Social Security is a major source of income for most retirees. On average, about 40% of their monthly income. So, it’s important to understand the rules and plan accordingly. Here are the basics:
- Choices. There are 3 different time periods in which Social Security can be claimed: (1) “Early”; (2) “On Time”; and (3) “Late”. These threshold categories depend on your date of birth. For most baby boomers
(born between 1943-1954), the earliest available age to file is 62 years; “on time”, or “full retirement”, would be 66 years; and “late” meaning the maximum age benefit would be 70 years.
- Wait – if you can. Your choice of when to claim Social Security can have a dramatic effect on your income received over the remainder of your life. Simply stated, it usually pays to wait, if you can. Your monthly benefit increases each year, after age 62, by about 8%, until age 70. So, if you start taking benefits at age 62, your payment will be about 25% lower than if you had waited until age 70. Everyone’s situation is different, and there may be some good reasons for opting in sooner, rather than later: health concerns, a family history of a shorter life expectancy, a belief that SSA will go broke soon, or you just need the money. In general, delaying and locking into a higher benefit appears to be the better strategy – statistically speaking. About one-third of all 65-year-olds are expected to live to be at least 90. And, of course, the greatest retirement risk is outliving your money.
- Tax Implications. As with all financial decisions, taxes must always be a consideration, particularly if you plan on continuing to work. While working, everyone’s Social Security is potentially taxable. The more you earn—the more your Social Security benefits will be taxed. However, if you are married, you will pay no tax on your Social Security for wages up to $32,000 per year. Annual income over $32,000 will be subject to a tax of 50% of their Social Security. If you make $44,000 or more, 85% of your Social Security will be taxed.
- Inflation. As evidenced this year, the government is not required to annually award a cost of living adjustment (COLA). Worse yet, many financial consultants consider the present 2% COLA to be understated. Either way, Social Security beneficiaries had their benefits cut this year. One more reason to delay claiming your benefit for as long as possible.
- Professional Advice. Navigating through the Social Security system is a complex business. Even more so now, with recent changes. If you’re nearing retirement, seek out professional advice from an accountant or personal financial specialist. If nothing else, go to the Social Security website ssa.gov to learn more, and use the online retirement estimator to see your projected benefit depending on when you plan to claim.