Since 1940, when the first Social Security checks were delivered, millions of Americans have come to rely on this government program to fund their retirement years—at least in part. Over the years, the rules about when you may start drawing on Social Security, and how much you will receive, have become more complex, leaving many people a little befuddled when they approach retirement. Here are the top six things about this long-time and much-loved government benefit that may clear up some of the confusion.
1. If you want to receive your full Social Security benefit, you must wait until you reach your “full retirement age.”
The full retirement age used to be 65 for everyone. Now the age at which you can start receiving full Social Security benefits depends on when you were born. For people whose birth year is between 1943 and 1954, full retirement age is 66. If you were born from 1955 to 1959, it’s somewhere between ages 66 and 67. If your birth year is 1960 or later, your full retirement age is 67 on the nose. You can view the complete chart of full retirement ages on the Social Security website.
2. You can start taking Social Security at age 62, but your payment will be smaller (for the rest of your life) than it would be if you waited a little longer.
It’s true, you can collect Social Security as early as 62, but if you choose early retirement, your benefit is permanently reduced by a fixed percentage for every month that you claim prior to your full retirement age. An online Social Security Administration calculator (click here to view) can help you determine what that reduction will be for your particular situation.
However, sometimes there are good reasons for taking your Social Security benefits early, such as:
- You need your Social Security income to make ends meet
- Your life expectancy is shorter than average due to poor health
- You earn less than your spouse
3. For every year you wait past your full retirement age, your Social Security payment will increase by 8% a year up until age 70 (there is no increase past age 70).
That income boost may be worth waiting for, especially if you’re in good health, and if you can live off alternative means of income for a while longer. Some reasons to hold off on collecting your Social Security may include:
- You are still working
- You earn more than your spouse
- Your tax situation
Sometimes overlooked but important to consider are the tax implications of taking your Social Security benefits. You must pay taxes on your Social Security benefits if:
- You file a federal tax return as an individual and your income exceeds $25,000.
- You file a joint return and you and your spouse have income of more than $32,000.
So whether you are working or not, the income you may be earning ( including adjusted gross income and tax-exempt interest income) will factor into when it may make sense for you to take your Social Security benefits. Typically, according to the Social Security Administration, no one pays taxes on more than 85 percent of their Social Security benefits.
4. If you’re married, consider your spouse’s circumstances when deciding when to start taking your own Social Security.
If you and your spouse are both working and healthy, it may be smarter for both of you to delay taking your Social Security benefits until age 70 and enjoy that higher payout. On the other hand, if one of you earns considerably less than the other, that lower wage earner may want to file at age 62, while the higher wage-earning spouse waits until age 70. Sometimes this scenario is referred to as the 62/70 strategy and may maximize Social Security income for the household, depending on your specific circumstances. Given the complexities of spousal benefits, it would be wise to speak with your financial advisor to help you decide the best plan of action for your family.
5. If you claim Social Security benefits prior to full retirement age and you’re still working, your payout will be reduced by $1 for every $2 you earn above the annual limit ($16,920 in 2017).
However, you will receive a higher benefit when you reach full retirement age. After that, your Social Security income will not be reduced, no matter how much you earn.
6. If you are receiving benefits and you change your mind about when they should start, you have a year to withdraw your Social Security claim and re-apply at a future date.
Of course, you will need to repay all the benefits you received to date. After 12 months, you will be locked into the original claim that you filed.
Rounding Out Your Retirement Income
The easiest way to estimate your Social Security income is to use the “Retirement Estimator” on the Social Security website. As you will likely learn, your expected benefit will probably fall short of the amount of income you will need in your retirement. It usually takes some combination of Social Security, your own investments, and work-related retirement plans to support your desired lifestyle after you’ve stopped working. Jemma Financial’s knowledgeable advisors can help you make the best decisions regarding your Social Security benefits—and assist you in overall planning for a successful retirement.
Securities offered through M.S. Howells & Co., Member FINRA/SIPC. Advisory services offered through Jemma Investment Advisors, LLC, a registered investment advisor. M.S. Howells & Co. and Jemma Investment Advisors, LLC are not affiliated.