5 Things You Probably Don’t Know About Social Security
July 7, 2021
If you’re an American who earns a paycheck, you likely pay into the Social Security system. And when you do so for at least 40 quarters (or a total of 10 years), you’re eligible to receive lifetime Social Security benefits! What you might not know: There’s more than one way to take those benefits, and your decision about how and when to claim them will affect how much you get back.
Naturally, after contributing hard-earned income into the system for all those years, you’ll want to receive the maximum amount possible—right? Yet many people don’t realize the many considerations involved in getting the most out of their benefits.
“Most people rush into the decision of when to take Social Security,” says Matt Nadeau, CFA, wealth advisor at Piershale Financial Group in Barrington, Illinois. “But it is a critical decision, because your timing may make a difference worth hundreds of thousands of dollars. People need to carefully plan for their Social Security benefits based on how they will fit in with other aspects of their retirement and income.”
Below, five important considerations that may help you make your plan.
The longer you wait, the more money you’ll get.
You become eligible to take Social Security benefits at 62, but if you claim them then—or anytime before you reach full retirement age (66 or 67, depending on the year you were born)—you are accepting a reduced monthly payment. The penalty, or reduction amount, for taking these “early benefits” depends on your age, your benefit amount, and how much before your full retirement age you begin taking them.
The Social Security Administration offers a chart detailing how much your payment will be reduced by starting benefits early. For instance, someone whose benefit at her full retirement age of 66 would be $1,000 monthly would receive just $750 per month at 62.
Waiting until your full retirement age means you’ll get your full benefit. But holding off even longer makes you eligible for delayed retirement credits—and these credits increase your monthly Social Security payment by 8% each year after full retirement age, up to age 70. After that, these credits stop accruing, so there’s no upside to waiting beyond 70 to start taking Social Security.
But remember: It’s about more than the monthly check.
Sure, you’ll get a bigger Social Security check every month if you wait longer to receive it. But sometimes, you have no choice but to start drawing Social Security. If that’s the case for you, while your benefits may be smaller, you may end up collecting them over a longer period of time. Those extra years of benefits may be more valuable to you than waiting. The bottom line: The right answer for someone else may not be the right answer for you.
Many financial professionals use software programs that can calculate your Social Security benefits at each age, integrated with other expected income, to help you make an informed decision. If you’re making this determination on your own, consider such factors as your life expectancy, whether you plan to continue working part-time, whether you’ll have other income if you choose to delay Social Security benefits, and whether you might qualify for benefits on someone else’s record (such as your spouse’s).
You only have a year to change your mind about when to take benefits.
One reason this decision is so important: The window of time for do-overs is small.
Once you’ve decided to take your Social Security benefits, you have one year to change your mind after you receive your first Social Security check. “If you get, say, three months of benefits and decide you’d rather wait until later, you can repay all the money you’ve received during those first three months and adjust your benefit timing,” says Steve Jablonski, CFP, financial advisor at Informed Family Financial Services in Norristown, Pennsylvania. “But you have to do it within the first 365 days. After that, there’s no turning back.”
If you are or have been married, you may be able to claim your spouse’s benefits.
Married couples qualify for spousal benefits, which pay a smaller payment to the lower-earning spouse based on the higher earning worker’s record. Let’s say both you and your spouse have enough work experience to qualify for Social Security. Your benefit is less than half of your spouse’s expected benefit. That means you can opt to take half of the higher benefit, Jablonski says.
Let’s take our example even further with some numbers. This means if a husband has a $3,000 monthly benefit and his wife has a $1,000 monthly benefit, she can choose to take $1,500 as a combination of the two benefits, Jablonski says.
Even if you are divorced, but you were married for at least 10 years or have not remarried before age 60, you may be eligible to claim your ex-spouse’s benefit in the same way as if you were still married, Jablonski says. Longtime widows or widowers who have not remarried or remarry after age 60 are also eligible to take the full, larger benefit of a deceased spouse rather than the smaller one they might receive based on their own earnings.
However, when a spouse dies, “the lower benefit goes away,” Jablonski says. So if the couple in the example above was expecting to live on $4,500 per month throughout retirement (his $3,000 benefit plus her $1,500 benefit), the budget would change significantly if one of them passed away. (Having life insurance protection may be helpful in this scenario.) The $1,500 benefit would be lost and the remaining spouse would get the $3,000 benefit.
Social Security income is taxed differently from other income.
Depending on total income, you may pay federal income taxes on your Social Security benefits. But at most, 85% of your Social Security benefit will be taxed. The Social Security Administration offers detailed guidelines describing how much will be taxed under specific circumstances. In addition, many states either do not tax or offer tax exemptions for Social Security income. Figuring out in advance whether and how much your benefits will be taxed could be helpful in figuring out other aspects of retirement, including where to live. Consulting a tax professional for advice may be a good move.
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