Supplementing Your Social Security Income
For many retirees, the income they receive from Social Security is not enough to live off of: According to AARP, the estimated average Social Security monthly benefit in 2022 is $1,657. If you haven’t started saving for retirement it’s essential to start early so you can take advantage of the power of compound interest .
If your company offers an employer-sponsored 401 with matching contributions, you should prioritize receiving the match because it’s essentially free money.
With a traditional IRA, individuals invest pretax income and don’t pay taxes until they withdraw their earnings. With a Roth IRA individuals invest after-tax money so their withdrawals are tax-free. A Roth IRA is considered a good option for those who anticipate being in a higher income tax bracket in retirement: Rather than paying higher taxes later on, you’ll pay taxes on your contributions upfront.
A Roth IRA, however, is not available to everyone. For 2022, the income limit for single-filers is $144,000 and for married couples filing jointly it’s $204,000. Companies like Vanguard, Wealthfront, Betterment, and Fidelity Investments all provide traditional and Roth IRA options.
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Can I Work After Full Retirement Age
Beneficiaries are free to continue working while taking their Social Security benefits, no matter what age they start taking those benefits. However, working and taking Social Security benefits before reaching full retirement age may affect your benefits.
If you start taking Social Security early but keep working, youre subject to whats called an earnings test. For every $2 you earn over $18,960, you will see $1 withheld in Social Security benefits. And in the year you reach full retirement age, this limit changes to $1 in benefits for every $3 you earn above $50,520 up to the month of your birthday.
Once you reach full retirement age, though, you can keep every dollar of your Social Security benefits, no matter how much income you bring in. Your future benefits will also be adjusted to include the money that the earnings test previously factored out.
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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.
What To Consider When Deciding The Best Age For Social Security Benefits
Youll receive reduced monthly benefits permanently if you start taking them before you reach full retirement age. And the reductions arent small. This breakdown summarizes how much you can lose depending on when you get your retirement benefits:
- Benefits are reduced by 30% if you opt to start receiving benefits just five years early.
- If you wait until you full retirement age youll receive 100% of your benefits.
- You can also elect to postpone benefits beyond full retirement age, up until you are 70.
- The monthly amount you will receive in the future increases each month you wait to start receiving benefits.
- If you can wait until the last possible month, your check will be 132% of the full retirement benefit.
For a fuller comparison, this table from the Social Security Administration shows how much you could get if you retire at age 62 based on your birth year:
|Social Security Administration Early Retirement at Age 62|
So, its almost always best to delay Social Security benefits for as long as you can. If you plan to work in retirement, youll definitely want to delay. Youll face a penalty if you continue to work after you claim early retirement benefits and earn more than the yearly earnings limit, which for 2020 is $18,960. This means that the Social Security Administration will deduct $1 from benefits for every $2 that you earned over $18,960.
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Youre Concerned Social Security Will Disappear
Some people are concerned about potential Social Security changes in the future, such as higher retirement ages, lower benefits or higher taxes on benefits. As a result, they want to take the sure thing as soon as possible. In a 2017 Social Security summary, the government said Social Security trust funds will be depleted in 2034. Even then, however, annual Social Security taxes are projected to keep benefits at almost three-fourths of current levels.
Social Security Disability Programs
In addition to retirement benefits, the Social Security Administration manages two programs that provide benefits to people who are disabled or blind.
- Social Security Disability Insurance Program
- SSDI supports disabled or blind individuals by providing benefits based on their workers contributions to the Social Security trust fund. Your contributions are based on your earnings or your spouses or parents earnings while in the workforce. Your dependents may also be eligible for SSDI benefits based on your earnings.
- Supplemental Security Income Program
- SSI benefits are paid out as cash assistance to people with limited incomes and resources who are elderly, blind or disabled. These benefits may also include blind or disabled children. SSI payments are a federal benefit funded by the general fund of the United States not the Social Security trust fund. Some states provide additional state supplemental benefits in addition to the federal SSI payments.
In some cases, people may be eligible for both SSI and SSDI at the same time. The Social Security Administration calls these concurrent benefits. This can happen when a disability qualifies you for Social Security Disability Benefits, but you only get a small amount of monthly SSDI benefits. This may qualify you to receive SSI benefits as well.
Comparing SSDI and SSI Programs
|Up to 85%|
Income Taxes for Other Benefit Programs
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Can I Buy Social Security Credits
You can’t buy Social Security credits, the income-based building blocks of benefit eligibility. You can’t borrow them or transfer them from someone else’s record. The only way to earn your credits is by working and paying Social Security taxes. In 2022, you earn one credit for each $1,510 in income from covered work.
Social Security: What Every Woman Needs To Know
When do I become eligible for benefits?
- As a worker: You must work and pay Social Security taxes for at least 10 years , and be at least 62 years old.
- As a spouse or divorced spouse: You must be at least 62 years old. If you are divorced, you must have been married to your ex-spouse for at least 10 years and currently be unmarried.
- As a widow: You must be at least 60 years old . If you are divorced, you can claim the survivors benefit if you were married at least 10 years and are currently unmarried .
If I qualify for more than one benefit, can I receive the total amount of both?
No. You will receive the benefit amount that provides you with the higher monthly benefit, but you do not receive both benefits added together.
When can I receive Social Security retirement benefits?You may receive full benefits at full retirement age. Full retirement age is increasing gradually until it reaches age 67 for those who were born 1960 or later. See the chart below.
|Year of Birth|
What happens to my benefit if I claim early?
If you start your benefits early, your benefits are reduced permanently. Your benefit is reduced about one-half of one percent for each month you start your Social Security before your full retirement age. For example, if your full retirement age is 67 and you sign up for Social Security when you are 62, you would only get 70% percent of your full benefit.
What happens to my benefit if I delay claiming it?
Can I work and still receive my Social Security benefit?
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Tips For Ensuring A Comfortable Retirement
- If you want to build a retirement plan, a financial advisor can help you reach your retirement goals. SmartAssets free tool can pair you with advisors in your area based on your needs. Get started now.
- Save, save, save. To be able to put off taking Social Security benefits until youre 70, youll need to have enough stashed away to live off of until then. Our retirement calculator can help you figure out how much youll need to save to retire comfortably.
- Start saving early, and take advantage of employer matches. With our 401 calculator, you can see how much your 401 will be worth when you reach retirement.
- Think hard about where you want to retire. Not all states are equally tax-friendly to retirees. Use our retirement tax-friendliness tool to see how tax-friendly your home state is, and whether Social Security benefits are taxable at the state level there.
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.
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The Problem: The Economic Toll From The Pandemic Will Very Likely Affect Social Security Benefits
The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy. Due to the economic fallout from the COVID-19 pandemic, the key measure of average wagesthe average wage index is very likely to decline in 2020. As a result, the initial retirement benefits for those who are first eligible to receive benefits in 2022when they reach the age of 62would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll. The effect is very likely to be so significant that workers turning 62 in 2022 would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history. This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in 2020 and first become eligible to retire in 2022 because benefits are normally expected to grow for each successive cohort of retirees. Moreover, the benefit reduction and notch would have long-lasting consequences, as they not only would affect benefits in the first year of ones retirement but also lower them for every year going forward, as annual benefits are determined by adjusting the initial level for inflation.
Your Monthly Social Security Benefits Increase The Longer You Wait To Claim
You can collect Social Security benefits as soon as you turn 62, but taking benefits before your full retirement age means a permanent reduction in your payments of as much as 25% to 30%, depending on your full retirement age.
If you wait until you hit full retirement age to claim Social Security benefits, youll receive 100% of your earned benefits. But you can also get a big bonus by waiting to claim your Social Security benefits at age 70 your monthly Social Security benefit will grow by 8% a year until then. Any cost-of-living adjustments will be included, too, so you don’t forgo those by waiting.
Waiting to claim your Social Security benefits can help your heirs as well. By waiting to take her benefit, a high-earning wife, for example, can ensure that her low-earning husband will receive a much higher survivor benefit in the event she dies before him. That extra income of up to 32% could make a big difference.
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Full Retirement Age And Your Benefit
The SSA has a set formula to calculate the amount of your monthly benefit check, also known as your primary insurance amount . The formula is somewhat convoluted, but it factors in your 35 highest years of earnings, each of which are indexed for inflation.
Your full retirement age determines when youre eligible to receive your PIA. So if you elect for benefits any time before your FRA, youll receive a lower monthly benefit. If you wait until after your FRA to elect, youll receive a higher benefit. For every month you wait from the age of 62 until your FRA, your monthly benefit will increase incrementally. For instance, if you were born in 1960 or after, you can receive 86.1% of your benefits at age 64 and 11 months. You can collect 92.2% of your benefits once you hit 65 and 10 months.
What may be confusing to some people is that the amount you receive at your full retirement age is not actually your maximum possible benefit. You can continue to delay electing for benefits past your FRA and your benefit amount will continue to increase. Once you reach age 70, your benefit amount will max out.
First The Math And The Exceptions
If youve ever filed your own tax return, you know that government policies and calculations can be complicated. Social Security is no exception. The basic FRA is 65 for those born before 1943 and scales up to age 67 for those born after 1960, as shown in the full retirement age chart on the SSA website. But know that, by some estimates, there are about 2,700 rules, exceptions, and contingencies covering things like spousal and survivor benefits, disabilities, working part-time while drawing benefits, and more.
How does the math work? You dont need a PhD in quantitative analysis to figure it out, but perhaps a bit of high school algebra would help. Basically, if you retire less than 36 months before your FRA, your benefits will be reduced 5/9 of 1% for each month you begin early. So if you retire exactly three years early, your benefits are reduced by 20% . For each additional month you retire early over and above the 36 months, your benefits will be reduced by an additional 5/12 of 1%, or 5% a year.
Dont want to do the math? A Social Security retirement age chart is available on the SSA website. Once there, you can click on any birth year to see how much your monthly benefit will be reduced if you choose to retire early. The retirement age chart also shows the reduction in spousal benefits should you choose early retirement.
FIGURE 1: RETIRE EARLY, LATE, OR AT YOUR FRA?
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Can You Retire Early At 57
A worker can choose to retire as early as age 62, but doing so may result in a reduction of as much as 30 percent. Starting to receive benefits after normal retirement age may result in larger benefits. With delayed retirement credits, a person can receive his or her largest benefit by retiring at age 70.