One of the difficulties in decisions around retirement, is most people only get one chance. Making the most of that chance involves essential decisions around when and how you choose to take Social Security. Maximizing your benefit has huge impacts to you retiring well. So this is not a subject that should be independent of your complete retirement financial plan. Carefully analyzing the best options could mean hundreds of thousands dollar differences for you throughout retirement. From tax impacts to earnings limits, in this episode we answered 8 of the top questions we hear about social security in less than 30 minutes. Our hope is that you’ll have a desire to dig deeper in your own analysis, to assure you are making the best decisions for you and your family.
Who is eligible for Social Security?
The social security program was created in 1935 to promote the economic security of the American people. It takes 10 years of work history for someone to become eligible for the benefits. The system works on credits and you need 40 credits over your lifetime (earn up to 4 a year). If you’re married, you’re eligible for spousal benefits especially if you don’t have as much of a robust work history. There are also disability and widower benefits. If you land in the latter category you should work with a CFP® to help you understand your best filing options. Social security benefits are calculated by taking your highest 35 years of earnings and your benefits are calculated by these.
When should I claim Social Security?
The big question that everyone wants to know is, when should I claim social security benefits? The trick is, the answer is different for everyone. You can start claiming social security at age 62, which 34% of people do, or you could wait until age 70, which only 4% of claimers do. Full retirement age ranges from ages 65-67. Claiming your benefit before your full retirement age reduces your benefits by 5-6% annually. So claiming at age 62 could be a reduction of 25%. On the flip side, every year you wait to claim social security after full retirement age, your benefit grows by 8%. When deciding when to claim your benefit, health and life expectancy also should play a role in your decision. The decision about when to claim is an important one that can have significant financial ramifications.
Married couples have more benefit strategies to consider
A married couple has a lot to consider when it comes to thinking about filing for social security benefits. A spouse that hasn’t worked as much as the other is entitled to 50% of the higher earner’s social security benefit. For those born before January 1, 1954, the restricted application benefit is still an option thru 2019. Where one spouse, can take a “restricted application” benefit equal to half their spouses monthly benefit while still delaying their own benefit until 70. If one spouse passes early then the other spouse is entitled to the higher earner’s benefit amount. There are 3 main options for couples to consider: both spouses delaying, the higher earner delaying (keep in mind the survivor benefit), or both taking early benefits. With singles, it is much easier to decide when to get your benefits, but still should be weighed with other income sources and current market environments.
How Will Social Security impact my tax bill?
Understanding how Social Security influences your tax situation creates opportunities. Because of the way Social Security is taxed, your income enters an effective tax bubble that can be as high as 46%. This is because more of your Social Security becomes taxable (up to 85%) at certain income thresholds, described here on ssa.gov. In 2018, if more than $34k as an individual, or $44k as a joint filer, then 85% of your benefit will be taxable. Less than those income levels, means a lower amount would be included. It’s most helpful to understand what future years of income will look like, as you can take advantage of tax brackets in certain years. Working with a CFP® who explains tax planning could be extra beneficial down the road. We’ve provided some examples of this in previous articles mentioned below.
When will Social Security run out?
A big influence on why people take Social Security early is the fear that it won’t be there in the years to come. We’ve heard for years that the social security fund will eventually run dry. While it’s true that the worker to retiree ratio is getting smaller, we shouldn’t have to worry about the program completely running dry in our lifetimes. Current projections show that social security will not be able to fully fund retirees beginning between 2033-2035. But, the system won’t run out completely and it could fund 70% if nothing is done to solve the problem. A few of the potential solutions include:
- Pushing the claiming age out (last extension in 1983 only affected those 45 and younger at the time)
- Increasing Social Security taxes through payroll deductions
- Benefit Cuts to certain income levels
Listen in to hear the rest of the questions chocked full of useful information to help you uncover the mysteries behind the social security system.
Outline of This Episode
- [2:07] What is social security?
- [3:07] Who is eligible?
- [4:07] How is it calculated?
- [7:00] When should I claim social security?
- [13:05] Married couples have more social security strategies to consider than singles
- [17:37] What about widows and divorcees?
- [19:07] How is social security taxed?
- [21:49] When will social security run out?
Resources & People Mentioned
- How to Avoid the Social Security Tax Bubble
- Will Social Security Run Out? Not If These Two Adjustments are made
- What You Need To Know About “File and Suspend” Changes
- Determining the Taxable Amount of Your Social Security
- When Should I Take Social Security?
Connect With Chad and Mike
- https://www.financialsymmetry.com/podcast-archive/
- Connect on Twitter @csmithraleigh@TeamFSINC
- Follow Financial Symmetry on Facebook
