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.
When A Spouse Dies
When one spouse dies, the surviving spouse is entitled to receive the higher of their own benefit or their deceased spouses benefit. Thats why financial planners often advise the higher-earning spouse to delay claiming. If the higher-earning spouse dies first, then the surviving, lower-earning spouse will receive a larger Social Security check for life.
When the surviving spouse hasnt reached their FRA, they will be entitled to prorated amounts starting at age 60. Once at their FRA, the surviving spouse is entitled to 100% of the deceased spouses benefit or their own benefit, whichever is higher.
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.
Who Should Delay Benefits
If you are married and the higher wage earner, it generally makes sense for you to wait as long as possible to claim.
One reason for that is Social Security payments are based on mortality tables that have not been updated since 1983. And life expectancies have increased since that time.
People are living longer than they would have been expected to back in 1983, and therefore the credits that you get for delaying Social Security are worth more to you than they would be if they were actuarially fair, Jones said.
Holding off until age 70 makes sense particularly for the higher earner of a married couple because their benefits will in turn determine spousal and survivor benefits for their significant other.
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You Think You Can Get A Better Return
You’ll get an 8% increase in your benefit each year past your full retirement age, up until you reach age 70. That means if you’re 67 and wait three years to claim benefits, your check will be 24% larger when you finally start.
But if you’re a savvy investor, it might make sense to start collecting those benefits sooner rather than later. Why? You could collect your Social Security benefits early, invest the money, and beat that 8% annual return.
Of course, there are risks associated with this strategy. Unless you have a crystal ball, you have no idea how the markets will perform. One bad year could wipe out any gains as well as your initial investment.
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You Can Work And Claim Social Security At The Same Time But Should You
Social Security is commonly seen as a source of retirement income. But you’re allowed to work and take Social Security retirement benefits or survivor benefits at the same time. If you do so before you reach full retirement age, though, Social Security may withhold part of your benefits.
Below we’ll cover how you can get Social Security benefits even while you’re still working. Learn how you can keep as much of that money as possible.
Future Of Social Security
An increase in eligible participants combined with an increase in life expectancy is straining the Social Security program. Because of the financial burden this created, Social Security was amended in 1983, changing the age people can collect full Social Security benefits.
As a result of the 1983 amendments, the retirement age will increase between 2003 and 2026 from age 65 to age 67 with an 11-year gap at which the retirement age will remain at 66, depending on the year of birth.
Economic analysts predict that the Social Security system eventually will pay out more in benefits than it receives in payroll taxes. Analysts have long warned of this shortfall, and they predict the program could be in jeopardy as of 2035.
It is anticipated a reduction in benefits of about 13% or an immediate increase in payroll tax rate from 12.4 to 14.4%, or a little of both, will be needed to allow full payment of scheduled payments for the next 75 years.
As the challenges to meet the needs of millions of retirees continue, policymakers and politicians continue to argue about revamping or privatizing the program. The recent economic downturn has affected jobs and savings programs, further weakening the program. With so many people dependent upon Social Security for retirement benefits, its vital to understand the system and its limitations, as well as to make changes before time runs out.
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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.
Children Can Collect Social Security Benefits Too
Minor children of Social Security beneficiaries can be eligible for benefits. Children up to age 18 and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit. The disability must have occurred before the age of 22. As long as the disability prevents the person from working, the adult child can continue collecting the benefit even after the parent has died.
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Claiming Social Security Benefits At The Right Time Means More Money In Your Pocket Here’s A Guide To Everything From Knowing Your Full Retirement Age To Taking Social Security Spousal Benefits
For many Americans, Social Security benefits are the bedrock of retirement income. Maximizing that stream of income is critical to funding your retirement dreams.
The rules for claiming Social Security benefits can be complex, but this guide will help you wade through the details. By educating yourself about Social Security, you can ensure that you claim the maximum amount to which you are entitled.
Here are 12 essential details you need to know.
How And When To Apply For Social Security Benefits
- B.S., Texas A& M University
Applying for Social Security benefits is the easy part. You can apply online, by telephone or by walking into your local Social Security office. The hard part is deciding when to apply for your Social Security retirement benefits and rounding up all the documents you’ll need when you do.
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Maximum Social Security Benefits Example
Say that someone who turns 62 in 2021 will reach FRA at 66 years and 10 months, with earnings that make them eligible at that point for a monthly benefit of $1,000. Opting to receive benefits at age 62 will reduce their monthly benefit by 29.2% to $708 to account for the longer time they could receive benefits, according to the Social Security Administration. That decrease is usually permanent.
If that same individual waits to get benefits until age 70, the monthly benefit increases to $1,253. The larger amount is due to the delayed retirement credits earned for the decision to postpone receiving benefits past FRA. In this example, that higher amount at age 70 is about 77% more than the benefit they would receive each month if benefits started at age 62, or a difference of $545 each month.
A Social Security Administration calculator can give you more-personalized information. Of course, the best time for someone to start taking Social Security benefits depends on a variety of factors, not just the dollar amount of the benefit. Things such as current income and employment status, other available retirement funds, and life expectancy must also be factored into the decision.
Theres An Annual Social Security Cost
One of the most attractive features of Social Security benefits is that every year the government adjusts the benefit for inflation. Known as a cost-of-living adjustment, or COLA, this inflation protection can help you keep up with rising living expenses during retirement. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can cost a pretty penny.
Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. In 2021, Social Security beneficiaries will see a 1.3% COLA in their monthly Social Security benefits.
The Kiplinger Letter forecast in March that the 2022 COLA would be 3%, which would be the largest increase since 2012 when Social Security benefits ticked up 3.6%.
Heres what COLAs have been in other recent years:
- 2009: 5.8%
- 2021: 1.3%
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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.
What Is Full Retirement Age
In addition to how much youve earned over the years, the size of your monthly Social Security benefit depends on when you were born and the age when you start claimingdown to the month.
Youll receive your full monthly benefit if you start claiming when you reach what Social Security considers your full retirement age , sometimes also referred to as normal retirement age. FRA was 65 when Social Security began, but it has been raised to 67 for anyone born in 1960 or later. To find your FRA, see the chart below.
|Finding Your Full Retirement Age|
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How Do You Apply For Social Security Benefits
If you are eligible for Social Security benefits, you can apply online, by phone or by appointment at a local Social Security office.
How to Apply for Social Security Benefits
- Applying online is the easiest way to apply for Social Security benefits. The Social Security website allows you to apply for retirement, spouses, Medicare and disability benefits at the same site. You can also apply for Supplemental Security Income benefits.
- If you dont have Internet access, you can sign up by phone. You can call the Social Security Administration at 1-800-772-1213 .
- The Social Security Administration has restrictions on office visits during the COVID-19 pandemic. It does allow in-person visits for certain services. You should check with the SSAs Coronavirus page to see if you can make an in-person appointment at your local office.
If You Were Born In 1959 Your Full Retirement Age Is 66 And 10 Months
You can start your Social Security retirement benefits as early as age 62, but the benefit amount you receive will be less than your full retirement benefit amount.
The chart below provides examples of the percentage of your full retirement benefit amount you and your spouse would receive from age 62 up to your full retirement age.
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.
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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.
Social Security Benefits For Surviving Spouses
If your spouse was receiving Social Security benefits upon their death, you must report the death as soon as possible. You can call the Social Security Administration at 1-800-772-1213 between 7 a.m. and 7 p.m. on weekdays or visit your local Social Security office in person.
You are eligible for a one-time, lump-sum death benefit of $255 from Social Security if:
- You were receiving benefits on your spouses record at the time of death, or
- If you were living in the same household as your spouse at the time of death.
Any benefits received in the name of your spouse during the month of death or later must be returned to the Social Security Administration as soon as possible.
If your spouse worked long enough under Social Security, you may be eligible for Social Security benefits. You must be age 60 or older or disabled and 50 or older to qualify.
How much youll receive depends on the percentage of your spouses benefit as well as your age and the type of benefit youre eligible for.
You must apply for survivor benefits in person. You can call Social Security at 1-800-772-1213 to request an appointment.
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How Does Work Affect Your Social Security Payments
Many people continue to work beyond retirement age, either by choice or out of necessity. But if you are receiving Social Security benefits, you need to be aware of how working can affect your benefit payments. Earning income above Social Security thresholds can cause a reduction in benefits and mean your benefits will be taxed.
Whether it makes sense to work and collect Social Security at the same time is a complicated assessment that depends on how much you earn and when you begin taking Social Security benefits.
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If you work and are full retirement age or older, you can earn as much as you want and your benefits will not be reduced. However, individuals may begin taking Social Security retirement benefits early beginning at age 62. If you are younger than full retirement age, there is a limit to how much you can earn and still receive full benefits. If you earn more than $18,960 , Social Security will deduct $1 from your benefits for each $2 you earn over the threshold. In the year you reach full retirement age, you can earn up to $50,520 without having a reduction in benefits. However, if you exceed $50.520 in earnings, Social Security will deduct $1 from your benefits for each $3 you earn until the month you reach full retirement age. Once you reach full retirement age, your benefits will no longer be reduced.
For more information on Social Security, .
When Is The Best Time For You To Claim Social Security
Without a crystal ball, it may be impossible to know the exact optimal day to claim Social Security benefits. That being said, there are some common things to consider. If you are not in good health, claiming earlier might make sense. On the flip side, if your grandmother is still kicking, you are likely going to want to wait as long as possible to begin claiming Social Security benefits.
For the vast majority of retirees, delaying Social Security benefits as long as possible will generate more income throughout your lifetime. That is even more true for married couples. Not to make things more complicated, but Social Security maximization planning is even more valuable for married couples. The odds of at least one half of a married couple living a long time is substantial. For a married couple retiring at 65, there is a 50% chance that one will live to 92, and a 25% chance that one will make it to 97. Longevity is great, but it does subject retirees to more risk of inflation and depletion of other assets.
Other retirement income and assets should also be considered. If you have a large pension, or enough retirement assets to cover your standard of living throughout retirement, your Social Security choices are not quite as important. I doubt Warren Buffet spent much time thinking about when to claim Social Security. Actually, I take that back. He is frugal , and my guess is that he made a wise choice about when to claim Social Security.
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