5 things to know about Social Security benefits
For most Americans, Social Security will provide a significant portion of their income in retirement. One of the biggest mistakes today’s retirees can make is to underestimate how important Social Security is to their retirement income strategies.
Consider the following:
• Age: The earliest age at which you can file for Social Security (unless you qualify for disability) is 62, but you won’t be able to collect your full benefit then.
Instead, the Social Security Administration reduces your benefits by 25 percent if your full retirement age is 66 or 30 percent if it’s 67. That reduction in benefits will be permanent.
You will be eligible to collect 100 percent of your personal benefit at your full retirement age, which is age 66 for anyone born between 1943 and 1954, 66 plus a two-month delay for those born between 1955 and 1960, and age 67 for anyone born after 1960.
If you can afford to wait until your full retirement age, you’ll be eligible for 100 percent of your Social Security benefit.
• Social Security strategy: Many retirees struggle with the question, “When is the right time to file for benefits?”
Unfortunately, there’s no simple answer because the details of your personal situation matter a great deal. While there is no perfect time to file for benefits, choosing the right claiming strategy can drastically affect how much you are able to collect over your lifetime.
If either you or your spouse expect to live past the age of 80, you’re generally better off waiting to claim as long as possible to receive a larger benefit. However, if your health isn’t good or you need the income, you might want to consider claiming Social Security benefits early.
• Social Security benefits are taxable: Unfortunately, retirement doesn’t mean retiring your worries about taxes.
If you collect substantial income from sources like wages, investment income, rental properties, or any source that is reported on your tax return, you will very likely owe taxes on your Social Security benefits.
The tax rate you’ll pay depends entirely on your overall income bracket since Social Security benefits are treated like ordinary income. You won’t ever have to pay taxes on more than 85 percent of your Social Security benefits.
Please keep in mind that taxes are just one piece of your overall financial picture and it’s important not to let them overshadow other important issues.
• Spousal and survivor benefits: Married couples need to think about how their Social Security claiming strategies will affect their spouse’s benefits and income in retirement.
This is especially important when one spouse is significantly older than the other or earned more during a career. Your spouse’s benefits are based on your personal benefit, which means that the age at which you file for benefits will have a major impact on what your husband or wife is eligible to collect as a spouse.
• Advanced Filing Strategies: If you are married, there are some advanced claiming strategies that you and your spouse may be able to use to increase your lifetime benefits.
“File and suspend” is a very popular strategy in which the higher earning spouse files for benefits at his or her full retirement age, and then suspends the claim.
Filing for benefits allows the spouse to collect spousal benefits, while the higher wage earner’s benefits continue to accumulate credits.
The “spousal benefit change-up” is a scenario in which the lower earner claims benefits at full retirement age, allowing the higher earner to claim a spousal benefit at full retirement age while his or her personal benefit continues to accrue.
At age 70, the higher earner switches to collecting his or her larger personal benefit.
Every strategy will not work for every retiree, which is why it’s so important to take the time to analyze your needs and test possible scenarios.
Jeff Hayes, Navigator Planning Group, is a registered representative of SII Investments and can be reached at (920) 406-8500 or jeff@navigatorpg.com. Visit us at Navigatorpg.com.