Your Social Security benefit is one of the most valuable pieces of your retirement plan.
For most people, it’s a significant portion of the income they’ll depend on when their paycheck goes away. Many couldn’t afford to retire without it.
And yet, retirees often overlook or misunderstand the various rules that can limit their benefits and the claiming strategies that could help them maximize their payments.
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This is, in part, because those rules keep changing. We think of Social Security as this sacred thing that has been around for generations. And it is. But it has evolved through the years — and continues to evolve.
If you’re basing your Social Security decisions on something your parents did, or what your neighbor says worked for her, or what you read a couple of years ago, you could be shortchanging yourself. Here are five wise decisions you can make about Social Security right now:
1. Make informed choices.
People are sometimes so eager to collect their Social Security benefits, they ignore the ripple effects of their filing decisions. Here are just a few of the things you should look at before you leap:
- Americans are living longer. Your retirement could last for 30 years or more. If you start your benefits before your full retirement age (which for people considering retirement now ranges from 66 to 67, depending on your birth year), your payments will be permanently reduced. While you can start benefits early, at age 62, if you can wait until your full retirement age — or longer — your check will be higher. You’ll receive an additional 8% for every year you delay past your full retirement age until you’re 70. Where else can you receive a such a high guaranteed return?
- Your claiming choice could have tax implications. Many people don’t know Social Security benefits are taxable. (Benefits were excluded from federal income taxes until 1984.) But if you file a joint return, and you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. “Combined income” is your adjusted gross income plus non-taxable interest, plus half of your Social Security benefits. If your combined income is more than $44,000, up to 85% of your benefits may be taxable. (The thresholds are slightly lower for individual filers.)
- Are you really ready to stop working? There is a threshold, too, for how much you can continue to earn if you take Social Security before your full retirement age. If you work and make more than the yearly earnings limit — $16,920 in 2017 — the Social Security Administration will withhold $1 in benefits for every $2 you earn over the limit.
2. Get personalized advice.
You can’t base your Social Security decisions on what others have done. The Social Security Administration’s website has lots of good information, and there are many books and Internet guides out there. But much of what you’ll hear and see may be dated. And the accurate advice is usually so generic, it serves just as a starting point. A financial adviser can run different scenarios based on your unique circumstances, go over the pros and cons of each possibility, and then help you choose the route that offers the maximum income for you and your spouse.
3. Don’t look at Social Security in a vacuum.
People tend to focus almost completely on age when they’re deciding when to start their benefits. Instead, you should look at how Social Security fits into your overall retirement plan. For example, if you have enough money coming from a pension or other sources, you might want to delay taking your benefits for a few years in order to receive more when you’re older. If you’ll be taking money from a qualified retirement account — such as a 401(k) of 401(b) plan — you should consider how those distributions, combined with other income streams, could affect your tax bracket. If you’re single and in poor health and want to invest money now to leave a legacy for loved ones or charity, you may want to take your benefits sooner. Social Security is just one piece of a complicated puzzle that requires comprehensive planning.
4. Look for hidden money.
If you’ve never been married and you don’t have any dependents, filing for Social Security can be fairly straightforward. For those who are or were married, however, it gets a lot more complicated. There are spousal and survivor benefits, and if you’re divorced but your marriage lasted 10 years or longer, you may be able to receive benefits on your ex-spouse's record. Some strategies involve turning on one benefit and then switching to another down the road. And as helpful as the folks at your local Social Security Administration office may be, they aren’t going to walk you through the possibilities or alert you when you have an opportunity to increase your payments. That burden is on you — and you could miss out on hundreds or even thousands of dollars if you let those opportunities pass.
5. Get your plan in place right now.
Often after one of our seminars, a couple in their late 50s or early 60s will take my card, and they’ll promise to call when they’re “ready to retire.” But I’ve found that the people who are most prepared for retirement start planning long before they stop working. Often, we can find money you’re missing out on right now, and you could retire sooner than you thought. And we can build a plan that changes if your life changes — in case a medical issue comes up, or there’s a job layoff, or you get a buyout offer. If you have a plan with options, you can address those issues calmly instead of panicking or passing up an unexpected opportunity.
Retirement planning — especially income planning — is dramatically different today than it was for generations past. Many Baby Boomers don’t have pensions to rely on, and they’re doing their best to do it themselves with 401(k)s and similar investment plans.
Maximizing your Social Security benefits is more crucial now than ever. A financial professional who specializes in retirement income strategies can help you make the right choices so you get everything you have coming to you.
- Americans are living longer. Your retirement could last for 30 years or more. If you start your benefits before your full retirement age (which for people considering retirement now ranges from 66 to 67, depending on your birth year), your payments will be permanently reduced. While you can start benefits early, at age 62, if you can wait until your full retirement age — or longer — your check will be higher. You’ll receive an additional 8% for every year you delay past your full retirement age until you’re 70. Where else can you receive a such a high guaranteed return?
- Your claiming choice could have tax implications. Many people don’t know Social Security benefits are taxable. (Benefits were excluded from federal income taxes until 1984.) But if you file a joint return, and you and your spouse have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. “Combined income” is your adjusted gross income plus non-taxable interest, plus half of your Social Security benefits. If your combined income is more than $44,000, up to 85% of your benefits may be taxable. (The thresholds are slightly lower for individual filers.)
- Are you really ready to stop working? There is a threshold, too, for how much you can continue to earn if you take Social Security before your full retirement age. If you work and make more than the yearly earnings limit — $16,920 in 2017 — the Social Secuity Administration will withhold $1 in benefits for every $2 you earn over the limit.
Kim Franke-Folstad contributed to this article.
Ensign Wealth Management is not affiliated with the U.S. government or any governmental agency. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Ensign Wealth Management are not affiliated companies.
Disclaimer
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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