Important Things to Think About as You Make This Strategic Decision
When it comes to Social Security, many Americans today depend heavily on their benefits to help support them financially throughout retirement. That’s why it’s crucial that you get strategic about your timeline for claiming your Social Security benefits. There are three options available for retirees. You can claim your benefits early, you can claim them right on schedule, or you can postpone claiming your benefits until a bit later in life.
Each option comes with its own advantages and disadvantages. For instance, claiming your Social Security benefits early at the age of 62 means that you’re benefiting from financial support earlier, but the downside is that your monthly checks will be reduced permanently. Whereas, if you delay claiming your benefits until age 70, then you’ll be rewarded with a larger monthly check and lower taxes, yet, you’ll have to wait several more years before collecting your benefits.
The right choice for you is going to come down to your unique financial situation and your long-term financial goals. When thinking about which Social Security claiming strategy is right for you, consider the five factors below.
Consideration #1: How Your Taxes Will Be Impacted
What many retirees don’t properly account for is just how much they’ll be paying in taxes on things like their Social Security benefits and withdrawals from retirement savings accounts. If you fail to plan accordingly, you could end up paying federal income taxes on up to 85% of your Social Security benefits.
To account for this, be sure to take into consideration what your provisional income will be, should you begin claiming your Social Security benefits. On your federal tax return, your provisional income is the sum of your adjusted gross income, any nontaxable interest, and half of your Social Security benefits.
If you’re filing individually, a provisional income that’s between $25,000 and $34,000 could result in you paying taxes on up to 50% of your Social Security benefits. If your provisional income is greater than $34,000, you could be paying taxes on as much as 85% of your benefits.
If you’re filing jointly and your collective provisional income is between $32,000 and $44,000, then you can expect to pay taxes on up to half of your Social Security benefits. You run the risk of paying taxes on 85% of your benefits if you’re filing jointly and your provisional income is more than $44,000.
Because of this, it may be smart to delay claiming your benefits until after you’ve retired so that your provisional income isn’t high enough to jeopardize your savings.
Consideration #2: How Long You Need Your Benefits to Last
While it’s impossible to know just how long we have left on this Earth, we still need to plan ahead to the best of our abilities. If you’re healthy and take care of yourself, there’s a good chance that you may end up living well into your 80s or 90s. If you’re retiring around the age of 65 or 70, that’s quite a long amount of time that you have to support yourself without a typical income.
This is when delaying your benefits until you’re 70 may work to your benefit. That larger monthly check could be especially important – particularly if you have concerns about outliving your nest egg.
Consideration #3: How Much You’re Allowed to Earn
If you begin collecting Social Security benefits before your reach full retirement age, there’s a limit to how much you can earn. Should you earn over that limit, then you’ll be penalized $1 for every $2 that you earn over the maximum limit. During the year you reach full retirement age, the rule relaxes a bit and you’re penalized $1 for every $3 that you earn over the limit. Once you reach full retirement age, the limit is irradicated and you can earn and work as much as you want without the threat of being penalized. Be sure to note that these earnings limits are adjusted for inflation each year, so make sure you know how much you’re allowed to make should you decide to claim benefits early.
Consideration #4: How Your Pension Factors In
Whether your pension is a government or private one can make a huge difference on how much you’re able to collect in Social Security benefits. For instance, some government employees receive a pension based on earnings that they didn’t pay Social Security taxes on. However, they may still be eligible for Social Security benefits if they paid the tax for a different job that they held. If that’s the case, then their benefit amount may be reduced.
Additionally, if you have a pension not covered by Social Security but you’re still eligible for the benefits because of your spouse, then there’s a chance that your benefits will be affected by your spouse’s record.
Consideration #5: How Your Strategy Will Impact Your Spouse
If you’re married at the time you’re considering claiming Social Security benefits, you’ll definitely want to sit down with your spouse and consider all the ways that your marital status can impact your benefits. One thing to be aware of is the spousal benefit. This benefit means that married people are eligible to earn up to 50% of the working spouse’s earned benefit. However, in order to be eligible, the spouse must be at least 62 and have already filed for benefits. This benefit may mean that it makes sense for one spouse to begin claiming Social Security benefits earlier while the other spouse waits until later in retirement to start claiming their own.
Even if you’re divorced, there are certain guidelines that make it possible for you to still be eligible for spousal benefits based on your ex-spouse’s working history. The marriage must have lasted at least 10 years, the divorce has to have been at least 2 years old, and you cannot be remarried. Additionally, you need to be at least 62 and ineligible for higher benefits based on your own work history. However, unlike when you’re married, your ex-spouse does not need to have filed for benefits themselves for you to claim your benefits based on their record.
Determining the Right Time for You
Developing a Social Security claiming strategy that works with the other aspects of your retirement plan can be an incredibly complicated process. It requires a deep knowledge of wealth management, tax law, Social Security laws, and an ability to see the larger picture. It can be beneficial for you to work with a qualified financial and tax professional to develop a strategy that works best for your unique financial situation and long-term financial goals.
If you’d like to schedule a meeting with a member of the Andersen Wealth Management team to help determine the right Social Security benefits timeline for you, please don’t hesitate to contact us today.