Retirees can count on Social Security as a reliable source of income in their golden years. However, many Americans are unfamiliar with the system.
Some 28% got a D and another 17% got a failing grade on a MassMutual quiz on basic knowledge of Social Security retirement benefits for soon-to-be retirees (ages 55 to 65). Fewer than 3% of students were able to correctly answer all 12 True/False questions.
In order to maximize your social security benefits, it’s important to know all the ins and outs of it. Here are nine things you may not have known about Social Security.
Social Security Isn’t Going To Disappear
Many Americans are concerned that they will be unable to collect Social Security benefits when they reach retirement age because the Trust Fund reserves are expected to be depleted by 2035.
As a CPA, CFP, and director of financial planning for Taylor Hoffman Wealth Management, Taylor Jessee explains, “This fear causes many people—to their detriment, most likely—to start collecting benefits as soon as they are able so they can get it while it lasts.”
However, payroll taxes, which have been collected for decades, provide the bulk of the funding for Social Security.
Social Security is not going away any time soon, he adds.
Social Security Isn’t Enough To Live Off in Retirement
On Social Security, most people are unable to support themselves. 30 percent to 40 percent of your pre-retirement income on average will be provided by it.
The benefits of Social Security are still valuable, so Edward Jones financial advisor Jackie King advises, “you’ll want to do everything you can to maximize them.
The more money you put into a retirement plan like a 401(k) or IRA, the more options you’ll have when it comes to managing your retirement costs.
“So try to contribute as much money as you can,” King advised.
Benefits Are Based on Your Highest 35 Years of Earnings
Were you afraid your Social Security benefits would be affected by working for several years on less money?
For the most part, this means that your benefit is based on your 35 highest-earning years and the age at which you begin receiving Social Security benefits, which is a welcome development.
Inquiring minds can sign up for a yearly statement from the Social Security Administration that provides an updated estimate of how much they can expect to receive.
Your Personal Situation Matters More Than Your Age
Your Social Security benefits will increase the longer you wait to claim them.
If you’re over the age of 62, you can take advantage of the reduced benefit. Full benefits are available to those who wait until they reach their full retirement age. Your full benefit will increase by 132 percent if you wait until you are 70 years old.
There are times when waiting to claim your benefits is not the best strategy.
The founder of Assisted Living Center, Stephan Baldwin, said, “Your needs come first.”
For example, if your spouse died, filing for survivor benefits rather than waiting for full benefits may make more sense, he said. As a result, make sure to weigh all of your options.
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You Can Claim Your Ex’s Benefits
There may be spousal benefits available even if the couple is no longer together. To be eligible, a couple must have been married for at least ten years, be at least 62 years old, and be unable to remarry. Baldwin also noted that if your ex-partner has died, you can claim 100% of the survivor’s benefit.
If Your Spouse Dies, You Get to Keep the Larger Benefit for Yourself.
A spouse’s smaller Social Security benefit is eliminated if both spouses are receiving benefits. In the event of a divorce, the surviving spouse is entitled to the larger benefit.
Jeremy Keil, a retirement-focused financial planner with Keil Financial Partners and host of the Retirement Revealed blog and podcast, says couples should focus on increasing the higher benefit. This is the one who will be there for the widow(er) the longest.”
Some of Your Benefits May Be Withheld
Some of your Social Security benefits may be withheld if you apply for benefits before reaching full retirement age, are still working, and earn more than the yearly earnings cap.
For 2022, the limit is $19,560, and if you earn more than that, you’ll lose $1 in benefits for every $2.
However, the advantage is not lost. Until you reach full retirement age, “you won’t receive it,” Kell said. “However, once you do, Social Security will recalculate and give you credit for those dollars.”
You Can Undo a Social Security Benefits Claim Decision
To get a second chance at getting your benefits, you can withdraw your application once for a one-time do-over with the Social Security Administration.
A CFA and chief investment officer for HCR Wealth Advisors, Jordan Kahn, says there are many reasons why someone may regret taking Social Security.
You could, for example, take on a part-time job and no longer need the additional income. Perhaps you didn’t realize how much more money you’d get if you waited a few more years.
“A person can stop receiving benefits and move forward as if they never claimed them if they make this determination within 12 months of filing their initial application,” Khan said.
However, any benefits you received during that time would have to be repaid.
You May Have To Pay Taxes on Social Security Benefits
Taxes on Social Security benefits are paid by many Americans. Your total income determines how much you’ll be required to pay.
“It’s not like you have to make a lot of money to be taxed,” Kahn said.
Up to half of your Social Security benefits may be subject to income tax if you are a single filer earning between $25,000 and $34,000. Up to 85% of your benefits may be taxed if you make more than $34,000 a year.
If your combined income with your spouse is between $32,000 and $44,000, you and your spouse may be required to pay income tax on up to 50% of your benefits as joint filers. Your benefits may be subject to tax if your combined income exceeds $44,000.
According to Kahn, 12 states levy income taxes on Social Security benefits, including Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, and Nebraska; New Mexico; Rhode Island; Utah; Vermont; and West Virginia; in addition to federal income tax.
Consider consulting a tax expert if you’re concerned about your tax bill in retirement and are looking for ways to reduce your taxable income.