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 really be a mere $225. You can read all about the taxation of Social Security benefits in Internal Revenue Service Publication 915.
Welcome To The Mad Mad World Of Social Security
When should you start taking Social Security benefits?
If you havent yet asked that question, you will one day. Few personal finance questions matter as much as this one. Thats because the majority of retirees get more than half their income from Social Security. And close to 20 percent of retirees get all their income from Social Security.1
Thats why the question is so important. Unfortunately, the Social Security system is complicated so complicated, in fact, that only 33 percent of respondents, aged 55 to 65, were able to pass 12 true or false questions on Social Security posed by MassMutual.2
So, when should you start taking Social Security benefits? The rules are so complicated that the answer is it depends.
For example, you can start to receive Social Security retirement benefits at age 62. But your monthly benefit rises 8 percent for each year you wait to start until age 70, when the increases stop.3 Therefore, you must consider carefully the best time to begin. Should you start to receive a smaller amount at 62, or wait until 70 to get a higher monthly check, or perhaps start somewhere in between?
There are lots of factors to consider, including:
- Your need for income.
- Your other sources of income.
- Whether youre still working, and what your income is.
- Your marital status, your spouses age and the amount of income your spouse earns.
- Your health.
Social Security Can Be A Family Benefit
When you start receiving Social Security, other family members may also be eligible for payments. A spouse qualifies for benefits if they are age 62 or older or at any age if they are caring for your child.
Benefits may also be paid to your unmarried children if they are younger than 18, between 18 and 19 and enrolled in a secondary school as a full-time student, or age 18 or older and severely disabled.
Each family member may be eligible for a monthly benefit that is up to half of your retirement benefit amount. There is a family limit, which varies, but is generally between 150% to 180% of your retirement benefit.10
Should you die, your family may be eligible for benefits, based on your work record.10
Family members who qualify for benefits include:
- A widow or widower
- age 60 or older
- age 50 and older if disabled or
- any age if they are caring for your child who is younger than 16 or disabled and entitled to Social Security benefits on your record.
Your survivors receive a percentage of your basic Social Security benefit usually in the range of 75% to 100% for each member though, the limit paid to each family is about 150% to 180% of your benefit rate.10
Spouses And Social Security
You can claim Social Security benefits based on your spouse’s work record. If claiming spousal benefits provides more, claiming before your FRA on a spouse’s record means you’ll lose even more than claiming on your own recordthe benefit reduction for a spouse is up to 35% while the reduction for claiming your own benefit is up to 30%. For instance, if you’re the spouse of Colleen in the above example and you are the same age, you’d be eligible for only $650 a month at age 6235% less than the $1000 a month you would get at your FRA of 67.
Not married? Read Viewpoints on Fidelity.com: Social Security tips for singles
Your decision to take benefits early could outlive you. If you were to die before your spouse, they would be eligible to receive your monthly amount as a survivor benefitif it’s higher than their own amount. But if you take your benefits early, say at age 62 versus waiting until age 70, your spouse’s survivor Social Security benefit could be up to 30% less for the remainder of their lifetime.
How Monthly Benefits Are Determined
The amount you collect from Social Security each month is a function of two things: your 35 highest years of earnings, and the age at which you first start taking benefits. The first part of the equation is fairly simple. A formula is applied that establishes your full monthly benefit amount based on your income during your 35 highest years of earnings on record. For example, your monthly benefit might equal $1,600 if that’s what your earnings history dictates. Whether you actually end up collecting $1,600 a month, however, will depend on when you first take benefits.
If you file for Social Security at full retirement age, which for today’s workers is 66, 67, or somewhere in between, you’ll get the full monthly benefit amount you’re entitled to. In our example, that’s $1,600. However, as stated earlier, most Social Security recipients begin collecting benefits at 62, since it’s the earliest age to file. Now, let’s say that your year of birth puts your full retirement age at 66. If you were to file at 62, you’d reduce your monthly $1,600 payments to $1,200 apiece. On the other hand, if you hold off on taking benefits past age 66, you’ll increase your payments by 8% for each year you wait. This means that if you file at 69 instead of 66, you’ll wind up collecting $1,984 per month instead of $1,600.
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Do You Plan On Working After Age 62
Another key factor in your decision is whether or not you plan to continue working after you start collecting Social Security benefits at age 62. That’s because income you earn before full retirement age may reduce your Social Security retirement benefit. Specifically, if you are under full retirement age for the entire year, $1 in benefits will be withheld for every $2 you earn over the annual earnings limit .
Example: You start collecting Social Security benefits at age 62. You continue working, and your job pays $30,000 in 2021. Your annual benefit would be reduced by $5,520 .
Note: If your monthly benefit is reduced in the short term due to your earnings, you’ll receive a higher monthly benefit later. That’s because the SSA recalculates your benefit when you reach full retirement age, and omits the months in which your benefit was reduced.
How Much Income Will You Need
Another important piece of the puzzle is to look at how much retirement income you’ll need, based partly on an estimate of your retirement expenses. If there is a large gap between your projected expenses and your anticipated income, waiting a few years to retire and start collecting Social Security benefits may improve your financial outlook.
If you continue to work and wait until your full retirement age to start collecting benefits, your Social Security monthly benefit will be larger. What’s more, the longer you stay in the workforce, the greater the amount of money you will earn and have available to put into your overall retirement savings. Another plus is that Social Security’s annual cost-of-living increases are calculated using your initial year’s benefits as a base–the higher the base, the greater your annual increase.
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Your Social Security Full Retirement Age Plays A Big Role Know It
First things first:Determine your Social Security full retirement age. For people born between 1943 and 1954, full retirement age is 66. It gradually climbs toward 67 if your birthday falls between 1955 and 1959. For those born in 1960 or later, full retirement age is 67.
You can claim your Social Security benefits a few years before or after your full retirement age, and your monthly benefit amount will vary as a result. More on that in a moment.
Are You Still Working
Americans may file for Social Security benefits when they turn 62, even if they are still collecting a paycheck. However, starting Social Security benefits at age 62 is four to five years before full retirement age , which is when you can expect to receive a full, unreduced benefit.
If you begin taking Social Security benefits early, each there is month between your start date and your full retirement age permanently reduces your monthly payment by about half a percent.
In addition to seeing a permanent reduction in monthly benefit, if you are still working while collecting early benefits, you may see some of your Social Security payments withheld because of something called the earnings test. If you havent reached full retirement age, you will see $1 of your Social Security benefits withheld for every $2 over $18,960 that you earn. This test changes to a withholding of $1 in benefits for every $3 you earn above $50,520 up to the month of your birthday during the year you reach full retirement age.
Take a 63-year-old beneficiary who is earning $35,000 per year while also taking Social Security benefits. Their annual income is $16,040 above the earnings test limit, which means $8,020 will be withheld from their Social Security benefits.
Once you reach the Social Security full retirement age, you can work as much as youd like without imperiling your monthly benefit, though youll still be on the hook for income taxes.
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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. If you are still receiving health insurance from your or your spouses employer, however, then you might not yet have to enroll in Medicare.
On March 17, 2020, all Social Security offices were closed completely due to the COVID-19 pandemic. As of Aug. 5, 2021, they 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.
In A Rush To File For Social Security Benefits At Age 62 Many People Are But Slow Down And Do The Math First Or You Might Regret It
When it comes to claiming Social Security retirement benefits, you may want to consider waiting to start benefits when youre 70.
That means not starting benefits when youre 62 , nor even full retirement age .
I know that starting benefits at age 70 might be a tough thing to reconcile with but it doesnt mean that you have to work until youre 70.
Here are three reasons why delaying taking your Social Security benefit to age 70 is a decision you may want to consider:
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Special Rule As You Approach Full Retirement Age
If you are already receiving your retirement benefits, a special higher earnings limit applies in the calendar year you turn your full retirement age . If you will reach full retirement age in 2021, you can earn up to $4,210 per month without losing any of your benefits, up until the month you turn 66. But for every $3 you earn over that amount in any month, you will lose $1 in Social Security benefits. Beginning in the month you reach full retirement age, you become eligible to earn any amount without penalty.
If you are self-employed, you may receive full benefits for any month during this first year in which you did not perform what Social Security considers “substantial services.” The usual test for whether you worked substantial services is whether you worked in your business more than 45 hours during the month . In other words, if you work in your business more than 45 hours in a month, Social Security may reduce your benefit.
How To Stop Social Security Check Payments
The SSA can not pay benefits for the month of a recipients death. That means if the person died in July, the check received in August must be returned. Find out how to return a check to the SSA.
If the payment is by direct deposit, notify the financial institution as soon as possible so it can return any payments received after death. For more about the requirement to return benefits for the month of a beneficiarys death, see the top of page 11 of this SSA publication.
Family members may be eligible for Social Security survivors benefits when a person getting benefits dies. Visit the SSA’s Survivors Benefits page to learn more.
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What You Can Do
For someone retiring now, Id say to act as if Social Security benefits will remain in place as is because it would be so politically unpopular to make cuts to someone within a few years of retirement that I think its unlikely that our elected officials would have the political capital to change it, said Patrick Carney, a certified financial planner in Lancaster, Pennsylvania. For someone farther from retirement, Id tell them to save for retirement like Social Security wont be there for you, and if it is, youll be pleasantly surprised.
What you can do at any age is to save more in tax-advantaged accounts, such as a 401 and a traditional or Roth IRA, which can help you make up any shortfall in Social Security funds and provide an important supplement to your retirement income. If your employer matches your 401 contributions, take advantage of the full match thats free money.
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Either way, signing up to make automatic contributions to your retirement savings can make that a priority in your budget and help you control the money you have available for retirement, no matter what happens to the Social Security system by then.
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Report The Death Of A Social Security Or Medicare Beneficiary
You must report the death of a family member receiving Social Security or Medicare benefits. The Social Security Administration processes death reports for both. Find out how you can report a death and how to cancel benefit payments. In addition to canceling SSA and Medicare benefits, find out what other benefits and accounts you should cancel.
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When To Apply For Social Security
As stated above, you are eligible to apply for Social Security retirement benefits when you are 61 and nine months. You can start collecting benefits as soon as you turn 62.
However, just because you can, does not mean that you should.
The longer you delay starting your benefits, the more your monthly income will be. In fact, the difference in lifetime income between starting at age 62 and waiting until your maximum retirement age can be more than $100,000 and for many people much much more.
While you can start benefits at age 62, the Social Security Administration considers that early. Depending on your birth year, you do not reach what the SSA calls full retirement age until sometime between ages 66 and 67.
- For every month prior to your full retirement age that you begin taking benefits, around 0.55% is deducted from your payout.
- And, for every year that you defer your benefits, you will receive a larger amount when you finally do begin drawing Social Security. The amount of the bonus is dependent, once more, on your birth date. For example, someone born in 1944 has a full retirement age of 66. If they start benefits at age 69, they will receive eight percent more benefits for each year they delay.
Earn Ssa Work Credits In Some Countries
You may not have enough credits from your work in the United States to qualify for retirement benefits. But, you may be able to count your work credits from another country. The SSA has agreements with 24 countries. If you earned credits in one of those countries, they can help you qualify for U.S. benefits.
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