The subject of Social Security is full of misinformation, which can prevent people from enjoying the full amount of money they are entitled to collect. This article provides clarity on the subject, so that individuals can maximize their retirement income and have financial security in their golden years.
- The longer a person waits (up to age 70) to take benefits, the higher those benefits will be.
- For those who work while receiving Social Security benefits, their benefits will be reduced, but they will be credited later.
- A portion of a person’s Social Security benefits may be taxable if they earn more than a certain limit.
Start collecting retirement benefits as late as possible
Although the full retirement age is 66 or 67, depending on a person’s birth year, people can start collecting Social Security benefits as early as age 62. While some believe that there are solid reasons to collect early, in most cases, it is more prudent to wait.
Those who argue for early collections believe that individuals should forfeit all the money as soon as possible, because Congress could possibly enact legislation that withholds retirement benefits. To make sure there is enough money in the system for the long haul.
But this approach is short-sighted because if Congress does indeed move into shrinking retirement benefits, there is a high chance that individuals at least 60 years old will be able to maintain their current payment model, where the Social Security Administration (Social Security Administration) SSA) calculates the average. Indexed Monthly Income (AIME), including the last year of indexing in the National Average Wage Index.
More importantly, collecting Social Security before full retirement age will permanently reduce one’s monthly benefits. For example, people who begin collecting benefits at age 62 will only receive 75% of the same amount of money each month as they would have received if they waited until full retirement age of 66. Those willing to wait even longer (up to age 70), when the maximum benefit, can receive even more per month.
Beware the “Breakeven Age” Theory
Some financial advisors believe that 78 is the “breakeven age” to start Social Security. This means that whether a person begins collecting benefits at age 62, or whether they stop until they reach their full retirement age, they will eventually pocket the same total amount by age 78. Will give After that age, those who waited until the traditional retirement age. Those who started to collect would eventually start paying more than those who chose to start collecting early.
Unfortunately, determining break-even age is an approximation at best, thanks to shifting variables at the back of the calculation. These include the time value of money, the inflation rate, and whether the recipient of benefits is a worker or a non-working spouse.
Reduced profits are credited later
When working individuals collect Social Security, their benefits can be reduced by $1 for every $2 of income received above a certain threshold ($19,560 in 2022). This continues till the person reaches retirement. Since then, there is a decrease of $1 for every $3 earned, at varying limits ($51,960 in 2022), until a person reaches full retirement age. After that, a person is entitled to earn as much as he wants without deducting more.
Let’s say your job allows you to pull in $27,560 ($8,000 over the $19,560 limit). In this scenario, your Social Security benefits will drop by $1 for every $2 you earn over the limit, for a total reduction of $4,000. Although it may seem like working harder is causing you to surrender benefits, in reality, those benefits are technically deferred and will eventually be credited to you when you reach your full retirement age.
Some benefits may be taxable
Many people don’t realize that their Social Security benefits may be taxable if their income exceeds a certain amount. Couples with combined income between $32,000 and $44,000 filing joint tax returns must pay income tax on up to 50% of their benefits. If their combined income exceeds $44,000, they must pay taxes on up to 85% of their benefits. The term “combined income” for this purpose refers to their adjusted gross income (AGI), plus any non-taxable interest they receive, plus half of their Social Security benefits.
Consider the following example. A couple with a combined income of more than $44,000 and total monthly Social Security benefits of $3,000 would be subject to taxes on up to 85% of their benefits—they would take $30 of their $36,000 annual Social Security benefits, 600, or $3,672 (assuming their marginal tax rate is 12%).
Determining the best time to take Social Security requires a thorough overview of a person’s overall situation, including taxes, longevity and life insurance.
Social Security benefits are not reduced by inflation
Some people falsely believe that inflation can hinder profits. Such faulty views do not take into account how the Social Security Administration’s Annual Cost of Adjustment (COLA) ensures that Social Security benefits are adjusted annually for inflation, as in urban wage earners and clerical workers. (CPI-W) is measured by the Consumer Price Index. )
For many retirees, Social Security is the only source of inflation-adjusted retirement income. Holding off on collecting benefits represents an effective way to maximize payments, especially for people who don’t have other income sources, such as pensions or annuities. The longer one waits to make deposits (up to age 70), the higher the COLA will be in dollar terms.
Social Security collections can be a complicated matter for those approaching their retirement age. Knowing about how payments work and how can go a long way toward maximizing the money collected. Fortunately, there is a plethora of useful information available through the Social Security website and the SSA’s local offices.