When It Comes To Claiming ‘context Matters’
Before hiring an adviser to help you claim Social Security, Kiner said, ask a lot of questions. “What’s their fee structure? If they’re not charging you anything, they want your assets,” he noted. If they’re charging a substantial fee, they’re more likely to be independent and objective.
One last tip, from Krueger: Look at your Social Security benefits claiming decision holistically as part of your big financial picture.
“There are certain investment strategies for people that play really well with your specific situation for taking benefits,” said Krueger. “Context matters.”
With the average Social Security benefit of just over $1,500 a month, making the right choice about when and how to claim Social Security, Kotlikoff said, “can be the difference between a decent retirement and a terrible retirement.”
Ive Tried To Build A Logical Framework To Make The Right Choice
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The Social Security claiming decision is one of the most complexand contentiouschoices that retirees have to make.
I was reminded of that in December, while at a Christmas party. Two former colleagues were discussing their Social Security decision. Both are male, single, childless, retired engineers. Each has a traditional pension, a paid-off home and significant retirement savings. Ted is age 77. Fred is 66.
Ted took his Social Security at 62. His reason was longevity or, rather, the lack thereof. He had been a smoker for many years. He calculated his break-even age as 77, at which point he would get back as much as hed paid into the system. He decided to collect a lower benefit as early as allowed and then invest the money. Ted lives frugally, and will leave a handsome legacy to his nieces and nephews.
In short, here we have two retirees in fairly similar situations who made entirely different choices based on their circumstances. Still, unlike many retirees, theyre fortunate: Both have the financial wherewithal to make taking Social Security an option, not a necessity.
How The Social Security Earnings Test Can Ding You
“If you take Social Security early, Social Security withholds one dollar of your benefits for every two dollars earned over eighteen thousand nine hundred and sixty dollars this year,” explained Savage. “If you wait until the year you do reach Full Retirement Age and are still working, the test is a little more generous. You forfeit one dollar in benefits for every three dollars in earnings above fifty thousand five hundred and twenty dollars.”
“In my experience, give the wrong answer or misleading answers half the time.”
The first place to start for claiming information is the Social Security website. There, you’ll want to set up a free “my Social Security” account to see your earnings history for Social Security and an estimated projection of your benefits.
But the Social Security Administration site has a big limitation for married couples: You can’t see Social Security benefit numbers for the two of you together.
You can also get claiming information from Social Security staffers by phone . Social Security field offices remain largely closed due to COVID-19 restrictions.
But Kotlikoff urges caution about information you receive from Social Security employees.
“In my experience, give the wrong answer or misleading answers half the time,” he said. “These people are underpaid, they’re well-meaning, but they’re overworked and undertrained.”
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S To Claiming The $4194 Max Monthly Social Security Benefit
It’s a common misconception that Social Security is all you need to retire comfortably. For most people, those benefits won’t translate to all that much buying power, especially these days, what with living costs soaring due to inflation.
But while you may not manage to live comfortably on the average monthly Social Security benefit, if you’re in line for the maximum monthly benefit, it’s a different story. In fact, today’s maximum benefit is actually quite generous.
The most you can collect from Social Security on a monthly basis is $4,194. To be clear, most seniors receive a much lower benefit. But if you’re eager to snag that maximum benefit, here’s what you’ll need to do.
Spousal Benefits For Widows And Widowers
A widow or widower can receive up to 100% of a spouse’s benefit amount. That’s if the survivor has reached full retirement age at the time of the application.
The payment is reduced to somewhere between 71% and 99% of the deceased’s entitlement if the widowed person is at least 60 but under full retirement age.
Disabled people can apply as early as age 50. The agency has a streamlined application process to avoid delays in the first payment.
You may be eligible for benefits even if your spouse died long before reaching retirement age. Every employee racks up annual Social Security “credits” for working. If your spouse earned credits for at least 10 years, a spousal benefit has been earned.
It’s important to note that it pays to hold off until you reach your “full” retirement age to maximize the amount you will receive.
Also, if you are receiving spousal benefits and your spouse dies, you need to notify Social Security. Your spousal benefit of 50% of your partner’s benefit will convert to a survivor benefit of 100%.
And do it promptly. It’s not usually retroactive.
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Can You Still Work While Receiving Social Security
You can continue to work while you receive Social Security benefits. But there is a limit to how much you can earn and still receive full benefits. The earning limit may be adjusted each year.
If you earn above the limit, Social Security will deduct a certain amount of your benefits each year.
Social Security Benefits, Earning Limits and Penalties
|SSA deducts $1 from your benefits for every $3 you earn above the limit|
Claiming Early Or Late
Your spousal benefit is based upon your partner’s “normal” benefit amount. But the amount you receive will depend upon when you begin to claim it.
You can claim spousal benefits as early as age 62, but you won’t receive as much as if you wait until your own full retirement age. For example, if your full retirement age is 67 and you choose to claim spousal benefits at 62, you’d receive a benefit that’s equal to 32.5% of your spouse’s full benefit amount.
The amount increases with each year you delay. At your full retirement age you’d be eligible for the maximum, which is 50% of your spouse’s full benefit.
Notably, spousal benefits are not reduced if the spouse is caring for a child who qualifies under the age or disability rules. Spousal benefits can never exceed 50% of the other spouses full benefit. So, there is no incentive to file for spousal benefits later than your own full retirement age.
An ex-spouse may be eligible for spousal benefits even if the former spouse hasn’t retired yet.
How Do Social Security Spousal Benefits Work
You’re eligible for spousal benefits if you’re married, divorced, or widowed and your spouse is or was eligible for Social Security. Spouses and ex-spouses generally are eligible for up to half of the spouse’s entitlement. Widows and widowers can receive up to 100%.
You can claim benefits based on your own work history or on that of your spouse. You’ll automatically get the larger amount.
If you are no more than three months away from age 62, you can apply online or by phone. If you plan to put off applying to get the largest payment possible, wait until you’re no more than three months from full retirement age. That’s 66 or 67, depending on your year of birth.
Report The Death Of A Social Security Or Medicare Beneficiary
You must report the death of a family member receiving Social Security or Medicare benefits. The Social Security Administration processes death reports for both. Find out how you can report a death and how to cancel benefit payments. In addition to canceling SSA and Medicare benefits, find out what other benefits and accounts you should cancel.
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Where To Get Help To Claim Social Security Wisely
Choosing what age to start collecting Social Security retirement benefits and which type of benefit to claim shouldn’t be difficult. But boy, is it!
“There are twenty-seven hundred and twenty-eight rules in the Social Security handbook,” Boston University economics professor and Social Security maven Laurence Kotlikoff told me on my new “Friends Talk Money” podcast episode. “And then there’s literally hundreds of thousands of rules about those two-thousand seven hundred and twenty-eight rules. It’s the most complicated system I think mankind has ever developed.”
70% of American workers said they wished they were more knowledgeable about Social Security.
That’s why I’m not too surprised at these findings from a recent Nationwide Insurance survey: Only 6% of the American public said they know all the factors that determine the maximum Social Security benefits someone can receive and just 39% know the age they’d be eligible to receive what are known as Full Retirement Age benefits.
Another Social Security survey, from the global investment manager Schroders, found that 70% of American workers said they wished they were more knowledgeable about Social Security.
The Longer You Wait To File The More Youll Receive
You can file for benefits at age 62, and many people do. But keep in mind that your benefits could be permanently reduced by up to 30%, depending on your full retirement age. If you delay your benefits beyond full retirement age, youll receive a delayed retirement credit of 8% per year . Your benefits wont continue to grow, though, once you turn 70.
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How Much Will You Receive Every Month
As mentioned, your benefits depend on your date of birth and earnings.
An easy and helpful way to plan is to use Social Security’s “Quick Calculator.”
All you do is fill out your birth date and earnings and the tool will calculate your assumed benefits.
There’s also an option to estimate your total benefits with a potentially higher inflation rate.
Once you’re able to obtain this number, it can be a useful tool as you’ll be able to determine how to best plan ahead and start saving.
Theres A Social Security Spousal Benefit
Marriage brings couples an advantage when it comes to Social Security. One spouse can take what’s called a spousal benefit, worth up to 50% of the other spouse’s Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouse’s own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 — bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
Social Security Retirement Benefits Are Based On Your Highest 35 Years Of Earnings
When I ask guests at our firms Social Security workshops how benefits are calculated, I rarely get a correct answer. Most people say the top five years of earnings, the top 20 years of earnings, or the last 10 years of earnings. None of these answers is correct. The SSA uses your highest 35 years of indexed earnings, which means the numbers are adjusted for inflation. The good news is, if you have zeros for some years , you still can bump up your benefit by working a bit longer.
The Basics Of Social Security Benefits
Who can claim Social Security benefits? Generally, youre eligible to receive benefits if youve worked and paid Social Security taxes for at least 10 years prior to claiming your retirement benefits. For each year you work and pay into Social Security through taxes, you earn a minimum of four credits toward your benefits, meaning you need a minimum of 40 credits to qualify.
Though you can begin collecting Social Security benefits as early as age 62, doing so may cost you, as your permanent benefit amount could be reduced by 25% to 35%. At Full Retirement Age , which for most retirees is 66 or 67, you will be entitled to full Social Security benefits.
If you can wait even longer to claim you can further boost how much you will receive each month. Your benefit may increase by an additional 8% each year you delay past your FRA, up to age 70. The maximum benefit for those who begin claiming at age 70 is currently $4,194 a month, $1,830 a month more than for those who start claiming at age 62.1
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The Basics About Survivors Benefits
. If you are working and paying into Social Security, some of those taxes you pay are for survivors benefits. Your spouse, children, and parents could be eligible for benefits based on your earnings.
. You and your family could be eligible for benefits based on the earnings of a worker who died. The deceased person must have worked long enough to qualify for benefits.
For more information, please read .
Know Your Social Security Full Retirement Age
First things first:Determine your Social Security full retirement age. For people born between 1943 and 1954, full retirement age is 66. If your birthday falls between 1955 and 1959, it gradually climbs to 67. If you are born in 1960 or later, your full retirement age is 67.
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. More on that in a moment.
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An Example Of Taxed Benefits
Lets say you receive the maximum Social Security benefit for a worker retiring at FRA in 2021: $3,148 per month. Your spouse receives half as much, or $1,574 a month. Together, you receive $4,722 a month, or $56,664 per year. Half of that, or $28,332, counts toward your combined income for determining whether you have to pay tax on part of your Social Security benefits. Lets further assume that you dont have any nontaxable interest, wages, or other income except for your traditional individual retirement accounts required minimum distribution of $10,000 for the year.
Your combined income would be $38,332half of your Social Security income, plus your IRA distributionwhich would make up to 50% of your Social Security benefits taxable because youve exceeded the $32,000 threshold. Now, you may be thinking, 50% of $56,664 is $28,332, and Im in the 12% tax bracket, so the tax on my Social Security benefits will be $3,399.84.
Fortunately, the calculation takes other factors into account, and your tax would be a mere $225. You can read all about the taxation of Social Security benefits in the Internal Revenue Service Publication 915.
What Are The Rules For Applying For Social Security
To apply for Social Security benefits you must be at least 61 years and 9 months old and have worked at least ten years total at jobs where you earn Social Security credits. Ninety six percent of all American workers are covered by Social Security. Step 3: Know the rules about when to start the application process.
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When Can You Start Collecting Social Security
Your FRA is the age you are eligible for full Social Security retirement benefits.
The year and month you reach your FRA depends on the year you were born.
The FRA for most people is currently 66 and a set number of months or 67.
Not only will you receive your full retirement benefit if you wait until your FRA, but if you delay taking your benefit past your FRA, your benefit will increase every year up to age 70.
What If You Can’t Claim The Maximum Social Security Benefit
While you can do your best to delay retirement and file for Social Security at age 70, you may not manage to work 35 years, or to earn a high enough income for 35 years that your earnings meet or exceed the wage cap. But if that’s the case, don’t sweat it.
Most seniors don’t manage to collect $4,194 a month from Social Security, so if you think you’ll end up with a lower benefit, you can compensate by making an effort to build a solid nest egg. If you retire with $1 million or more in your IRA or 401, that should make for a comfortable retirement — regardless of what Social Security ends up paying you.
And if you think a $1 million nest egg is out of the question, think again. You can get there by contributing $500 a month to a retirement plan over 35 years and enjoying an average annual 8% return during that time, which is a few percentage points below the stock market’s average. Once you reach that point, your Social Security benefit may not end up mattering to you all that much.
The $18,984 Social Security bonus most retirees completely overlook
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