Social Security’s Breakeven Setup
One lesser-known fact about Social Security is that the program is designed to pay you the same total lifetime benefit regardless of when you initially file. The logic is that filing ahead of FRA will reduce your benefits, but that reduction will be offset by the greater number of individual payments you collect in your lifetime. On the flipside, filing after FRA will raise your benefits, but you’ll collect fewer individual payments to counteract that boost.
As such, it technically shouldn’t matter when you file for Social Security. In reality, however, it does, and here’s why: This breakeven formula only works when you live an average life expectancy. If you expect to pass away sooner than the typical senior, then it generally pays to claim Social Security as early as possible, because in doing so, you’ll come away with a larger lifetime payment. And if you expect to outlive your peers, then it usually pays to do the opposite — file for benefits as late as possible.
Here’s how this might play out in terms of actual numbers. Imagine you’re entitled to a $1,500 monthly benefit at an FRA of 67. Filing at 62 will reduce your monthly benefit to $1,050, but you’ll collect 60 more payments. If you live until roughly 78 1/2, you’ll pretty much break even with about $209,000 in lifetime Social Security income. If you pass away at 75, however, you’ll come out about $20,000 ahead by filing at 62 instead of 67.
More From The Motley Fool
Work Information Youll Need
What you do for a living may have an impact on your benefits, so youll need to supply the SSA with some employment information as well. This includes the name and address of your employer for both this year and last year.
Youll also need to know how much money you earned this year, last year and potentially next year. Youll need an estimate of next years income if youre applying in September, October, November or December.
Similar to the above section, you should also indicate on your application if any of these conditions apply to you:
- Youve been unable to work because of injury, illness or another condition at any point within the past 14 months.
- Youve qualified for a pension or an annuity from a federal or state government employer.
- You or your spouse have ever worked for the railroad industry in any capacity
- Youve earned any Social Security credit under the social security system of another country
How Your Social Security Benefits Are Earned
To be eligible for Social Security benefits in retirement, you must earn at least 40 “credits” throughout your career. You can earn as many as four credits each year, so it takes 10 years of work to qualify for Social Security.
In 2021, you must earn $1,470 to get one Social Security work credit and $5,880 to get the maximum four credits for the year.
You May Like: Social Security Check Amounts
How Is Social Security Calculated
Its based on your lifetime Social Security earnings & adjusted for inflation. The basic formula is the total of your highest 35 years of adjusted earnings divided by 420 equals your monthly average earnings. Your benefits are determined using this amount, and the maximum benefit cap. The monthly amount you receive if you file at your FRA is called the Primary Insurance amount .
Tips For Saving On Taxes In Retirement
- Finding a qualified financial advisor doesnt have to be hard. Finding a qualified financial advisor doesnt have to be hard. SmartAssets free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If youre ready to find an advisor who can help you achieve your financial goals, get started now.
- What you pay in taxes during your retirement will depend on how retirement friendly your state is. So if you want to decrease tax bite, consider moving to a state with fewer taxes that affect retirees.
- Another way to save in retirement is to downsize your home. Moving into a smaller home could lower your property taxes and it could also lower your other housing costs.
Recommended Reading: Social Security Account Activation Code
Spouses Who Dont Qualify For Their Own Social Security
Spouses who didnt work at a paid job or didnt earn enough credits to qualify for Social Security on their own are eligible to receive benefits starting at age 62 based on their spouses record. As with claiming benefits on your own record, your spousal benefit will be reduced if you take it before reaching your FRA. The highest spousal benefit that you can receive is half of the benefit that your spouse is entitled to at their FRA.
While spouses get a lower benefit if they claim before reaching their own FRA, they will not get a larger spousal benefit by waiting to claim after their FRAsay, at age 70. However, a nonworking or lower-earning spouse may get a larger spousal benefit if the working spouse has some late-career, high-earning years that boost their benefits.
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.
Read Also: Socilsecurity
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.
You Can Undo A Social Security Benefits Claiming Decision
There aren’t many times in life you can take a mulligan. But Social Security offers you the chance for a do-over. Let’s say you claimed your benefit, but regretted the decision and wished you had waited. Within the first 12 months of claiming Social Security benefits, you can withdraw the application. You will need to pay back all the benefits you received, including any spousal benefits based on your record. But you can later restart your Social Security benefits at the higher amount youll earn by waiting.
Early claimers have another opportunity for a do-over: They can choose to suspend their Social Security benefit at full retirement age. Say you took your benefit at age 62. Once you turn full retirement age, you can suspend your benefit. You don’t have to pay back what you have received, and your benefit will earn delayed retirement credits of 8% a year. Wait to restart your benefit at age 70, and your monthly payment will get up to a 32% boost — which could erase much of the reduction from claiming early.
Also Check: Social Security?
All You Need To Know Is Yourself
Answer simple questions about your life and TurboTax Free Edition will take care of the rest.
Estimate your tax refund andwhere you stand
Know how much to withhold from your paycheck to get
Estimate your self-employment tax and eliminate
Know which dependents credits and deductions
Estimate capital gains, losses, and taxes for cryptocurrency sales
See which education credits and deductions you qualify for
The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
When Seniors Must File
For tax year 2021, unmarried seniors will typically need to file a return if:
- you are at least 65 years of age, and
- your gross income is $14,250 or more.
However, if your only income is from Social Security benefits, you don’t include these benefits in your gross income. If this is the only income you receive, then your gross income equals zero, and you typically don’t have to file a federal income tax return.
But if you do earn other income including certain tax-exempt income, then each year you must determine whether the total exceeds the filing threshold.
- For tax years prior to the 2018 tax year , these amounts are based on the year’s standard deduction plus the exemption amount for your age and filing status.
- Beginning in 2018, only your standard deduction is used since exemptions are no longer part of calculating your taxable income under the new tax law passed in late 2017.
For the 2021 tax year,
- If you are married and file a joint return with a spouse who is also 65 or older, you must file a return if your combined gross income is $27,800 or more.
- If your spouse is under 65 years old, then the threshold amount decreases to $26,450.
- Keep in mind that these income thresholds only apply to the 2021 tax year, and generally increase slightly each year.
You May Like: What Will My Social Security Benefits Be
What Is The Future Of Social Security
Social Security is expected to run out of cash reserves in 2034, according to the Old-Age and Survivors Insurance Trust Fund, the retirement benefits account managed by the Social Security Administration.
However, this doesnt mean the program would be bankrupt and unable to pay out benefits. If Congress does nothing to reform the system by 2034, Social Security would still be able to pay 79 percent of promised benefits until 2090.
Social Security has run out of cash reserves before. Congress reformed the program in the 1980s by taxing benefits based on income levels and by gradually increasing the full retirement age from 65 to 67.
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.
Don’t Miss: What Will I Make On Social Security
How Your Social Security Benefits Are Calculated
Your Social Security benefits are based on the 35 calendar years in which your income was the highest. If you have fewer than 35 years of earnings, each year with no earnings will be entered as zero. You can increase your Social Security benefit at any time by replacing a zero or low-income year with a higher-income year.
There is a maximum Social Security benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2021, the maximum monthly benefit is $3,113. For someone filing at age 70, the maximum monthly amount is $3,895.
Is My Social Security Income Taxable The Quick Answer
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .
If your combined income is above a certain limit , you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
Read Also: What Will My Ss Be When I Retire
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.
Do I Need To File A Tax Return If My Only Income Is Social Security
Submitted by anonymous.
Thats a great question, as many Americans only source of income is Social Security. Social Security income is taxed for federal and state income tax purposes. If your earned income exceeds IRS 2019 filing guidelines, you are required to file a tax return with the IRS and in most states.
What If I Change My Mind
If you receive Social Security benefits at a reduced rate, but then change your mind, you have the option of withdrawing your application and paying back to the government what you’ve already received . Then, you could restart benefits at a later date to take advantage of a higher payout. But you are limited to one withdrawal per lifetime.
For example, let’s say you elected to receive early benefits at age 62, but then decided to go back to work at age 63. You could withdraw your Social Security application within the first 12 months of receiving benefits, pay back the years’ worth of benefits you received, go back to work, and then wait until a later age to restart your benefit checks at a higher level.
For important details about repaying benefits please read the SSA publication If You Change Your Mind.
Can You Still Work While Receiving Social Security
You can continue to work while you receive Social Security benefits. But there is a limit to how much you can earn and still receive full benefits. The earning limit may be adjusted each year.
If you earn above the limit, Social Security will deduct a certain amount of your benefits each year.
Social Security Benefits, Earning Limits and Penalties
|SSA deducts $1 from your benefits for every $3 you earn above the limit|
You May Like: Social Secrutiy
How Would Filing Early For Social Security Affect My Benefits
Its important to understand the cost of filing for Social Security early, before you reach your Full Retirement Age. If you do so, youll be penalized for earning any money above a certain amount: as of 2018, that amount was $17,040. If you earn anything above that amount, your benefit will be reduced by $1 for every $2 you earn above the limit.
Then, during the year where youre going to reach your FRA, that amount will change. For every $3 you earn above the $45,360 limit, theyll take away $1. But that only happens in the months before your birthday.
The first month after you reach your Full Retirement Age, your earnings will no longer reduce your benefits from Social Security anymore. Now you can have an outside job and earn as much money as you want without being penalized.
How To File A Social Security Disability Application
More than eight million Americans receive SSDI benefits.
Workers must have a qualifying disability to receive payments.
Children and spouses of the beneficiary also qualify.
It takes at least six months to receive a payment.
Social Security Disability Insurance benefits are one of the most useful safety nets the US government offers working-class people. The program provides payment to over 8 million Americans and more than 1.5 million children and spouses. Hundreds of thousands of people apply for the program every year, but its extremely difficult to get approved the first time around. In fact, less than 40% of first-time applicants are actually awarded benefits. Theres good news for those who arent approved the first time around, but meet the requirements theyre eligible for back-pay dated back to the first application.
Of course, nobody wants to fight with the Social Security Administration . Thats why its critical to fill out the application right the first time.
Recommended Reading: How Much Do You Receive For Social Security