3 reasons your Social Security benefits could take a serious hit

10 Myths and Misconceptions About Social Security

3 reasons your Social Security benefits could take a serious hit

The facts: The two trust funds that pay out Social Security benefits — one for retirees and their survivors, the other for people with disabilities — have never been part of the federal government's general fund. Social Security is a separate, self-funded program. The federal government does, however, borrow from Social Security.

Here's how: Social Security's tax revenue is, by law, invested in special U.S. Treasury securities. As with all Treasury bonds, the federal government can spend the proceeds on a variety of programs. But as with all bondholders, Treasury has to pay the money back, with interest. Social Security redeems the securities to pay benefits.

This borrowing fuels the notion that the government is raiding or even stealing from Social Security and leaving it with nothing but IOUs. But the government has always made full repayment, and the interest increases Social Security's assets, to the tune of more than $80 billion in 2019 alone.

Myth #6: Undocumented immigrants drain Social Security

The facts: Some have blamed problems with Social Security's financial health on undocumented immigrants draining the system's resources. It's a popular complaint, but a false one.

Noncitizens who live and work in the U.S. legally can qualify for Social Security under the same terms as native-born and naturalized Americans, but undocumented people are not allowed to claim benefits.

There is evidence that undocumented workers actually improve Social Security's bottom line.

Some do obtain Social Security numbers under false pretenses, and payroll taxes are withheld from their wages even though they are not eligible to later collect benefits.

A report by Social Security actuaries said that undocumented immigrants made a net contribution of around $12 billion to the program in 2010 and that their earnings would ly continue to “benefit the financial status” of Social Security.

Myth #7: Social Security is a retirement savings account

The facts: The government does not stow your payroll tax contributions in a personal account for you, to be paid out with interest when you retire.

Your benefit is how much money you earned over your working life, not on how much you paid into the system. As noted above, those contributions fund benefits for current retirees (and their survivors, and people with disabilities).

When you retire, those still working will cover your benefits, and so on.

You might think of it less saving for retirement — there are other vehicles for that — and more an earned benefit the government promises to pay so you have at least some income in your later years.

Emphasis on “some”: Contrary to another common misperception, Social Security is not meant to replace your entire work income. On average, it provides about 40 percent of a beneficiary's preretirement earnings.

The formula for calculating benefits is weighted so that they replace a larger percentage of income for lower-wage workers and a lower percentage for upper-income earners.

Myth #8: You don't pay taxes on Social Security benefits

The facts: This was true until 1984. The Social Security overhaul passed by Congress and signed by President Ronald Reagan the year before included a provision that made a portion of Social Security benefits taxable, depending on your income level.

You will pay federal income tax on up to 50 percent of your benefits if your income for the year is $25,000 to $34,000 for an individual filer and $32,000 to $44,000 for a couple filing jointly.

Above those thresholds, up to 85 percent of benefits are taxable. Below them, you don't owe the IRS anything on your benefits.

(Roughly speaking, Social Security counts as income the money you get from work, pensions and investments; nontaxable interest; and half of your Social Security benefits.)

You might also owe state taxes on your Social Security income if you live in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont, Utah or West Virginia. Their rules on taxing benefits vary widely; contact your state tax agency to learn more.

Myth #9: An ex-spouse's benefits come your own

The facts: If you are divorced, your former spouse may be eligible to collect Social Security benefits on your earnings record (and vice versa). As with benefits for a current spouse, these can be up to 50 percent of the benefit amount you are entitled to at full retirement age.

But those ex-spouse (or spouse) benefits don't reduce your Social Security. They are distinct payments and have no effect on what you receive each month, even if both a current and a former spouse (or multiple former spouses) are collecting them. You get the benefit you're entitled to, your earnings history and the age when you file for Social Security.

Myth #10: You lose benefits permanently if you keep working

The facts: Social Security does have a rule, called the “earnings limit” or “earnings test,” that can temporarily reduce the benefits of people who still work. But it doesn't apply to all working beneficiaries and is not permanent.

The rule only covers people who claim benefits before full retirement age and continue working. In this circumstance, Social Security withholds a portion of benefits if earnings from work exceed a set cap, which changes every year and differs depending on how close you are to full retirement age.

In 2020, your benefit is reduced by $1 for every $2 in income above $18,240, if you won't hit full retirement age until 2021 or later.

If you will reach FRA in 2020, the formula is $1 less in benefits for every $3 in earnings above $48,600. On the date when you hit FRA, the earnings test goes away — there's no benefit reduction, regardless of your income.

Social Security also adjusts your benefit upward to so that over time, you recoup the money that was withheld.

Источник: https://www.aarp.org/retirement/social-security/info-2020/10-myths-explained.html

3 Ways Social Security Penalizes Early Claimants

3 reasons your Social Security benefits could take a serious hit

When you retire, there's a very good chance that your Social Security income will become vital to making ends meet.

Social Security Administration data shows that 62% of current aged beneficiaries lean on their monthly check to comprise at least half of their income.

And while future retirees expect to be less reliant on the program, some 84% still intend to lean on Social Security in some capacity during retirement, according to an April 2018 Gallup survey.

With that being said, there's perhaps no decision that's more important to qualifying senior citizens than deciding when to claim their Social Security benefit. For those unfamiliar, benefits can begin at age 62, or at any point thereafter.

Image source: Getty Images.

If you claim benefits early, Social Security can penalize you three ways

Data culled from the Center for Retirement Research at Boston College finds that roughly 45% of claimants take their entitlement at age 62, with approximately 60% claiming between ages 62 and 64. Beyond these early claimants, close to 30% take benefits at either age 65 or 66, while the remaining roughly 10% take benefits between ages 67 and 70.

Though there are plenty of valid reasons for claiming Social Security benefits early, there are also three penalties that you should be aware of if you do so.

1. A permanently reduced monthly payout

The most front-and-center penalty for claiming benefits early — let's define “early” as any point prior to your full retirement age — is that it'll permanently reduce your monthly benefit.

As noted, benefits can begin at age 62. There is, however, a pretty big incentive to wait to begin taking your entitlement.

For each year an individual waits to take their benefit, it increases by approximately 8%, up until age 70.

Assuming we were looking at two identical individuals with the same income and work history, as well as birth year, the one claiming at age 70 could net up to 76% more per month than the one claiming at age 62.

Image source: Getty Images.

your full retirement age — the age at which you'll receive 100% of your retirement benefit, as determined by your birth year — this means claiming early can reduce your monthly take-home by as much as 25% to 30%, depending on your birth year.

For example, the Social Security Administration (SSA) notes that the average retired worker brought home $1,414.73 in July 2018. If an individual turning 62 in 2018 claims their payout as soon as possible, they would see a permanent reduction of 26.

7% relative to what would have been their full retirement age benefit. Assuming this was the average retired worker, we're talking about a monthly pay $1,037, or $12,444 a year.

That's more than a $4,500 annual reduction from what a person born in 1956 would receive if they'd waited to take their entitlement at their full retirement age of 66 years and four months. 

Although waiting doesn't work for everyone, those claiming early need to understand the consequences of doing so.

2. A potentially reduced or withheld payout via the retirement earnings test

A second way your Social Security benefit could take a hit when claiming early is by being exposed to the retirement earnings test.

In its simplest form, the retirement earnings test allows the Social Security Administration to withhold some, or all, of your retired worker benefit if your income exceeds a certain level.

Please note that the retirement earnings test applies only to workers claiming benefits prior to their full retirement age (also known as “normal retirement age” by the SSA).

If you've claimed early and reached or surpassed your full retirement age, or simply waited until later to claim benefits, then the retirement earnings test has no bearing on you.

Image source: Getty Images.

If an individual won't reach their full retirement age in 2018, $1 in benefits will be withheld for every $2 in earnings above $17,040. Thus, an individual who wishes to continue working but also claim benefits at age 62 may not be able to double dip and receive both sources of income. If you earn too much, the SSA may just withhold some, or all, of your benefit.

For individuals who will be hitting their full retirement age in 2018 but have yet to do so, the SSA can withhold $1 in benefits for every $3 in earnings above $45,360.

If there is a silver lining here, it's not as if the withheld benefits are forfeited or lost forever. You'll get them back once you hit your full retirement age in the form of a higher monthly payout. 

3. A reduced survivor benefit for your loved ones

Lastly, early claimants can be indirectly hurt since their enrollment could impact the earning potential of their loved ones.

If you're single and have no young children, then your claiming decision really is all about you. But if you have a wife or husband and/or school-age children, then your claiming decision becomes a little more complicated — especially if you're the income breadwinner of the household.

Image source: Getty Images.

You see, if you happen to pass away prior to your spouse, the survivor benefit that your spouse may receive as a result of your earning and work history could be reduced if you claimed benefits prior to reaching your full retirement age. The SSA bases the surviving recipients' payout on what the deceased worker was receiving each month. Or in simpler terms, claiming early could mean putting your loved ones on shakier financial footing after you're gone.  

To reiterate, claiming early does make sense for some retired workers. But if you're going to take your benefit before reaching your full retirement age, you need to fully understand the consequences.

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Источник: https://www.fool.com/retirement/2018/09/13/3-ways-social-security-penalizes-early-claimants.aspx

Here are 3 great reasons to take Social Security benefits at 62

3 reasons your Social Security benefits could take a serious hit

As more baby boomers put off retirement, millennials and Gen Xers are finding it harder to move up in the workforce. USA TODAY

In the ever-popular “when to claim Social Security” debate, you'll often hear age 62 tossed around as a viable option. That's the earliest age seniors can file for benefits, though claiming them at that point means reducing them in the process.

Here's a quick refresher on how those benefits are calculated.

The Social Security Administration (SSA) takes your average wages over your 35 highest-paid years in the workforce and adjusts them for inflation.

Then, a special formula is applied to what's known as your AIME, or average indexed monthly earnings, to determine how much money you'll be eligible to collect at full retirement age, or FRA.

FRA isn't the same for everyone; it's a function of your year of birth. Anyone born in 1960 or later has an FRA of 67. If you were born from 1943 to 1954, your FRA is 66.

If you were born after 1954 but before 1960, it's 66 and a certain number of months. Filing at 62 therefore means claiming benefits early, so if you choose to go that route, the SSA will reduce your benefits by 6.

67% a year for the first 36 months you file ahead of FRA, then by 5% a year for each 12-month period thereafter.

This means that if your FRA is 67 and you file at 62, you lose 30% of your benefits, and usually on a lifelong basis. The only way that reduction won't be permanent is if you undo your benefits by withdrawing your application within 12 months and paying back the SSA every dollar it paid you.

Clearly, a 30% reduction in benefits is serious business, especially for those coming into retirement with little savings or outside income of their own. As such, you'd think filing for Social Security at 62 would be a terrible idea. But under the right circumstances, it can be a very smart move. Here are three such examples.

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1. You can afford to

If you plan to rely on Social Security as your primary source of retirement income, a massive reduction in benefits could be catastrophic.

If you enter retirement with plenty of savings and expect to work in some capacity to continue generating income, filing at 62 could make a lot of sense.

Those benefits could give you the option to travel, start a business or meet any number of goals you'd rather achieve early in retirement. If you can afford to take a hit on your benefits, you might as well enjoy them when you want to.

2. Your health is in bad shape

Social Security is supposed to pay you the same lifetime total regardless of when you initially claim benefits. Here's the logic: Filing early will reduce your benefits on a monthly basis, but you'll collect a larger number of individual payments. Filing at FRA means you'll get your full benefit, but fewer individual payments.

Things should even out if you live an average lifespan. If you pass away sooner than the typical senior, you could  lose out on lifetime Social Security income by waiting to file.

Imagine you're entitled to $1,500 a month in benefits at your FRA of 67. Filing at 62 will reduce each payment you get to $1,050, but you'll collect 60 more payments. You'll break even in both filing scenarios if you live just past 78 1/2. If you pass away at 72, you'll come out $36,000 ahead in your lifetime by virtue of having filed early.

That's why your health should be a major factor in determining when you claim benefits. If it's poor, and you're unly to live a long life, filing for Social Security at the earliest possible age of 62 often makes sense.

3. You have no other steady source of income

 If you reach age 62 and are let go from your job, you may have no choice but to file for benefits in the absence of outside income to pay your bills.

Granted, you do have the option to charge expenses temporarily on a credit card while you look for new work or to take out another type of loan. But doing so is risky, because unfortunately, finding a job can be difficult when you're older, what with age discrimination rampant in the workforce.

The longer you carry any sort of debt, the more interest you accrue on it. A better bet may be to file for Social Security as soon as you can to get your hands on the money you need to keep functioning.

That way, you'll avoid debt, and if you do find a job shortly after claiming benefits early, you can undo them as discussed earlier and file again later to avoid a lifelong reduction.

Many seniors file for Social Security at 62 simply because they can. Although that's a decision that can backfire, there's nothing wrong with claiming benefits at 62 if you have a well-thought-out reason for doing so.

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Источник: https://www.usatoday.com/story/money/2019/11/08/social-security-benefits-62-years-old/40556249/

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