Social security benefits form an important part of most people’s retirement plans, so you want to get the most out of the program. The key to doing this is to work hard to increase your income while you are still employed and then choose when to reap benefits. Understanding how your decision to start Social Security will affect your long-term finances and others who may claim Social Security on your work record is essential to maximizing your benefits and avoiding costly mistakes.
Consider the following three questions and make sure you are comfortable with the answers before applying for Social Security benefits. If you are not, you may be better off applying for Social Security at another time.
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1. How does my age affect my benefit from Social Security?
You will be eligible for Social Security as soon as you turn 62, and many people cannot wait until they reach this age to sign up. But your benefits start with this early on permanently reducing the size of your controls. If you live in your late ’80s or later, there’s a good chance that early on you will lose tens of thousands or hundreds of thousands of dollars in benefits compared to delaying benefits until your checks are greater.
If you want the standard benefit to which you are entitled based on your work history, you will have to wait to claim benefits until your full retirement age (FRA). This is 66 or 67, depending on your year of birth. Each month, you claim benefits before this age reduces your checks, and if you start right away at 62, you only get 70% of your planned benefit per check if you are FRA 67, or 75% if you are FRA 66. benefits increase the size of your checks each month until you reach the maximum benefit at 70. This is 124% of your planned benefit per check if your FRA is 67, or 132% if your FRA is 66.
Deferred benefits make the most sense when you think you will live long and are able to finance your pension on your own until your FRA or beyond. But if you have a terminal illness when you need Social Security to cover your bills, it may be the smarter play.
2. Will I lose any of my benefits back to the government?
There are two key ways in which you can lose some of your benefits back to the government: taxes and the social security benefits test. If you claim Social Security and your annual income is more than a certain amount, which depends on your tax filing status, you may owe taxes up to 85% of your benefits. If you are interested in learning more about how the government is taxing the benefits of Social Security, here is a brief overview. Note this formula only applies to the federal government. Some state governments also imply benefits taxes for social security, but each has its own rules.
You may not be able to avoid Social Security benefit taxes in full, but if you are still working and your income pushes you into a higher tax bracket, consider waiting until you are fully retired and your income is lower. This can help you avoid benefit taxes or reduce the amount of your benefits that the government can tax.
The other way you can lose benefits is if you are under your FRA and still working. In that case, your income will be subject to the Social Security test. If you will be under your FRA throughout 2020, the government will charge $ 1 for every $ 2 you earn more than $ 18,240. If you reach your FRA in 2020, it will take $ 1 for every $ 3 you earn more than $ 48,600 if you reach this amount for your birthday.
This money is not lost forever. When you reach your FRA, the government will recalculate your advantage to record the amount it has withheld, so that your controls will be increased to this point. But instead of dealing with all of this, you may prefer to delay social security until you are retired or until you reach your FRA and are eligible for even greater controls.
3. How will my decision affect my family members?
You are not always the only one claiming Social Security on your work record. A stay-at-home couple like your minor child may also qualify for benefits based on your work history, once you start claiming. But the date you decide to start Social Security may affect its benefits as your own. For example, starting social security under your FRA permanently diminishes the benefit to your partner and your own.
If there are others in your household who can claim Social Security benefits on your work record, talk to them about your decision as well and make sure you are comfortable with it all. Coordinating benefits with your family can help you maximize your household benefits, and that can lead to more money in the long run.
Thinking about the three questions above is a great starting point when deciding when to take care of Social Security. If you are not yet ready to claim, you can always set a tentative start date and check your decision as it gets closer.
