Think About Your Tax Situation
What Uncle Sam gives, he also takes away in the form of taxes. Regardless of when you retire, up to 5085 percent of your Social Security income may be taxable if your modified adjusted gross income reaches certain levels. There is nothing to be done about this simply be aware that your Social Security benefit may bump you up to a higher income tax bracket. See Question 25 for more about taxes in retirement.
Bottom line? The most common error people make when it comes to Social Security is starting to collect their benefit too early. Yes, its tempting to take the money and run. But before you do, carefully weigh your options. On further scrutiny, you are likely to find that you will get the best return on your money by postponing and allowing your monthly draw to increase.
|Consider taking benefits early if:||Consider taking benefits later if:|
|Youre not working and cant make ends meet.||Youre still working and make enough to impact the taxability of your benefits.|
|You are in poor health.||You are in good health and longevity runs in your family.|
|You are the lower-earning spouse and your spouse can wait to file for a higher benefit.||You are the higher-earning spouse and want to be sure that your surviving spouse receives the highest possible benefit.|
Part IV: Maximizing Social Security and Medicare, Question 30
You Want The Money Now
Even if you don’t need your benefits early to support yourself, you may have other reasons for wanting to take them as soon as possible. Some people, for example, are concerned that Social Security may be unable to meet all of its obligations in the future, so they might as well get theirs now. Others believe they could do better by collecting benefits and investing them, rather than leaving it in the government’s hands.
That said, you would have to be a skilled investor to beat the 6% to 8% guaranteed annual return on your money that Social Security offers to those who wait until full retirement age or later.
Youre Divorced Or Have A Deceased Spouse
Filing early can make financial sense for those who are divorced but were married at least 10 years, as well as those whove lost a partner. The survivor benefits can be a great boon, especially for a single senior. Each person can claim one benefit at a time and wait to take the other benefit later.
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How To Calculate Social Security Benefits
Lets say your FRA is 66. If you start claiming benefits at age 66 and your full monthly benefit is $2,000, then youll get $2,000 per month. If you start claiming benefits at age 62, which is 48 months early, then your benefit will be reduced to 75% of your full monthly benefitalso called your primary insurance amount. In other words, youll get 25% less per month, and your check will be $1,500.
That reduced benefit wont increase once you reach age 66. Rather, youll continue to receive it for the rest of your life. It may go up over time due to cost-of-living adjustments , but only slightly. You can do the math for your own situation using the Social Security Administration Early or Late Retirement Calculator, one of a number of benefit calculators provided by the SSA that can also help you determine your FRA, the SSAs estimate of your life expectancy for benefit calculations, rough estimates of your retirement benefits, individualized projections of your benefits based on your personal work record, and more.
Although the cost-of-living adjustments announced each year are usually only slight increases, Social Security benefits will increase by 5.9% in 2022, marking the largest increase since 1982.
Basic Rules For Spouses
- As a spouse, at age 62 you can choose to take a benefit based on your own earnings or a spousal benefit based on your spouses earnings. The only caveat is that to receive the spousal benefit, your spouse must have already filed.
- The spousal benefit is up to 50 percent of the earners benefit. The actual percentage depends on when you both file if you both wait until FRA or later, you collect a higher benefit. For example, if a husband files early at age 62, his benefit would be reduced by 25 percent. If his wife waited until FRA to file for a spousal benefit, she would collect 50 percent of his reduced benefit. However, if the wife decided to take spousal benefits at age 62, her benefit would be reduced even more to 35 percent of his reduced benefit.
Smart Move: A husband or wife maxes out their spousal benefit at FRA. There is no benefit to waiting longer.
- The impact on survivor benefits is similar. At FRA a widow or widower can collect up to 100 percent of their spouses benefit . When someone opts to collect benefits early, his or her surviving spouse will also collect a reduced benefit. Conversely, when a person decides to delay benefits, he or she is providing their survivor with a larger benefit. See Question 34 for more details on Social Security benefits for surviving spouses.
If you are divorced but were married for at least ten years and are currently unmarried, you can still collect a benefit based on your exs record. See Question 32 for more details.
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Think About Your Income From Other Sources
If you dont have enough savings and are dependent on Social Security income to pay for necessities, you may have no choice but to collect Social Security as soon as you can. But if you have savings or income from other sources, and can afford to postpone your start date, you will likely benefit by delaying.
Also realize that if you file for Social Security benefits before your FRA but you continue to work, and your earnings exceed certain limits, part of your benefit will be temporarily withheld. In 2013, if you file for benefits at age 62, $1 in benefits will be withheld for every $2 you earn above $15,120. In the year you reach your FRA, $1 is deducted for every $3 you earn above a higher limit, currently $40,080. Once you reach your FRA there is no earnings deduction, and you will get the money previously withheld in the form of a higher benefit.
|Unmarried child under age 18 or any age if disabled before age 22||50% of PIA, subject to family maximum|
Get Your Social Security Estimates
The SSA website provides estimates for how much you’ll collect if you start receiving benefits at age 62, your full retirement age , and age 70. Remember that you don’t have to start taking your benefits at those milestone ages you and your spouse can start collecting anytime between ages 62 and 70.
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When To File For Social Security Retirement Benefits Early
Delayed gratification isn’t always the best bet when it comes to Social Security claiming strategies.
Retirees have been more willing to wait to claim Social Security in recent years. The number of men claiming benefits at age 62 dropped from 56 percent in 1996 to 35.6 percent in 2013, according to a recent analysis from the Center for Retirement Research at Boston College, which used unpublished Social Security Administration data. Among women, the rate dropped from 62.8 percent to 39.5 percent over the same period.
That bucks the conventional wisdom among financial advisors and other experts that waiting is the best way to maximize benefits, especially with increasing longevity. “If you claim early and die later, you’re at greater risk of eating cat food,” said David Mendels, a certified financial planner and director of planning at Creative Financial Concepts in New York City. More clients are more worried about outliving their assets, he said, than leaving Social Security money on the table if they claim late and die early.
Several factors in particular could make it worth reassessing an early claiming strategy:
A Decade Of Positive Returns Creates Optimism In Investing
Theres nothing like a decade of positive returns in the market to create optimism for investing. Were starting to see this optimism affect how individuals file for social security.
A few years ago, there werent many people saying they were big believers in the market. We were still recovering from the worst market since the Great Depression, and news was still negative.
A few years later, individuals started seeing a few years of positive returns. Some of those have been double digit returns, and optimism began rising.
And so Ive started to hear more people say things like Devin, I think I could file early for Social Security, invest it, and create more income down the road than what I wouldve had with Social Security.
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You Have No Other Assets
Social Security was never intended to be the sole support of people’s retirement years for most folks, it is a supplement to their income. But suppose a rampaging bear market has played havoc with your retirement accounts and plans? For example, the Great Recession of 2008 was a game-changer, erasing a decade’s worth of gains in many investment portfolios. If continuing to work isn’t an option, it might be best to ensure an immediate steady income stream via your benefits.
There’s Another Way Your Benefits Could Shrink If You File Asap
In the above example, filing before age 70 can shrink monthly benefit checks compared to the maximum you could receive. But it won’t necessarily reduce lifetime benefits, because total benefits will depend on how long you live.
However, your benefits could also shrink for another reason if you file earlier than you could. And this time the reduction in benefits could be a permanent one that affects the total income received from the SSA.
In this case, your benefits could be smaller if you file earlier in life and your decision to claim benefits at a young age results in your primary insurance amount being lower than it would be if you waited.
Remember, your PIA is based on an average of your highest 35 years of earnings, after adjusting wages for inflation. If you file early in life, you may not get a full 35 years of work in. If you don’t, some years when you earned nothing are counted, and you have some $0s factored in. Adding in $0s drags your entire average down, lowering your primary insurance amount.
If you opt to forgo the opportunity to boost average wages used to determine benefits, the resulting reduction in your PIA makes your lifetime Social Security income lower — not just your monthly benefit.
You do eventually get back the money withheld because you earned too much money — provided you live long enough. But there’s little point in claiming benefits ASAP if you won’t actually receive them because you’re earning too much income.
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What Documents Do You Need To Apply For Retirement Benefits
We request different documents depending on your circumstances. You can help by being ready to provide the information and documents listed below. You can also use our Checklist For The Online Medicare, Retirement, And Spouses Application to help you gather the information you need to apply.
Documents we may ask for include:
- Your Social Security card or a record of your number.
- Your original birth certificate, a copy certified by the issuing agency, or other proof of your age.We must see the original document, or copies certified by the agency that issued them. We cannot accept photocopies or notarized copies.
- If you were not born in the U.S., proof of U.S. citizenship or lawful alien status. We must see the original document, or copies certified by the agency that issued them. We cannot accept documents if they have expired. We cannot accept photocopies or notarized copies.
- A copy of your U.S. military service paper if you served before 1968. A photocopy is acceptable.
- A copy of your W-2 form and/or self-employment tax return for last year. A photocopy is acceptable.
We will return all documents and photocopies unless specifically told otherwise.
How Much Can You Expect To Get
Your Social Security retirement benefit payment is based on how much you made during your working years. The more you earned, the more you’ll get when you retire.
Your Social Security retirement benefit payment is also affected by the age at which you decide to retire. You can retire as early as age 62, but if you retire before your full retirement age, your benefits will be permanently reduced, based on your age. For example, if you retire at age 62, your benefit would be about 25 percent lower than what it would be if you waited until you reach full retirement age.
You also need to remember that monthly premiums for Medicare Part B are usually deducted from monthly Social Security benefits. Retirement is a great time to look into the pros and cons of a private Medicare Advantage plan.
Retirement benefits are based on the recipients lifetime earnings in work in which they paid Social Security taxes. Higher income translates to a bigger benefit, up to a point. The amount to which retirees are entitled is modified by other factors, most crucially the age at which they first claim benefits.
For reference, the estimated average Social Security retirement benefit in 2021 is $1,543 a month. The maximum benefitthe most an individual retiree can getis $3,148 a month for someone who files for Social Security in 2021 at their full retirement age.
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What If You Invest It For A Longer Period Of Time Does That Work Out
But what if you have a longer time period?
Lets say that you dont need the income to start until youre 70. In this scenario, youd have from the beginning of age 62 to the beginning of age 70 to receive benefits and invest them. How would the time/value of money change the outcome?
Now we know you may have saved, but how much would it take to replace $1,265?
You need an annuity of $200,000, and an investment portfolio of around $300,000. This means that for the annuity to work youd need to get about a 7% return and for the portfolio to work youd need about a 17% return.
Againthose numbers are just to give you the dollar amount of income that youd get from Social Security without taking hardly any risk. And, the risk is not the only difference here.
For example, the annuity options do not have survivor benefits, the taxation of an annuity vs. investment portfolio vs. social security is all different so the net amount would not be the same. The annuity options were calculated with todays interest rates and theres just no way to know what the interest rates would be in the future and how these annuities would be affected. The investment returns I illustrate are compounded annually and would be slightly different if compounded on a monthly basis. The amount of your social security benefit would also affect the required rate of return on the other options.
Penalties For Those Receiving Government Pensions
The Windfall Elimination Provision reduces Social Security benefits for retired and disabled workers who also receive federal, state, or local government pensions based on their previous earnings. The reduction in Social Security benefits for this group can be significantsometimes up to 60%. Check out the governments Social Security WEP calculator to see how this provision might affect you.
Your Benefits Will Be Permanently Reduced
As we’ve mentioned, claiming your benefits early means they will be reduced on a permanent basis. For example, as the table above illustrates, someone born in the 1960s or later who takes their benefits starting at age 62 will get 30% less each month for the rest of their lives than if they’d waited until their full retirement age of 67.
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|
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