Taking Social Security: How To Benefit By Waiting
For those who are able to do so, it may make sense to wait even longer, because youll receive a larger monthly benefit even more than your full benefit. Every month past your full retirement that you delay, Social Security will increase your check by about 0.7 percent per month.
If your full retirement age is 66, then heres how much your check would increase:
|Retirement age||New benefit||A $1,000 check becomes|
So if your full retirement age is 66, then if you can wait two more years and claim benefits at age 68, youll increase your monthly check by 16 percent. In this case, if your full benefit were $1,000 a month, your new benefit would become $1,160 per month. And youll still receive cost of living adjustments on top of this amount, typically raising your payout a little each year.
Workers have other ways to grow their Social Security benefits, too, but its important to start early.
Taxes On Your Benefits
Your Social Security benefits may be partially taxable if your combined income exceeds certain thresholds. Regardless of how much you make, the first 15% of your benefits are not taxed.
The SSA defines combined income using this formula:
- Your adjusted gross income + nontaxable interest + half of your Social Security benefits = your combined income
If you file your federal tax return as an individual and your combined income is $25,000 to $34,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, you may have to pay tax on up to 85% of your benefits.
If youre married, filing a joint return, and your combined income is $32,000 to $44,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $44,000, you may have to pay tax on up to 85% of your benefits.
What Else Affects Your Retirement Benefits
Everyones retirement is unique. Beyond deciding when to begin receiving retirement benefits, other factors that can affect your benefits include whether you continue to work, what type of job you had, and if you have a pension from certain jobs.
Continuing To Work
You can choose to keep working beyond your full retirement age. If you do, you can increase your future Social Security benefits. Each extra year you work adds another year of earnings to your Social Security record. Higher lifetime earnings can mean higher benefits when you choose to receive benefits.
Specific Types Of Earnings
While Social Security earnings are calculated the same way for most American workers, there are some types of earnings that have additional rules.
Earning types with special rules include:
Pensions And Other Factors
Pensions and taxes have the potential to impact your retirement benefit. Review the resources below on pensions and other factors you should consider:
- Windfall Elimination Provision : If you have a pension from a job for which you didnt pay Social Security taxes, this policy may lower your retirement benefits.
- Government Pension Offset : This policy affects benefits as a spouse, widow, or widower if you have a pension from a government job for which you didnt pay Social Security taxes.
- Income Taxes And Your Social Security Benefits: You might have to pay federal income taxes on your Social Security benefits in certain situations.
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The Bottom Line On When To Claim Your Social Security
Every individuals and couples needs are different when it comes to claiming Social Security. But maybe waiting until age 70 is something we should seriously consider.
Even if youve already filed, you may find that youre eligible for a do-over. You can withdraw your application for up to 12 months after you file, and reapply later. But you only get one do-over. If it makes sense for you to do this, youll have to pay back the Social Security benefits that you received, and in many cases your IRA or 401 may be where you have to get that money.
If you arent sure which Social Security claiming strategy is the best fit for your needs and goals, talk to a financial adviser who is knowledgeable about retirement income planning and, specifically, Social Security benefits. An experienced professional can lay out all your options and help you work out a timeline.
Kim Franke-Folstad contributed to this article.
Limits On Earned Income If Claiming Early Benefits
Until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a certain amount of earned income for the year. For the year 2021, this limit on earned income is $18,960 . The amount goes up each year. If you are collecting Social Security retirement benefits before full retirement age, your benefits are reduced by $1 for every $2 you earn over the limit. Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit.
Henry is considering claiming early retirement benefits this year, at age 64. Social Security calculates that if he does so, he’ll receive $866 a month . But Henry also intends to continue working part-time, with an income that will be about $5,000 over the yearly limit on earned income. If he does claim the early benefits and makes that part-time income each month, Henry would lose one dollar out of two from the $5,000 he earns over the limit, which means $2,500 for the year. So, by claiming early retirement and continuing to earn over the limit, Henry incurs a double penalty: His retirement benefits are permanently reduced by 13%, and he loses an additional amount every month to the extent he earns over the income limit.
Social Security does not reduce each monthly check by a small amount, unfortunately. Instead, the agency may withhold several months’ entire checks until the reduction is paid off.
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Find Out How To Save On Your Medicare Costs
Reaching retirement age means that you may also be considering your Medicare coverage options.
Medicare can be confusing, and depending on where you live, there may be a number of different Medicare Advantage and Medicare Part D prescription drug plans available in your area.
Compare Medicare plans in your area
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About the author
Christian Worstell is a licensed insurance agent and a Senior Staff Writer for MedicareAdvantage.com. He is passionate about helping people navigate the complexities of Medicare and understand their coverage options.
His work has been featured in outlets such as Vox, MSN, and The Washington Post, and he is a frequent contributor to health care and finance blogs.
Christian is a graduate of Shippensburg University with a bachelors degree in journalism. He currently lives in Raleigh, NC.
Where you’ve seen coverage of Christian’s research and reports:
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Your Income Determines If Any Money Is Withheld From Your Checks While Claiming Under Your Full Retirement Age
If you’re working under your full retirement age — anywhere from 66 to 67, depending on your birth year — your Social Security benefit becomes subject to the earnings test. If your income is too high, the government withholds some money from your Social Security checks.
In 2022, you lose $1 for every $2 you earn over $19,560 if you’ll be under your FRA for the full year. For those reaching their FRA this year, you’ll lose $1 for every $3 you earn over $51,960 if you reach this amount before your birthday.
The good news is you’ll get this money back eventually. When you reach your FRA, the government reevaluates your benefit amount to include the money it previously withheld. This makes your future checks a little larger.
But if you don’t need your Social Security checks to cover your bills, you might be better off delaying benefits until you retire. This will grow your checks more than the method described above.
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Tips For Planning For Retirement
- Dont forget to factor Social Security benefits into your savings total. Use SmartAssets Social Security calculator to determine how much youll receive.
- A financial advisor can be a big help in figuring out how Social Security fits with other income sources in your retirement plan. Finding the right financial advisor that fits your needs doesnt have to be hard. SmartAssets free financial advisor matching tool matches you with financial advisors in your area in 5 minutes. If youre ready to be matched with local advisors that will help you achieve your financial goals, get started now.
You Expect Your Investments To Grow Faster Than The Increased Benefit
If youre the next Warren Buffet, its possible you could do better taking Social Security early and investing the money than you could by waiting to take a larger benefit later. When weighing the best decision, consider the inflation rate, the rate your benefits increase and how much you can expect to earn in your portfolio. Given that benefits increase by 8 percent per year for each year you wait after full retirement age, however, its hard to outperform that rate of increase in the market. These safe investments do have high returns.
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Benefit Amounts Vary Depending On Your Social Security Retirement Age
Your Social Security retirement age and the amount you receive varies depending on several factors. For example, the earliest age you can collect your Social Security retirement benefits is 62, but there is an exception for widows and widowers, who can begin benefits as early as 60. If you start collecting benefits early and continue to work, your benefits may be reduced.
Here’s how this works with the basics on Social Security claiming ages from 60 to 70.
Are Social Security Benefits Taxable At Full Retirement Age
Your age does not have an impact on whether you will owe tax on Social Security benefits. Depending on your earnings, you may pay federal taxes on Social Security benefits regardless of the age at which you claim.
Social Security benefits are taxed on amounts exceeding the “provisional income” limit set by the IRS. To calculate your provisional income, add up all non-Social Security sources of income, including nontaxable income such as municipal bond interest, and include half of your annual Social Security income.
Single filers earning provisional income between $25,000 and $34,000 and married joint filers earning between $32,000 and $44,000 will owe income taxes on 50% of their Social Security benefits. For single filers with provisional income above $34,000 and married filers above $44,000, up to 85% of Social Security benefits will be taxable.
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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.
How Does Working After Full Retirement Age Affect My Benefits
Continuing to work past your full retirement age, whether or not you take benefits, can potentially increase your future benefits. Thats because the Social Security administration calculates your primary insurance amount based upon your 35 highest-earning years and uses zeros for the calculation if you have worked fewer than 35 years.
Working longer replaces each of those zeroes, or even lower earning years if you have no zeros, which boosts your PIA. Its also important to note that lower-earning years after retirement will not affect your benefits since Social Security uses whichever 35 years are your highest earning.
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How Should I Decide When To Take Benefits
Consider the following factors as you decide when to take Social Security.
Your cash needs: If you’re contemplating early retirement and you have sufficient resources , you can be flexible about when to take Social Security benefits.
If you’ll need your Social Security benefits to make ends meet, you may have fewer options. If possible, you may want to consider postponing retirement or work part-time until you reach your full retirement ageor even longer so that you can maximize your benefits.
Your life expectancy and break-even age: Taking Social Security early reduces your benefits, but you’ll also receive monthly checks for a longer period of time. On the other hand, taking Social Security later results in fewer checks during your lifetime, but the credit for waiting means each check will be larger.
At what age will you break even and begin to come out ahead if you delay Social Security? The break-even age depends on the amount of your benefits and the assumptions you use to account for taxes and the opportunity cost of waiting . The SSA has several handy calculators you can use to estimate your own benefits.
If you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be a good deal. On the other hand, if you’re in poor health or have reason to believe you won’t beat the average life expectancy, you might decide to take what you can while you can.
A quick note about life expectancy
How The Full Retirement Age Affects Social Security
Full retirement age also affects the Social Security program as a whole. Americans are living longer and the working-age population is shrinking. Some have proposed raising the FRA to 70, based on predictions that the Social Security reserve fund could run out of money by 2034.
Even if the reserve fund is depleted, however, future retirees should expect to get something from Social Security. Social Security income is taxable, which generates revenue. Plus, the Social Security program gets funding from the interest generated by trust funds. So future retirees will likely receive around 75% of every dollar that they currently contribute to the program.
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Should I Apply For Medicare
Remember, Medicare usually starts when you reach age 65.
If you decide to delay starting your benefits past age 65, be sure to go online and file for Medicare.
You will need to apply for Original Medicare three months before you turn age 65. If you dont sign up for Medicare Part B when youre first eligible at age 65, you may have to pay a late enrollment penalty for as long as you have Medicare coverage.
Even if you have health insurance through a current or former employer or as part of your severance package, you should contact them to find out if you need to sign up for Medicare. Some health insurance plans change automatically at age 65.
Please read the general and special enrollment period information in our Medicare booklet to find out what may happen if you delay.
When you start receiving Social Security retirement benefits, some members of your family also qualify to receive benefits on your record.
If they qualify, your spouse or child may receive a monthly payment of up to one-half of your full retirement benefit amount. These payments will not decrease your retirement benefit.
No One Else Is Relying On Your Benefits
In the event of your death, a surviving spouse, minor or disabled child can receive money from the Social Security Administration based on the amount of your benefits. For example, a surviving spouse can receive between 71.5% and 100% of your benefit amount, depending on the surviving spouses age. A disabled child can receive 75% of your benefits each month even after youre gone.
If no one else can qualify for benefits based on your record, you might want to retire early because no one is depending on that money. If everything else falls into place and you meet the minimum Social Security retirement age, consider collecting your benefits early and enjoying life.
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