Social Security was never really intended to be the sole source of income for older Americans. Originally developed in the 1930s to supplement employer-sponsored plans and other personal savings, it’s now become the major stream of income for many retirees.
Ninety percent of those 65 and older receive benefits today. More than 64 million Americans will receive approximately $1 trillion in Social Security benefits this year.1 However, the gap between what we receive from Social Security and the income many of us will need in the years to come may be wide.
That’s why it’s crucial to consider how timing, income, and taxes impact your Social Security benefits. Understanding more about these factors can help you plan accordingly, avoid surprises, and prepare for what you may need to find other sources of income to fill any gaps.
When Should I Begin Taking Social Security?
Let’s start with your biggest priority—knowing the amount of your Social Security benefits. The age you start taking benefits may affect that amount more than you realize. To have a successful retirement, it’s important to think about how much income you’ll actually need versus when you should file. When you figure that out, choosing when to file becomes a whole lot easier.
Today, 67 is full retirement age for anyone born in 1960 and later. Your benefits grow by 8% every year that you delay claiming them. The longer you hold off, the greater your benefits will be.
Amount of Full Social Security
You can receive retirement benefits starting as early as age 62 or as late as age 70. In the example above, age 66½ is full retirement age. Taking full retirement before the age of 66½ could reduce your benefits by 25% – 30%. Conversely, deferring until age 70 could result in benefits that are 30% higher.
There are certainly pros and cons to taking them early or waiting. You can actually delay taking them all the way to age 70 before you stop seeing incremental increases in the benefit amount. If you can delay taking benefits until at least 70, you’ll have increased your annual Social Security income by 76% relative to someone who began taking benefits early at 62.
What Happens If I Continue To Work?
If you’re thinking about working while receiving Social Security benefits, your benefits may be reduced depending on when you file.
- Before full retirement age, benefits are reduced $1 for every $2 above $17,640 in earned income.
- At full retirement age, benefits are reduced $1 for every $3 above $46,920 in earned income.
- After full retirement age, there’s no limit on earnings. Withheld earnings are returned.
Suppose you’re 63 and have work earnings of $30,000. You’ve exceeded your limit by $12,360 ($30,000 in earnings minus $17,640). Because of that, $6,180 (which is 50% of the overage) is going to be subtracted from your Social Security benefit. If your Social Security benefit is supposed to be $775 a month, or $9,300 a year, your benefit is going to be reduced dramatically. Instead, the benefit amount you’ll receive is only about $3,120 ($9,300 minus $6,180), or $260 per month. In other words, your benefit is going to be reduced by $515 a month because you’ve chosen to continue working.
For those winding down work or working part-time, taking benefits may make sense. For those who are remaining at the same compensation level, you should consider delaying receiving benefits. The good news is you’d get that $515 a month back, but not until full retirement age. It would gradually be paid back after you reach full retirement age, even if you continue to work.
Will My Benefits Be Taxed?
Your benefits may be taxed. The question is if they are, at what percentage? That depends on what tax bracket you’re in. If your combined income is equal to or less than $25,000 if you file as an individual ($32,000 if married, filing jointly), then none of your Social Security benefit is taxable.
If it’s more than $25,000 and equal to or less than $34,000 ($32,000 and $44,000 if married, filing jointly), up to 50% is taxable. If your combined income is more than $34,000 ($44,000 if married, filing jointly), it goes up to 85% being subject to taxation.
Speak with your tax advisor for guidance concerning the calculation of taxes.
Who Can Help Me?
It would be easy if there was a simple manual for collecting Social Security benefits, a magic age, or exact income amount that worked for everyone. But, that’s not the case. Your situation and needs are unique. So, too, is the amount you’ll need to generate in order to live the way you want to in retirement. Social Security alone most likely won’t get you there. With potential funding issues down the road, it might get even tougher.
So, work with your financial advisor and tax advisor to put together your own personal plan for yourself and your loved ones. Visit the Social Security Administration website (ssa.gov) to access your Social Security statement or call 800-772-1213. Educating yourself today on the ins and outs of Social Security and its place in your retirement can help you make the most of your tomorrow.
1Social Security Basic Facts, ssa.gov, 2019
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