program outside the U.S. and for the implementation of the benefit provisions of international agreements. Since SSA has no offices outside the U.S., OEIO is assisted by the Department of State’s embassies and consulates throughout the world.
Foreign Countries Served by Social Security Administration
If you live outside of the United States, there are a number of Social Security Field Offices and American embassies and consulates who have specially trained personnel to assist you in seeking Social Security services. You can access information to contact our Social Security and consular staff by locating your country in the link below:
Your May Have To Pay Taxes On Social Security Benefits
Most people know that Social Security is funded by a tax on earnings, currently 6.2% for the employee . But some retirees dont realize that you may well have to pay income tax on Social Security benefits when it comes time to claim them. Benefits lost their tax-free status in 1984, and the income thresholds for triggering tax on benefits havent been increased since then.
It doesnt take a lot of income for your Social Security benefits to be taxed. Your benefits wont be taxed if your provisional income is less than $25,000 if youre single or $32,000 if youre married. If youre single and your provisional income is between $25,000 and $34,000, or married filing jointly with provisional income between $32,000 and $44,000, up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000 on a single return or $44,000 on a joint return, up to 85% of your benefits may be taxable.
The Social Security Administration says about 40% of beneficiaries pay taxes on their benefits. Since the thresholds arent adjusted for inflation, the number of beneficiaries who pay taxes on Social Security benefits increases every year. The Social Security Trustees annual report estimates that taxes on Social Security will total $45.1 billion in 2022, up from $34.5 billion in 2021.
You may also have to pay state income taxes on your Social Security benefits. See our list of the 12 States That Tax Social Security Benefits.
Social Security Won’t Run Out
You’ve likely seen headlines about Social Security running out in 2035 — but this is a worst-case scenario and not something that should cause you to panic. However, you may need to adjust your retirement plans depending on how the gap in funding will be bridged.
“The death of Social Security has been greatly exaggerated,” said Paul Tyler of Nassau Financial Group in Hartford, Connecticut. “If Congress doesn’t add additional funds to the trust, payroll taxes on current workers will continue to support the program. However, the taxes would not fund 100% of the expected benefits. The gap could be closed by imposing means testing, deferring full retirement ages beyond 67 or increasing taxes on benefits. Any of these modifications would require many people to adjust their retirement plans.”
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How does Social Security work? The program is based on contributions that workers make into the system. While you’re employed, you pay into Social Security you receive benefits later on, when it’s your turn to retire. Contributions take the form of the Federal Insurance Contributions Act taxes that are withheld from most paychecks.
Medicare benefits are commonly considered part of Social Security benefits, although technically Medicare is a separate program. Medicare contributions are withheld from your paycheck in much the same way as your Social Security contributions FICA taxes support Social Security and Medicare.
Am I eligible for Social Security benefits? Yes, so long as you’ve worked for at least 10 years . Ten years is the minimum amount of time required to earn the mandatory 40 credits. Even if you have accumulated your 40 credits, however, you can’t start getting payouts until you’re 62 or older.