Social Security and Retirement

Posted on July 22, 2020 by admin

Enjoying a comfortable retirement is everyone’s dream. Social Security’s purpose is to help you secure your retirement dream.

According to the Social Security Administration, 9 out of 10 people over age 65 receive Social Security benefits. On average, Social Security counts for about 39% of total income during retirement. Thus, as you can see, Social Security can’t cover all your financial needs and expenses during your retirement years.

Furthermore, Social Security rules and decisions are complex. And, it is a challenging task deciding when to claim your benefits. When claiming benefits, it’s important to determine if it’s more financially beneficial to have income sooner by claiming it at early retirement age or wait as long as possible to receive a bigger benefit.

Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families. Social Security replaces a percentage of a worker’s pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits. However, you can becoming eligible for Social Security benefits in retirement working for only 10 years. You only need to accumulate 40 “credits” during your working life, and you can collect up to four credits each year.

The Social Security system works like this: when you work, you pay taxes into Social Security. Social Security Administration (SSA) uses the tax money collected to pay benefits to:

People who have already retired.
People who are disabled.
Survivors of workers who have died.
Dependents of beneficiaries.

The money you pay in taxes isn’t held in a personal account (or lock box) for you to use when you get benefits. We use your taxes to pay people who are getting benefits right now. Any unused money goes to a Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

There are advantages and disadvantages to taking your benefit before your full retirement age. The advantage is that you collect benefits for a longer period of time. The disadvantage is your benefit will be reduced. Each person’s situation is different.

You can start receiving Social Security benefits as early as age 62 or any time after that. However, you are entitled to full benefits when you reach your full retirement age. Full retirement age refers to the age when a person can receive their Social Security benefits without any reduction, even if they are still working part or full time. In other words, you don’t actually need to stop working to get your full benefits. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.

If you start receiving benefits early, your benefits are reduced a percent for each month before your full retirement age. The longer you wait, the higher your monthly benefit will be, although it stops increasing at age 70. Your monthly benefits will be reduced permanently if you start them any time before your full retirement age.

Create a retirement plan

Planning is the key to creating your dream retirement. You’ll need to plan and save for years to achieve your retirement goals. While many factors affect retirement planning, it is important to understand what Social Security can mean to you and your family’s financial future.

On average, retirement beneficiaries receive 35% to 40% of their pre-retirement income from Social Security. As you make your retirement plan, knowing the approximate amount you will receive in Social Security benefits can help you determine when to claim benefits and how much other retirement income you’ll need to reach your goals.

Although the are thousands of options, you can consider the below three basic strategies for claiming Social Security benefits. When and how you file for Social Security can significantly impact your retirement income. You can take Social Security benefits between ages 62–70 but it makes a big difference in the amount of money you get. At 62, you receive 25% less than if you wait for full retirement age. Also, this would affect you down the road since your annual cost of living adjustments will be based on a smaller figure. For those who wait until they are 70, they would receive 32% more than at full retirement age (based on 66 years young).

Full Retirement Age: Full retirement age is the age when you will be able to collect your full retirement benefit amount. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. You can find your full retirement age by birth year in the full retirement age chart.
Early Retirement Age: You can get Social Security retirement benefits as early as age 62. However, your benefit is reduced if you start receiving benefits before your full retirement age. Understand how claiming retirement benefits early will affect your benefit amount.
Delayed Retirement Age: When you delay collecting benefits beyond your full retirement age, the amount of your retirement benefit will continue to increase up until age 70. There is no incentive to delay claiming after age 70.

Types of Social Security Benefits

Social Security offers three distinct types of benefits for retired workers and/or their spouses. In general, claiming strategies for couples will work to intentionally maximize each of the three types of benefits.

Retired Worker Benefit (which is based on his or her own earnings record) – Retirement benefits may be available as early as age 62. Your benefit amount is calculated based on a formula that incorporates your highest 35 years of earnings. If you claim benefits at Full Retirement Age, which varies from 66 to 67 based on your year of birth, you will receive your full benefit, which is known as your “Primary Insurance Amount” (PIA). If you claim early, you will receive a reduced benefit and if you delay, your benefit will be increased by 8% per year (pro-rated by months) of delay up to age 70.
Auxiliary Benefit (which provides a worker’s spouse or children with a benefit once the worker has claimed his own benefit) – The most common Auxiliary benefit for a married couple is the Spousal Benefit. Spousal benefits are generally available to the spouse of a worker who has been married to the worker for at least one year. The amount of the Spousal benefit is 50% of the worker’s Primary Insurance Amount if claimed at Full Retirement Age. Spousal benefits are reduced if claimed prior to Full Retirement Age, but do not increase if delayed past Full Retirement Age. When an individual is simultaneously entitled to both a Spousal benefit and a Retirement benefit, the Spousal benefit is reduced by the greater of the Retirement benefit or if a reduced Retirement Benefit is taken, the PIA.
Survivor Benefit (which provides a surviving spouse or certain other dependents with a benefit after a worker’s death) – The Survivor benefit is unique in that it is based both on when the deceased filed for benefits and when the Surviving spouse claims benefits. For example, if a higher wage earning spouse elects early, then dies, their spouse will be faced with a permanently reduced Survivor benefit, regardless of when they claim. If the higher wage earner delays claiming Retirement benefits, the available Survivor benefit is also increased.

Retirement Earnings Test for Social Security Benefits

You are able to work and receive Social Security retirement, spousal, or survivor’s benefits. However, you may be subject to a reduction in benefits if you haven’t attained full retirement age.

The Social Security Administration (SSA) will withhold benefits during the year in which you work assuming that you provide an estimate to the Social Security office about your expected earnings. If you do not report estimated earnings, the SSA will withhold your monthly payments in the following year until all benefits that should have been withheld are paid in full.

Social Security benefits can be withheld and taxed

Social security (SS) benefits are subject to taxes. For retirees who are still working, a part of their benefit is subject to taxation. The IRS adds these earnings to half of your social security benefits; if the amount exceeds the set income limit, then the benefits are taxed.

In 2020, you are allowed to earn up to $18,240 before benefits are withheld. For every $2 you earn above the exempt amount, $1 dollar will be withheld. This applies to all years leading up to the year in which you attain your full retirement age. During the year you attain full retirement age the exempt amount increases to $48,600 and for every $3 you earn over the exempt amount $1 will be withheld.

Even though your benefits are withheld they are not completely lost. Once you reach full retirement age, your benefits will be increased to account for the number of months that you did not receive a benefit. For example, if your full retirement age is 66 and you filed for benefits at 62 you received a reduction in benefits for taking benefits 48 months early. If 12 payments are withheld due to the earnings test, your benefits will be adjusted at your full retirement age and it will be as if you elected at age 63, or 36 months early.

What SSA considers income

If the retiree earns an income that exceeds the annual earnings limit, then the social security benefits are reduced until they attain the full retirement age. Note that investment income is not included in the annual taxable earnings. The only income involved comprises of wages or a salary earned from self-employment or when working for someone. For people who are self-employed only net earnings count. It is important to note that employee contributions to pension or retirement plans are included in gross wages. Income that is not counted as earnings include:

Government benefits,
Investment earnings,
Interest,
Pensions,
Annuities; and
Capital gains

are allowed to withdraw your Social Security benefits after enrolling.

If you start taking Social Security benefits before full retirement age, you can withdraw your benefits within the first year of claiming Social Security, no matter what your age. You must pay back any money you received; the Social Security Administration then treats it like you never enrolled, and your monthly check can continue to grow until you start taking benefits again.

Early retirement age to claim Social Security benefits is 62. Full retirement age is 66 for people born from 1943 to 1954 and gradually rises to age 67 for people born after that. You’ll earn an extra 2/3 of 1% for each month you delay after your birthday month, adding up to 8% for each full year you wait until age 70.

Every year you delay taking your Social Security benefits after age 62, you get a bump of 8% in your benefit until age 70.

Dependent children under the age of 18 or disabled before age 22 may be able to claim 50% of their living parent’s primary insurance amount (PIA} or 75% of their deceased parent’s PIA.

Social Security earnings are calculated the same way for most American workers The maximum Social Security benefit depends on the age you retire. For example, if you retire at full retirement age in 2020, your maximum benefit would be $3,011. However, if you retire at age 62 in 2020, your maximum benefit would be $2,265. If you retire at age 70 in 2020, your maximum benefit would be $3,790.

Social Security Problems

Social Security is facing funding challenges, largely because people are living longer. Currently, the average 65-year-old American is expected to live approximately 20 more years, so Social Security has to support people for longer.

Also, Social Security works because people currently working pay into the trust fund from which retirees are paid. Over time, the ratio of contributing workers relative to collecting retirees has shrunk. Because people are living longer and the ratio of people paying in has shrunk, the Social Security program will soon stop running a surplus, leading to potential problems down the road.

When you start collecting Social Security benefit checks may not make a significant difference with respect to the total benefits received. The system is designed for those who live average-length lives. This means that the total sum you collect will be roughly the same no matter when you start collecting benefits. Thus, if you delay receiving benefits until full retirement age, you will collect fewer benefit checks than someone who starts collecting smaller checks early.

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Social Security Age: Claim at 62 or Wait until 70

Posted on April 29, 2020 by admin

“The age you claim Social Security affects your lifetime income.”

Social Security Administration (SSA) payments are based on a calculation of a 35-year average of your lifetime earnings. Each year’s wages are adjusted for inflation before being averaged. If you worked longer than 35 years, the highest 35 years will be used. If you worked fewer than 35 years, SSA will average in zeros for the missing years.

When to collect benefits

According to the Center for Retirement Research at Boston College, 48% of women and 42% of men who claimed Social Security retirement benefits in 2013 did so as soon as they were eligible at age 62.

Yet, according to many financial advisers, baby boomers would be better off waiting until their seventieth (70th) birthday to start claiming Social Security, than if they take benefits in their 60s.

The logic behind this advice is driven by the 8% government-guaranteed increase in lifetime payments for each year baby boomers delay benefits past age 62, up to age 70.

But, baby boomers need to ask themselves what is the likelihood they will live long enough to benefit from the increased payments that start later in life at seventy years old versus collecting benefits at sixty-two years old.

When you decide to delay starting Social Security benefits, you’re betting that you will out-live an actuarially based mortality estimate.

Discount Rate Specification and the Social Security Claiming Decision from the Social Security Administration (SSA) study evaluates Social Security benefits not only as a function of the age of death, but also the probability of reaching that age. It provides that analysis over a range of discount rates.

A general conclusion of the study is that you shouldn’t wait to reach the age of 70 to initiate your Social Security benefits.

Social Security Benefit Breakeven

Before you start drawing on Social Security at age 62, it is recommended that you determine if it maximizes your total payments by calculating the breakeven. Additionally, it’s important that you balance the timing of those benefits with the rest of your retirement income plans. This choice of starting benefits isn’t reversible after 12 months.

Social Security breakeven age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).

Example: If you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

https://youtu.be/9e3M3kM9LFk

Early Benefits

Collecting early benefits may pay off despite the reduced monthly check. Since it is impossible to predict how long a baby boomer will live. If you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate.

Just be aware that you will receive a reduced benefit. If your full retirement age is 67 and you begin collecting Social Security at age 62, for example, your benefits are reduced by about 30 percent.

The rational advisors often hear from baby boomers who want to apply for Social Security early benefits at age 62 is that you’ve paid into the system for decades, and want to get something out of it before it goes bankrupt. It might feel like the best decision at the time, but down the road, it may prove the worst decision you ever made in your life.

The legitimate fear for planning purposes is not that you might die early and miss out on some money you could have had from social security, but rather that you will outlive your money. Think about waiting to collect Social Security as a form of longevity insurance—for you for sure, but also for your surviving spouse if you are the higher earner. In fact, a higher Social Security benefit is the best deal on longevity insurance you can get.

Benefits reduced if you’re work while receiving benefits

Working after you start receiving retirement benefits may affect your monthly benefit amount, depending on your age and how much you earn. If you are younger than your full retirement age, and your earnings exceed certain dollar amounts, some of your monthly benefit may be withheld.

Social Security will increase your monthly benefit after you reach full retirement age to account for the months of withheld benefits. When you reach your full retirement age, you can work and earn as much as you want and your benefit will not be affected.

Full Retirement Age

Optimum strategy for most baby boomers may or may not be to postpone Social Security benefits at least until you reach full retirement age, which is determined by the Social Security Administration.

Your full retirement age (FRA) is determined by the year you were born. The retirement age used to be 65 for everyone, but is gradually increasing to 67. As the full retirement age goes up, benefits claimed at earlier ages go down.

FRA is 67 for those born in 1960 or later. If you were born in 1937 or earlier, your full retirement age is 65. The FRA rises two months every year after that until it caps out at age 67.

However, collecting Social Security early will cost you. If your full retirement age is 67, your Social Security benefit is reduced by:

About 30 percent if you start collecting at 62.
About 25 percent if you start collecting at 63.
About 20 percent if you start collecting at 64.
About 13.3 percent if you start collecting at 65.
About 6.7 percent if you start collecting at 66.

If you expect to live beyond the breakeven age, it would be financially worth your while to delay drawing benefits. Yet, there’s not an age that’s appropriate for everyone. Baby boomers must consider their own financial need, health and post-retirement plans before deciding when to begin social security benefits.

There are many ways to collect Social Security benefits. You can collect benefits starting at age 62 or anytime up until you’re 70. Collecting early benefits at age 62 means smaller monthly payouts than waiting until full retirement age or waiting until seventy (70). It’s generally advisable to wait until full retirement age to start collecting Social Security benefits because the monthly benefit is higher than starting early benefits at age 62.

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