What Should Current And Future Retirees Do
You don’t want to end up struggling to survive because you have too little income outside of Social Security. To make sure this doesn’t happen to you, contribute as much as possible to retirement savings throughout your working life.
If you’re very close to retirement age, you may want to work longer, so you can save more and increase your monthly Social Security checks. While you can start receiving your benefits as early as age 62, benefits increase each year you wait up until 70. If you’re going to depend on Social Security to make up a big portion of your income, you want to get the largest monthly checks possible.
And if you’re already retired and rely on Social Security, look into downsizing your home and moving to an area with a lower cost of living as soon as you can so your money will go as far as possible. Doing this early allows you to withdraw less from any savings accounts that you do have so your money is more likely to last. Moving to a cheaper area can also allow you to enjoy a better quality of life on the benefits Social Security provides.
Your goal should be to join the minority of Americans who depend on Social Security for less than half their income as retirees. If your benefits are just a small portion of the funds you have to live on, you’ll be able to enjoy your life more without worrying about how to stretch your checks.
Delayed Retirement = Increased Benefits
If you sign up for benefits after your Full Retirement Age, the SSA calls this Delayed Retirement. Your benefit amount increases, but you receive benefits for a shorter period of time. In fact, for each month you delay applying for Social Security, your benefit amount increases at a rate of 2/3% each month, or about 8% per year.
|Benefit Amount at FRA of 66||$1,000|
|Increased Amount at age 70||$1,320||32% increase|
The Social Security Administration calls the additional income you receive by waiting the Delayed Retirement Credits . You will also receive any annual Cost of Living Adjustments that were implemented between your FRA and the year you actually retire.
For a more detailed discussion of Delayed Retirement, see Waiting to Apply for Social Security = MUCH Higher Monthly Checks!
Your May Have To Pay Taxes On Social Security Benefits
Most people know that you pay tax into the Social Security Trust Fund throughout your career, but some retirees don’t realize that you also have to pay tax on your Social Security benefits once you start taking them. Benefits lost their tax-free status in 1984, and the income thresholds for triggering tax on benefits haven’t been increased since then.
It doesn’t take a lot of income for your Social Security benefits to be taxed. For example, a married couple with a combined income of more than $32,000 may have to pay income tax on up to 50% of their Social Security benefits. Higher earners may have to pay income tax on up to 85% of their benefits.
You may also have to pay state income taxes on your Social Security benefits. See our list of the 12 States That Tax Social Security Benefits.
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Fact #: Social Security Benefits Are Modest
Social Security benefits are much more modest than many people realize the average Social Security retirement benefit in June 2020 was about $1,514 a month, or about $18,170 a year. For someone who worked all of their adult life at average earnings and retires at age 65 in 2020, Social Security benefits replace about 40 percent of past earnings. This replacement rate will slip to about 35 percent for a medium earner retiring at 65 in the future, chiefly because the full retirement age, which has already risen to 66, and is gradually climbing to 67 over the 2017-2022 period.
The average Social Security retirement benefit in June 2020 was $1,514 a month, or about $18,170 a year.
Moreover, most retirees enroll in Medicares Supplementary Medical Insurance and have Part B premiums deducted from their Social Security checks. As health care costs continue to outpace general inflation, those premiums will take a bigger bite out of their checks.
Social Security benefits are modest by international standards, too. The United States ranks just outside the bottom third of developed countries in the percentage of an average workers earnings replaced by the public pension system.
Social Security lifted 1.5 million children out of poverty in 2018, as the chart shows.
The First Thing You Should Do With Your Social Security Check
Whether you’re 20 years old or 10 years away from retirement, it’s important to plan how you’re going to supplement your income and spend your money during your golden years. For many soon-to-be retirees, this means making a plan for their Social Security checks.
Americans 65 and older spend an average of about $48,791 annually between 2016 and 2020 on essentials such as food, housing, transportation and healthcare, according to the Bureau of Labor Statistic’s 2019 Consumer Expenditure Survey. But the average monthly Social Security benefit for retired workers is $1,619.67 — which comes out to only $19,436.04 annually. If you plan to rely on Social Security alone, you’ll quickly realize that this amount probably isn’t enough to fully fund your retirement lifestyle.
Still, you don’t want to blow through your Social Security check. That’s why it’s important to carefully budget and spend your benefits wisely. Keep reading to learn more about what you should do with your Social Security check.
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How Much Income Do Retirees Get From Social Security
According to a Vanguard study, Social Security provides 90% or more of income for 35% of retirees, and between 50% and 90% of income for another 29%. Just 36% of retired seniors rely on their benefits to produce less than half of all income.
For those relying on Social Security as their exclusive or primary means of support, it can be very difficult to make ends meet. If you receive the average Social Security benefit , relying on that for 90% of your income could leave you with around $19,000 annually. This is far too little to live on in most parts of the country, especially when you factor in high healthcare costs many seniors face.
Even if Social Security makes up about half your annual income, you’d be left trying to survive on around $34,000 a year. While this is definitely more doable, it can be a challenge considering that the Bureau of Labor Statistics reported mean expenditures for Americans 65 and older were $50,860 in 2018.
Can I Qualify For Benefits Based On My Spouses Income
Short answer: in some cases.
Retirement benefits are based on your own earnings record. Spousal and survivors Social Security benefits, however, are based on your spouses earnings, whether the spouse is deceased or divorced from you.Keep in mind that you may be eligible for spousal Social Security or survivors Social Security benefits as well as your own retirement benefit but, Social Security wont let you add these amounts together. Instead, you will receive whichever benefit is larger.
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A Vanguard Advisor Can Help
When to collect Social Security is an obvious retirement decision you have to make, but there are other questions you may not have thought of. Which accounts should you spend from first? Is a Roth conversion appropriate for any of your accounts?
While representatives from the Social Security Administration are trained to help get you through the system, they can’t create a financial plan or tell you how to maximize your benefits.
That’s where Vanguard Personal Advisor Services® can help. You’ll also get a custom financial plan, ongoing portfolio oversight, investment coaching, and real-time goal trackingall at a low cost.
How To Receive Federal Benefits
To begin receiving your federal benefits, like Social Security or veterans benefits, you must sign up for electronic payments with direct deposit.
If You Have a Bank or Credit Union Account:
- Call the Go Direct Helpline at .
If You Don’t have a Bank or Credit Union Account:
- Direct Express debit card – a pre-paid debit card. Get help by calling the Go Direct Helpline at .
Make Changes to an Existing Direct Deposit Account:
Learn how to make changes to an existing direct deposit account. You also may contact the federal agency that pays your benefit for help with your enrollment.
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Fact #: Most Elderly Beneficiaries Rely On Social Security For The Majority Of Their Income
Social Security provides the majority of income to most elderly Americans. For about half of seniors, it provides at least 50 percent of their income, and for about 1 in 4 seniors, it provides at least 90 percent of income, across multiple surveys and the study that matches survey and administrative data.
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.
What If I Delay Taking My Benefits
If you retire sometime between your full retirement age and age 70, you typically earn a “delayed retirement” credit . For example, say you were born in 1955 and your full retirement age is 66 and 2 months. If you started your benefits at age 68, you would receive a credit of 8% per year multiplied by approximately two . This makes your benefit ~15% higher than the amount you would have received at age 66.
That higher baseline lasts for the rest of your retirement and serves as the basis for future increases linked to inflation. While it’s important to consider your personal circumstancesit’s not always possible to wait, particularly if you are in poor health or can’t afford to delaythe benefits of waiting can be significant.
If you decide to wait past age 65, you may still need to sign up for Medicare. In some circumstances your Medicare coverage may be delayed and cost more if you do not sign up at age 65.
What If I Continue Working In My 60s
Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something youâd like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you donât outlive them. If you claim Social Security benefits early and then continue working, youâll be subject to whatâs called the Retirement Earnings Test.
If youâre between age 62 and your full retirement age, and youâre claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly. For 2021, the Retirement Earnings Test Exempt Amount is $18,960/year . If youâre in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits you’ll receive.
Contrary to popular belief, this money doesnât disappear. It gets credited back to you – with interest – in the form of higher future benefits. You may hear people grumbling about the Social Security âEarnings Taxâ, but itâs not really a tax. Itâs a deferment of your benefits designed to keep you from spending too much too soon. And after you hit your full retirement age, you can work to your heartâs content without any reduction in your benefits.
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What To Expect In 2023
The reality is that most of Social Security’s changes each year are linked to adjustments in inflation. So while you’ll likely receive larger checks in 2023, that won’t necessarily increase your buying power.
As prices continue to soar, seniors have actually been losing purchasing power over the years even with annual raises. In fact, since 2000, Social Security benefits have lost roughly 40% of their buying power, according to a report from The Senior Citizens League.
That said, when prices are high and many seniors are struggling to pay the bills, every little bit counts. And an increase in benefits could make it easier to stay afloat financially in retirement.
Will My Social Security Benefits Be Reduced
The Social Security Windfall Elimination Provision and Government Pension Offset are just two examples of how financial planning for public sector workers can differ from their private sector counterparts.
Both can impact your Social Security benefits if you:
- work for an employer who didn’t withhold Social Security taxes, such as some state and local government systems,
- receive a pension based on that work, and
- qualify for Social Security benefits based on other employment.
The WEP can reduce what you, or your spouse or a child, could get based on your earnings.
The GPO can reduce what you could get based on a current, ex, or decedent spouse’s earnings.
The Social Security Administration knows when you didn’t pay into Social Security in fact, your Social Security Statement will reflect that by showing $0 earnings years but it doesnt know if you will be entitled to a pension. So your Statement wont reflect any WEP reduction.
It’s critical to understand and plan for both the WEP and GPO if you’re impacted by them. Otherwise you may overestimate your retirement income and be in for a nasty surprise.
If you’re subject to the WEP, its impact may be lessened.
The GPO can reduce the benefit you get from your spouses earnings by up to two-thirds. Unlike the WEP, there is no limit on the reduction so it can completely eliminate your spousal benefit.
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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.
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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Suspend And Restart Your Benefits
If you’re between your full retirement age and 70 and are already receiving benefits, you can still stop your monthly checks now and restart them later in order for your benefits to start growing again.
The bump-up you will receive is the delayed retirement credit for the time your benefits were suspended.
But beware: If your spouse or children are receiving benefits based on your record, their checks will also stop. And their benefits will not grow during that time, with the exception of adjustments for inflation, Kotlikoff said.
A Quick Note About Life Expectancy: According To The Social Security Administration Average Life Expectancy For A 65
Your spouse: If you are married, you can explore additional strategies to maximize the benefits you receive collectively. Start by taking your spouse’s age, health, and benefits into account, particularly if you’re the higher-earning spouse. The amount of survivor benefits for a lower-earning spouse could depend on the deceased, higher-earning spouse’s benefitthe bigger the higher-earning spouse’s benefit, the bigger the benefit for the surviving spouse.
Whether you’re still working. Earning a wage can reduce your benefit temporarily if you take Social Security early. If you’re still working and you haven’t reached your full retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit .
In the year you reach your full retirement age, the reduction falls to $1 in benefits deducted for every $3 you earn above a higher limit . However, starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.
Again, any reduction in benefits due to the earnings test is only temporary. You receive the money back in the form of a recalculated higher benefit beginning at full retirement age, so don’t use the reduction as the sole reason to cut back on working or worrying about earning too much.
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