What Is Social Security
Social Security is a federal government program that acts as a retirement pension plan for eligible citizens. Social Security benefits replace a percentage of a personâs pre-retirement income based on their lifetime earnings. These benefits supplement other retirement savings to help cover expenses for retirees. Social Security is funded by American workers through a payroll tax deducted from their wages.
Tax Considerations For Social Security Benefits
How do these tax considerations affect when you should apply for Social Security benefits? At todays , they may not have much of an impact on most people. Still, tax rates and income thresholds can change, so its worth remembering that you will lose less of your Social Security to taxes if you are in a lower marginal tax bracket when you begin to collect.
You should also note that if you decide to return to work, even part-time, and arent yet at your FRA, your Social Security benefits may be temporarily reduced. The reduction is $1 for every $2 of earned income over $18,960 in 2021 . During the year when you reach your FRA, your benefits will be reduced by $1 for every $3 in income over $50,520 in 2021 until the month when you become fully eligible. That money isnt lost, however. The SSA will credit it to your record when you reach your FRA, resulting in a higher benefit.
Whats Your Social Security Break
If youre looking to maximize your total lifetime Social Security payout, youll want to conduct a break-even analysis to determine when you should start drawing your benefits.
Your break-even age occurs when the total value of higher benefits starts to exceed the total value of lower benefits .
For example, if you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.
If you expect to live beyond that age, it could make financial sense to delay drawing benefits. The Social Security Administrations life expectancy calculator can help you decide.
When it comes to calculating a start date for Social Security benefits, however, theres not an age thats appropriate for everyone. Consider your own financial needs, health and other retirement plans before making the call. If you cant reasonably afford to live without taking benefits, it may make little sense to delay taking your benefit.
Also Check: Find Address By Ssn
How The Retirement Age Could Change
Retirement ages were last altered in 1983 under then-President Ronald Reagan.
Those changes, which raised the full retirement age to 67 from 65, are still being phased in today.
Even just the bump up to age 66 from 65 represented a 5% benefit cut, Elsasser noted.
Many experts expect that any future changes could push up the Social Security retirement age. Notably, the Social Security 2100 Act: A Sacred Trust, introduced by Rep. John Larson, D-Conn., last year, would leave those thresholds unchanged and, in some respects, make benefits more generous. But the legislation has a five-year timeframe.
Separately, the Social Security Administration has scored the financial effects other proposals to change the age thresholds could have on the program.
Just in 20 years, we’ve seen a substantial increase in the retirement age.Mark J. Warshawskysenior fellow at the American Enterprise Institute
“I expect that at some point in the not too distant future, Congress will agree on a Social Security package that includes some type of adjustment to the retirement age,” Akabas said. “Whether that’s in two years or 10 years, it’s very difficult to predict.”
Experts say it’s possible the full retirement age could get pushed up by a year or two, which could be gradually phased in.
Additionally, lawmakers could also raise the initial age for eligibility for retirement benefits from 62, as well as the highest age for delaying benefits and earning benefit increases from 70.
Three Things To Keep In Mind
For most people, Social Security benefits will represent a portion of their income during retirement yearsnot their sole source of income. It’s important to be aware of three important factors that will affect the amount of Social Security benefits you will eventually receive:
- When you choose to begin taking benefits
- Whether or not your benefits are taxed
- Whether or not you continue working
Recommended Reading: How Do I Start Collecting Social Security Benefits
Early Retirement Vs Full Retirement Vs Delayed Retirement
You can decide when to start taking your Social Security benefits. You may decide to take them early beginning at age 62, at your full retirement age , or delayed until age 70.
When you start receiving Social Security benefits before your full retirement age, you will lock in a reduced benefit for life. That means that the reduced benefit will continue on for the duration of your retirement â even after you reach your normal retirement age.
On the other hand, if you choose to delay receiving your Social Security benefit until after your FRA, you will receive an increased benefit for life.
Watch Out For Hidden Costs
Youll also want to consider other lifestyle factors, especially Medicare. Americans become eligible for federal health insurance coverage at age 65, well after when you can begin to file for Social Security.
If you stop working at age 62 and lose health insurance, you have to get supplemental insurance to bridge the gap until you turn 65 and Medicare kicks in, Neiser says.
If you work during retirement, you have another incentive to delay collecting Social Security. Earning too much at a job after you begin collecting your benefit can reduce your payout, but only if you have yet to hit full retirement age.
However, when you hit full retirement age, your benefit will increase to account for any benefit that was withheld earlier due to working. Heres how much you can earn and not get hit.
If youre younger than full retirement age for all of 2021, the Social Security Administration will deduct $1 of your monthly check for every $2 you earn above $18,960 per year.
If you reach full retirement age in 2021, the administration deducts $1 of your monthly check for every $3 you earn above $50,520 until the month you reach retirement age.
Youll also owe Social Security and Medicare tax on your earnings, even if youre already receiving benefits.
So those are some potential pitfalls to claiming Social Security early.
Don’t Miss: I Get Social Security
Will Taking Social Security At Any Time Affect My Medicare
Though they are separate programs, there are some beneficial connections between them.
If you’re receiving Social Security benefits, Social Security works with Medicare and you’ll get an initial enrollment package from Medicare 3 months before the month of your 65th birthday.
Also, your Medicare premiums will most likely be collected by Social Security if you are already receiving those benefits. Social Security will send a notice before the deductions begin. If you arent receiving Social Security retirement benefits, you’ll get a monthly bill from Medicare.6
When Will I Receive My Payments Each Month
If you sign up for direct deposit, your payment is automatically deposited into your bank account on the third from last banking day of each month, otherwise it will be sent to you by mail, usually during the last three banking days of each month.
If you are automatically enrolled for the OAS pension and if you currently receive a CPP benefit by direct deposit, we will deposit your OAS pension payments to the same account.
Don’t Miss: What Is My Social Security Worth
Offer From The Motley Fool
The $16,728 Social Security bonus most retirees completely overlook: If you’re like most Americans, you’re a few years behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
No More File And Suspend
Note that the claiming strategy called file and suspend, which allowed married couples who have reached their FRA to receive spousal benefits and delayed retirement credits at the same time, ended as of May 1, 2016. However, spouses born before Jan. 2, 1954, who have attained their FRA may still be able to file a restricted application. It allows them to claim spousal benefits while delaying their own benefits up to age 70.
Social Security benefits can be taxable if your combined income is high enough.
Recommended Reading: Social Security Retirement Pay
Can I Collect Social Security Early Yes But It Comes At A Cost
The average American worker pays a lot of their hard-earned money to Social Security. You do it so that when you retire, you have a safety net of supplemental income. Because you put so much money into it, you may ask: how early is too early to start pulling from Social Security benefits?
There are regulations in place that allow you to start receiving benefits early, but taking benefits earlier doesnât mean youâll get more Social Security income in the long-term. In fact, for most people, itâs exactly the opposite. Taking benefits earlier means agreeing to a reduced benefit â and that reduction is permanent.
If youâre wondering when is the best time for you or a loved one to take Social Security benefits, here are some things you should know and think about.
Alternatives To Taking Early Retirement
If you are in need of cash to fund your expenses, an alternative to taking early retirement is pulling money from your investment portfolio to help fund your living expenses. Delaying your Social Security retirement benefit past your normal retirement age guarantees an annual return of 8%. This increased benefit will last for the duration of your life. That means youâll be much less reliant on your portfolio to fund your retirement once you start receiving the delayed Social Security benefit.
In this way, you are âfront-loadingâ your dependency on your portfolio so that you can fully maximize your Social Security benefit and take advantage of a guaranteed 8% annualized return.
If you do decide to take early retirement, you can change your mind and cancel your application within 12 months. Youâll have to repay the benefits you received, and you can resume the benefits later at a higher payout. Be aware, though, that you are only allowed to do this once in your lifetime.
Also Check: Will I Receive Social Security
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.
If You Are Made Redundant
If you are made redundant, you may qualify for a statutory redundancy lumpsum payment. The statutory lump sum is theminimum sum that you must get. A higher payment may of course be negotiatedwith your employer, either by you or by your union. You can get moreinformation about redundancyon our website.
Also Check: Who Can Get Social Security
How To Apply For Social Security
Submitting an online application is the easiest way to apply for benefits. You can typically do so within about 15 minutes.
As of October 2020, local Social Security offices remain closed due to COVID-19, but if you need assistance, you can call 800-772-1213 from 8 a.m. to 7 p.m. Monday through Friday.
Why It Makes Sense For The Higher Earner To Wait Longer To Collect
David and Linda are married. David’s primary insurance amount at full retirement age is $1,600 Linda’s is $1,450. They both have an FRA of 67.
If they both wait until 68 to collect, which means their benefits will increase by 8%, David’s benefits will be $1,728 , and Linda’s will be $1,566 .
That extra $12 per month means an extra $144 per year, or $2,880 over 20 years.
In addition, the spouse who lives longer will continue to collect the higher payments.
Don’t Miss: Social Secutirty
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.
Applying For Social Security
- Generally, you should apply for Social Security retirement benefits three months before you want your benefits to begin. Even if you dont plan to receive benefits right away, you should still sign up for Medicare three months before you reach age 65.
- If you were born before 1938 and you meet all other requirements, you can receive benefits beginning with the first full month you are age 62. However, if you choose to begin receiving benefits before age 65, your benefits will be reduced to account for the longer period over which you will be paid.
- The full retirement age is 65 for persons born before 1938. The age gradually rises until it reaches 67 for persons born in 1960 or later. Social Security benefits are payable at full retirement age for anyone with enough Social Security credits. As you work and pay taxes, you earn credits that count towards eligibility for future Social Security benefits. You can earn a maximum of four credits each year. Most people need 40 credits to qualify for benefits. People who delay retirement beyond full retirement age get special credit for each month they dont receive a benefit until they reach age 70.
- To find out what your retirement age is, use the Social Security Retirement Age Chart at www.ssa.gov
- You should speak with a Social Security representative in the year before you plan to retire. It may be to your advantage to start receiving your retirement benefits before you actually stop working.
ave questions? Call at 874-4618.
Also Check: How To Determine Social Security Payments
Are You Sure You Want To Start Benefits At 62
There are plenty of great reasons to take Social Security at 62, particularly if you want to retire early or you’re no longer able to work.
But if you have the option to keep working or live off your retirement savings, holding off is often the better option. Waiting until your full retirement age, which is between 66 and 67 for people born in 1943 or later, will give you a monthly payment that’s 30% higher than you’d get by starting at 62.
Each year you delay beyond your full retirement age yields an extra 8% until you reach age 70. The difference between starting Social Security at 70 versus 62: A monthly benefit that’s 76% higher.
Also, keep in mind that your options for reversing your Social Security decision if you started benefits too early are extremely limited.
But ultimately, the best age to take Social Security depends on a lot of factors, including your health and life expectancy, your financial situation, and when your spouse is claiming.
Bottom line: If you’ve weighed all the factors and decided starting Social Security at 62 makes sense for you, apply at least three months before your birthday. You won’t get your first payment in time for your big day, but you can have an encore celebration when it hits your bank account.
Provincial Territorial And Municipal Programs
Your provincial, territorial and municipal governments may offer income assistance and services to seniors. For more information, visit the Benefits Finder.
The Government of Canada provides information on retirement planning, including useful tools such as the Canadian Retirement Income Calculator.
You May Like: What Is Your Social Security Amount Based On
Continuing To Work May Reduce Your Benefits
Another consideration when determining whether to take Social Security benefits before your full retirement age is that your work activity during this time may decrease your benefit payments.
After you reach your full retirement age, you can earn as much as you like and still receive your full Social Security benefits. However, the rules for how work affects your benefits are complicated if you would like to work while receiving benefits, you should contact the Social Security Administration before making any decisions.
Note: You should apply for Medicare at age 65, even if you decide to continue working. If youre still working, you might need just Part A of Medicare your local Social Security office can tell you whether taking Part B is a good idea. In some cases, waiting to apply will result in higher premiums.
Generally, Social Security recipients who have not yet reached full retirement age will see their benefits reduced by $1 for every $2 they earn over an annual limit. Once recipients reach the year in which they attain their full retirement age, the reduction changes to $1 for every $3 they earn over a different limit. Once recipients reach the month and year of full retirement age, there is no limit on work activity.