- Understanding your social security options
- Think about your life expectancy
- Think about your needs
- Taxes and your benefits
- Social Security and your retirement
- 9 Things You Might Not Know About Social Security… But Should
- 1. Social Security was created after the Great Depression as a social safety net to provide funds for older Americans who are no longer working.
- 3. Over time, Social Security has shifted from serving as a supplemental retirement program to a significant source of retirement income for many households
- 4. Your social security benefit is your work record
- 5. You are eligible to receive 100% of your Primary Insurance Amount if you wait to file at your Full Retirement Age which is your year of birth.
- 6. If you file early and continue working, some of your benefits may be held back subject to an earnings test.
- 7. The break-even age for filing is not as far away as many people believe
- 8. Social Security benefits may be taxable.
- 9. The Social Security Administration only sends out Social Security statements to individuals age 60 and over who have not yet begun receiving benefits.
- Social Security Basics – 3 Questions to Ask Before Taking Benefits
- 1. Should You Delay Withdrawing SS Income?
- 2. What About Your Spouse?
- 3. Are Social Security Benefits Taxable?
- Social Security is Not Guaranteed
Understanding your social security options
Social Security is a major part of your retirement. Here are some things to think about, from your life, to your family, to how taxes may impact your decision.
Your Social Security and retirement decisions typically go hand in hand. And one of the biggest retirement-related decisions you'll make is when to start taking Social Security.
That's why we believe it's important to talk with your financial advisor before making this decision. We'll ask questions and listen to better understand your situation.
Then we can help outline what options you may have when it comes to Social Security.
This isn't a choice we think you should take lightly. That's because Social Security is one of the most valuable retirement assets you have.
Think about it this way: Using the average individual benefit of $1,404 per month in 2018, finding a similar investment paying the same amount for as long as you live, with inflation adjustments and survivor benefits for your spouse, would cost nearly $450,000.*
This chart shows how your monthly Social Security benefit differs the age you start receiving your benefits.
Assuming a $1,000 monthly benefit as full retirement age of 66, you would receive $750 a month if you started receiving benefits at 62, But the benefit can increase incrementally to $1,350 a month – or a 32% increase – if you wait until age 70. Source: Social Security Administration. Example does not include any potential cost-of-living adjustments (COLA).
- Your Social Security retirement benefit is your highest 35 years of earnings, adjusted for inflation, as well as the age you begin taking Social Security.
- Your yearly statement from the Social Security Administration can provide you with an estimate of what your retirement benefit is, your full retirement age (FRA) and work history. You can also find your statement and estimate your benefits online.
- You can claim benefits as early as age 62 and as late as age 70. However, your benefits are reduced by up to 30% if you claim before your FRA but can increase by up to 32% above your full-retirement benefit if you delay past your FRA.
- You may also be eligible for spousal and survivor benefits depending on your situation, and working in retirement can affect your benefit if you claim before FRA.
- The chart outlines how the age you choose to begin taking Social Security can affect your income throughout retirement, assuming a full retirement age of 66.
Ultimately, when to take Social Security is a personal and complex decision that we recommend viewing through a LENS.
Think about your life expectancy
Since benefits change what age you begin taking Social Security, this decision is in some respects a question of receiving a smaller amount for a longer period of time or a larger amount for a shorter time. So, how long you (and your spouse) expect to live plays an important role.
The better your health and the longer you and your spouse expect to live, the more it may make sense to take Social Security later. This assumes you don’t need your benefit now and aren’t putting undue strain on your investments to make up the difference, as the “life expectancy” of your portfolio also can be affected by your decision.
Before your full retirement age, your benefits are lowered by $1 for every $2 in earned income above $18,960. In the year of full retirement age, your benefits are lowered by $1 for every $3 in earned income for earnings over $50,520. At and/or after full retirement age, there's no earning limit but your benefits can sill be taxed
You probably don’t plan on slowing down when you retire and may even plan to continue working. However, if you take Social Security early, working at the same time can really affect your benefits.
That's because your benefits are lowered by $1 for every $2 in earned income above a certain amount ($18,960 for 2021). This changes to $1 for every $3 in earned income the year you reach your Full Retirement Age for earnings over $50,520.
It's important to note that this is only earned income and doesn’t include income from investments, pensions or Social Security itself.
If you plan to continue working (and have meaningful earned income), it may not make sense to take Social Security early. After you reach FRA, there is no adjustment in benefits how much you earn.
Source: Congressional Budget Office, Social Security Administration. For more information, see the Social Security Administration publication How Work Affects Your Benefits and IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits.
Think about your needs
If you have control over when you retire, analyze what it would cost to live your desired lifestyle after you stop working full-time. Then, add up where the money comes from to provide for this lifestyle – such as outside income, Social Security and investment resources – to determine if these sources will cover your spending needs.
Ultimately, you may determine that your income, including Social Security and portfolio withdrawals, isn't going to be enough, and it may make sense to delay retirement. This additional time could increase your potential income in retirement by providing:
- Higher Social Security benefits
- An opportunity to continue to save
- An opportunity for your investments to grow
For spousal benefits, you're entitled to up to half or 50% of your spouse's benefit or your own, whichever is higher. When it comes to survivor benefits, you're entitled to up to 100% of a deceased spouse's benefit or your own, whichever is higher.
There are two types of benefits for spouses: spousal and survivor.
- Spousal Benefits – Essentially, a spousal benefit would entitle you to receive up to half of your spouse's retirement benefit, offset by your own benefit. your own retirement benefit, the spousal benefit is also reduced if you claim before Full Retirement Age. This benefit may be available for divorced spouses as well.
- Survivor benefits – Your decision about when to take Social Security for yourself could also affect your spouse’s survivor benefit. If you are widowed, you can receive your own benefit or 100% of your deceased spouse's benefit, whichever is larger. If you take benefits early and receive a permanent reduction, the survivor benefit to which your spouse is entitled will also be permanently reduced, which could have a major effect on your spouse’s income after you pass away. This benefit may be available for divorced spouses as well.
Claiming Social Security later could be one way you provide for your spouse. If you are the higher wage earner (with the higher Social Security benefit) and either are older than your spouse or expect your spouse to live longer than you, it may make sense to delay taking Social Security to maximize the survivor benefit if you pass away prematurely.
Taxes and your benefits
Taxes shouldn’t be the key driver of when you decide to take Social Security. However, it’s important to understand how your benefits could be taxed when determining your after-tax income in retirement:
If your combined income is $25,000 to $34,000 if single or $32,000 to $44,000 if married, up to 50% of your Social Security benefits will be taxed at your income tax rate.
If your combined income is above $34,000 if single or above $44,000 if married, up to 85% of your benefits will be taxed at your income tax rate.
Social Security and your retirement
With all this in mind, it's important to remember that Social Security was never intended to cover everything – on average, it provides about 40% of your pre-retirement income. That's why it's so important to work with your Edward Jones financial advisor to position your investments to help provide for your income needs throughout retirement.
Before making any decisions, be sure to check with the Social Security Administration and consult with your qualified tax advisor.
*Edward Jones estimates CANNEX Immediate Annuity Quote System – 12/01/2017. Example assumes a joint life annuity, 66-year-old person, 3% inflation rate and the 2018 average benefit level from the Social Security Administration.
9 Things You Might Not Know About Social Security… But Should
One of the most confusing topics in retirement planning is understanding the basics of Social Security. I will admit that Social Security can be extremely technical, confusing and downright boring, and with the future of Social Security uncertain, many people are hesitant to put in the time and brain cells required to understanding how the program works.
Putting political views aside, Social Security is ly here to stay. Although benefits may be different for younger generations, it will continue to be a significant source of retirement income for many households. So it is important! Putting excitement level aside, it is essential to understand the basics and how the benefit fits into your overall financial plan.
1. Social Security was created after the Great Depression as a social safety net to provide funds for older Americans who are no longer working.
The 1935 Act provided for retirement benefits, benefits to dependent children, disability, and unemployment insurance. Keep in mind that around this time, individuals who reach the age of 65 could expect to live, on average of only another 12 years!
3. Over time, Social Security has shifted from serving as a supplemental retirement program to a significant source of retirement income for many households
In 2018, Social Security provides over 50% of retirement income for almost half of married older couples and 69% of older unmarried individuals. The average monthly Social Security benefit is about $1,413 per month or $17,000 a year and replaces less than 40% of past earnings for the average beneficiary.
4. Your social security benefit is your work record
To be eligible to receive Social Security benefits, you must have 40 quarters—or 10 years– of work-related income credits. The amount of earnings it takes to earn a credit may change each year.
In 2018, you must earn $1,320 in covered earnings to get one Social Security work credit and $5,280 to get the maximum four credits for the year (SSA.gov).
Your benefit is calculated the highest 35 years of wages, factoring in the present value of the average and a benefits formula to establish your primary insurance amount.
5. You are eligible to receive 100% of your Primary Insurance Amount if you wait to file at your Full Retirement Age which is your year of birth.
The earliest most people can file is age 62 which would reduce your permanent benefit by almost 30%; and if you wait to file after your Full Retirement Age, your benefit will increase by 8% every year that you do not file until age 70. So it pays to wait!
6. If you file early and continue working, some of your benefits may be held back subject to an earnings test.
If you earn more than $17,040 in 2018 and you file for benefits before your FRA, $1 of benefits will be held back for every $2 of earnings above that earnings threshold. In the year that you reach FRA, for every $3 you earn above $45,360, $1 of benefits will be held back.
The benefits held back will then be added to your benefit once you reach FRA. So individuals who are still working in their early 60’s may want to wait to file for benefits until they fully retire from work.
Note that if an individual reaches FRA and continues to work, the earnings test does not apply.
7. The break-even age for filing is not as far away as many people believe
JP Morgan research (illustrated in the chart below) estimates that the break-even age for an individual who turns 62 in 2018 and files in 2018 (in purple), and an individual who turns 62 in 2018 but files at his/her FRA at age 66 and 4 months (in gray) is age 76. In other words, both claimants will have received about the same amount of benefits by the time they reach age 76 even though they claimed at different ages; but over time, the person who waited until FRA to file will receive more benefits overall.
8. Social Security benefits may be taxable.
If you are receiving benefits and your “combined” income (combined income is defined as all income including tax-exempt income plus half of annual Social Security benefit) is $25,000-34,000 for single filers and $32,000-44,000 for joint filers, up to 50% of your Social Security benefit may be included in taxable income. If your combined income is more than $34,000 for single filers/$44,000 for joint filers, up to 85% of your benefit is taxable. The includable amount will be taxed at your current tax rate.
9. The Social Security Administration only sends out Social Security statements to individuals age 60 and over who have not yet begun receiving benefits.
Individuals who wish to receive an estimated benefit amount may create an account and receive an estimate. The SSA.gov website also provides Social Security benefits calculators as well as information on spousal and other benefits.
Social Security Basics – 3 Questions to Ask Before Taking Benefits
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One of the realities you will face upon retirement is navigating the world of Social Security. The whole time you earn income, you're paying into the system, and are entitled to receive some of that back when you retire. However, understanding Social Security basics, when to take benefits, and learning what happens if you don't follow correct procedure, can be a daunting task.
Roger Whitney, a Certified Financial Planner and Accredited Investment Fiduciary, writes about retirement issues on his blog, The Retirement Answer Man.
And offers some insight into what you need to know about Social Security in order to get it right for your situation.
1. Should You Delay Withdrawing SS Income?
“Many people think of Social Security in one dimension,” says Whitney. “They look at it in terms of whether to delay or not, and there are a lot of other dimensions to it.”
First of all, you can't decide when to take Social Security benefits if you don't know what's considered your “full” retirement age.
Your full retirement age is when you were born, so you should check with the Social Security Administration to see what your full retirement age will be. No matter what your full retirement age is, you can start collecting benefits at age 62.
However, if you start collecting your benefits “early,” before reaching your full retirement age, you will see a reduction in your monthly pay out.
You also need to consider what will happen if you decide to take your Social Security later, which means a higher pay out each month. “If you delay taking Social Security, you get a bump in payments each month,” Whitney says, “but that doesn't matter as much if you don't have the resources to put it off.”
In fact, if you aren't careful, and start taking Social Security at age 62 — while you are still earning money — you could be in trouble. “If you take Social Security early and earn too much, your monthly benefit is decreased,” Whitney explains. “Once you reach full retirement age, your benefit is recalculated to leave out the months when benefits were withheld.”
Whitney also counsels those approaching retirement to consider the implication involving Medicare premiums. “When you're taking Social Security, your Medicare premiums cannot increase more than your Social Security benefits. If you delay, though, Medicare premiums are subject to whatever the increase is. Once we're no longer in a low-rate environment, that can become problematic.”
2. What About Your Spouse?
Another important part of basic Social Security planning is figuring out how to coordinate benefits with your spouse's benefits. Whitney points out that there can be some strategy involved when deciding how to approach spousal benefits.
“You can either be receiving your own benefit, or receiving a spousal benefit,” says Whitney. “You can't take both at once, but you can switch off, depending on your situation.”
“If you are a high-income earner, take the spousal benefit at full retirement at the lower earner's rate,” suggests Whitney. “You have a choice, regardless of who's earning. You can delay taking your own until later, but start on your spousal benefit.”
That way, you're building up a monthly pay out, but still receiving some Social Security income. Whitney does point out that your spouse can't claim a spousal benefit until you retire. “If you want to delay taking your own benefit, but would it if your spouse could claim his or her benefit, you can file for benefits, and then suspend.”
He points out that many people don't realize they can suspend their benefits, or delay them until a later age. So, even though you have filed for benefits, you don't have to take them.
You can suspend, and your spouse can still get the spousal benefit, and you can benefit from an increased payout down the road. And, of course, you can switch things around, depending on your situation, figuring out a combination of regular and spousal Social Security benefits that works for your financial situation.
“When you're married, there are these other things that come into play,” says Whitney. “It makes sense to run different scenarios and see what combination of you and your spouse can come up with to maximize every dollar you get.”
3. Are Social Security Benefits Taxable?
Many people don't realize that Social Security benefits are taxable. These benefits are considered income, and you have to pay tax on them. If you know you'll have to take required minimum distributions (RMDs) from a retirement account later, you might want to consider the impact of your income from a retirement account on the Social Security benefits.
There can also be complications from taking benefits early, especially if you're still earning money. “If you take Social Security before full retirement age, the benefits are taxed, and your benefits can be decreased what you earn if you are over a certain income limit.”
Understanding the taxes involved is an important part of not being caught by surprise. “At first, it seems so simple,” says Whitney. “You get that statement in the mail each year, and they tell you about your benefit. But there's a lot more that goes into it.”
Social Security is Not Guaranteed
Of course, the other important thing to remember about Social Security is that it can change. Nothing is set in stone, especially since Congress can change the way the retirement age is figured, as well as cut benefits, or change other aspects of Social Security.
The most basic thing to remember about Social Security is that the reality is that you probably need to rely more on yourself than on this program.
While it is unly that Social Security will disappear entirely, you do need to be prepared for the fact that it might change — and that means you are responsible for your own retirement success.