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
An Advanced Claiming Strategy
If you or your spouse reached age 62 by the end of 2015, you qualify for a Social Security claiming strategy called restricted application.
Here’s how it works: The younger spouse claims Social Security benefits based on his or her own earnings record.
When the older spouse reaches full retirement age , he or she files a restricted application for spousal benefits only. At that point, both spouses are claiming benefits based on the younger spouse’s earnings record.
Then, at age 70, the older spouse claims benefits based on his or her own earnings record, which have increased to 132% of what that spouse would’ve been eligible for at FRA.
See how it works:Restricted application
How Do I Qualify For Social Security Retirement Benefits
When you work and pay taxes, you earn credits toward Social Security retirement benefits. These credits are based on your annual earnings you can accrue a maximum of four credits per year. Once youve acquired 40 credits , youre fully insured and eligible to receive retirement benefits.
Your paychecks will withhold Federal Insurance Contributions Act tax until youve earned up to the taxable earnings base for the year.
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How Social Security Benefits Are Calculated
Similar to a pension, Social Security provides a stream of retirement income that continues as long as the recipient is alive . And also like a pension, Social Security calculates its benefits by applying an income replacement formula, based on the earnings of the individual during his/her working years.
The difference, however, is that while a pension might simply be calculated based on an individuals last-3 or last-5 years of earnings, Social Security is actually paid out based on an average of 35 years of lifetime earnings. And it doesnt have to be a consecutive 35 years or the last 35 years Social Security uses whatever the highest 35 years were over the workers entire career.
What Else Do I Need To Know
If you have a spouse or other family member who receives Social Security benefits based on your Social Security record, and you go back to work and exceed the earnings limit, your earnings in excess of the earnings limit can reduce their benefits too. This can apply in situations where there are spousal benefits or benefits coming in for dependents. See the Social Security publication How Work Affects Your Benefits for additional details.
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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.
How To Calculate The Impact Of Filing Early
Since PIA is reduced for each month you claim ahead of schedule, the math will be slightly more complex to calculate precisely what it will cost you if you don’t retire exactly one, two, three, or four years early. If you claim 36 months or fewer before FRA, here’s the equation that will provide you with the percentage:
- 5/9 times the number of months before FRA
For example, if you’re filing 14 months early, multiply 5/9 x 14 = 7.78. That’s a 7.78% reduction in your monthly check size.
If you’re filing more than 36 months early, account for the additional reduction with this equation:
- 5/12 times the additional number of months before FRA
So, for example, if you’re claiming 41 months early:
Start with: 5/9 x 36 = 20 .
Add to that the result of: 5/12 x = 2.08
And you’ll find that your monthly check size will be reduced by 22.08% if you claim 41 months early, compared to the amount you’d receive if you waited until your FRA.
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Timing And Your Health Coverage
Your health insurance coverage can also play a role in deciding when to claim Social Security benefits. Do you have a health savings account to which you would like to keep contributing? If so, note that if youre age 65 or older, then receiving Social Security benefits requires you to sign up for Medicare Part A, and once you sign up for Medicare Part A, youll no longer be allowed to add funds to your HSA.
The SSA also cautions that even if you delay receiving Social Security benefits until after age 65, you might still need to apply for Medicare benefits within three months of turning 65 to avoid paying higher premiums for life for Medicare Part B and Part D.
In 2022, the average monthly premium for Part D will be $33 per month versus $31.47 in 2021. If you enroll in a Medicare Advantage plan, the average monthly premium will be $19 per month in 2022 versus $21.22 in 2021. However, if you are still receiving health insurance from your or your spouses employer, you might not yet have to enroll in Medicare.
As of Oct. 16, 2021, Social Security offices are only open by appointment, and to get an appointment you need to be in a limited, critical situation. Most people will have to transact their business online, by phone, or through the mail.
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.
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How Much Does Filing Early Cut Benefits
You’ll receive your primary insurance amount if you file for Social Security at exactly your FRA, but you will receive less if you start collecting benefits earlier. The size of the reduction to your monthly benefit check is in proportion to how early you file:
- If you file 36 months or fewer before full retirement age, PIA is reduced by 5/9 of 1% per month.
- If you file more than 36 months before FRA, PIA is reduced by 20%, plus an additional 5/12 of 1% per month for each month earlier than 36 months prior to your FRA that you file.
In short, the Social Security Administration reduces the amount of your monthly checks by 6.7% annually for the first three years early that you file and by 5% for each additional year. The chart below shows how much PIA is reduced depending on the age of filing.
If You Claim Benefits at Age…
When Your Full Retirement Age Is…
The Value of Your Monthly Check Will Be Reduced By…
Who Was President When Social Security Was Passed
Roosevelt played the most important role of all the listed presidents in being the architect behind the Social Security Act, which provided financial protection for older Americans who could no longer earn a wage after decades of employment. Though the bill was signed into law in August 1935, payouts didnt actually begin until Jan. 1, 1940.
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How To Estimate Benefits By Birth Year
The SSA’s website offers a series of charts based on birth year that outline benefit amounts you and your spouse at many points before and at your FRA. As of June 2021, 1960 was the latest year available.
The earliest you can apply for Social Security benefits is three months before you turn the age at which you expect to retire and want to begin receiving benefits.
Heres How Working After 62 Can Change Your Social Security Benefits
Continuing to work after age 62 can affect your level of Social Security retirement benefits, whether you are receiving benefits at the time or not. Knowing how continuing to work might change benefit levels can lead to better decisions about when to claim benefits and whether to continue working.
You can begin claiming Social Security retirement benefits as early as age 62, whether you are working or not. You know that the level of benefits increases for each year you wait to claim them through age 70. Theres no benefit for delaying claiming past age 70. In addition, the level of benefits might increase if you continue working after 62, whether you claim benefits at 62 or later.
Social Security retirement benefits are calculated using your 35 highest-earning years. If you dont have 35 years of earnings, youll be assigned an income of $0 for each of the missing years. After you turn 62, Social Security recalculates your benefits every year that you dont claim benefits. It will take your earnings for the latest year, add that to your record of lifetime earnings and select the 35 years with the highest inflation-adjusted earnings. Those are the only details of how benefits are calculated you need for this discussion.
When claim Social Security retirement benefits and continue to work, the effects are more complicated.
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How Does Full Retirement Age Work
Full retirement age is not the same age for everyone. Understanding when you will reach full retirement age depends on the day and year you were born.
Although full retirement age once was 65 for everyone, Congress passed a law in 1983 that gradually increased it to age 67, because people were living longer.
|Year you were born|
|1960 or later||67|
Not only does FRA depend on the year you were born, but it also depends on the day, because Social Security considers you to have attained an age the day before your birthday. Therefore, if you were born on January 1, you would use the FRA for the year before your year of birth.
For example, someone born on Jan. 1, 1956, would use 1955 as the year to figure their full retirement age, as they would be considered to have attained an age on Dec. 31 of the previous year . According to the Social Security Administration, full retirement age for 1955 as a birth year would be 66 and 2 months, therefore that is their retirement age, even though they were actually born in 1956.
For purposes of the month you are entitled to receive benefits, if you were born on the first of the month, you are considered to attain that age the month before. Someone born on February 1 would be entitled to receive their FRA benefit amount for the month of January.
Does Social Security Start On Your Birthday Or Birth Month
Schedule of SS payments Social Security benefits are not prorated. They start the month following the birthday. The schedule, according to AARP, follows this rule: When the birth date falls between the 1st and 10th of the month, the payment is issued on the second Wednesday of the month following the birthday month.
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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.
Full Retirement Age: Figuring Out Yours
For the first several decades of the Social Security program, everyone had the same full retirement age: 65. But Congress introduced amendments in 1983 that would allow the normal retirement age to increase over time. Congressional leaders felt that a gradual adjustment of the full retirement age was necessary to ensure that there was enough money to keep Social Security from facing insolvency.
The result is that not everyone has the same full retirement age. The age at which you gain access to full Social Security benefits depends on the year you were born. If you were born between 1943 and 1954, your full retirement age is 66. If your birth year is 1960 or after, your normal retirement age is 67. Anyone born between 1955 and 1959 has a normal retirement age between 66 and 67 that is, 66 plus a certain number of months. For instance, if you were born in 1958, your full retirement age is 66 and eight months.
The day you were born could also affect your normal retirement age. If you were born on January 1, youll need to use the full retirement age for the folks who were born a year before you. If you were born on the first day of any month, your FRA will be the same as someone born the previous month. For example, if you reach your FRA on March 1, youll receive full benefits for the month of February, too.
Heres a complete breakdown of the full retirement age by birth year.
|Full Retirement Age|
|67 years old|
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How Is Fra Calculated
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.
On the other hand, if you start receiving benefits early, your total benefit is reduced a small percent for each month before your FRA.
What Is The Retirement Earnings Test
The Social Security earnings test applies to people who are earning an income and choose to collect benefits before FRA. For every dollar an individual makes above a certain income limit, the Social Security administration will withhold some of their benefits.
In other words, a working individual, who collects before FRA, will receive a reduced percentage of their benefits.
However, it’s important to remember that those withheld benefits are not lost forever. Workers will recoup those lost benefits once they hit FRA. This means that the benefits that the Social Security administration withheld from workers before FRA will be fully paid out to them later on.
Though the earnings test has undergone many legislative changes since 1935, it still remains in place.
While it’s commonly thought that the test was first passed to encourage older workers to leave the workforce in order to make room for younger workers during the Great Depression, historian Larry Dewitt writes in 1999 that “the RET is part of the Social Security Act for the basic reason that Social Security was designed as an insurance scheme, which seeks to compensate covered individuals who suffer a loss of income due to retirement.”