While the majority of Americans will collect Social Security at some point in their lives, not everyone fully understands the program. This program, which is often a vital part of a person’s retirement plan, is notorious for being confusing. Taking the time to gain a deeper understanding of Social Security can help you maximize your benefits and avoid benefit reductions.
Whether you’re looking to claim your benefits in the near future, or you’re years away from retirement, it’s in your best interest to gain a fundamental understanding of Social Security.
While the majority of Americans will collect Social Security at some point in their lives, not everyone fully understands the program. This program, which is often a vital part of a person’s retirement plan, is notorious for being confusing. Taking the time to gain a deeper understanding of Social Security can help you maximize your benefits and avoid benefit reductions.
Whether you’re looking to claim your benefits in the near future, or you’re years away from retirement, it’s in your best interest to gain a fundamental understanding of Social Security.
1. What is it?
Social Security is a program created in 1935 to provide retirement income to Americans. It’s still used today by most Americans once they reach a certain age. Some use it in conjunction with other retirement income sources and some use it as their only income stream.
Currently, the system works like this: every time you receive a paycheck for working, a portion of the taxes you pay go towards Social Security. This money is then reallocated back to Americans who are collecting their benefits.
2. How are benefits determined?
Not everyone receives the same benefits. Your benefits are determined by how many credits you earn during your working years. Essentially, the more you make the more credits you receive. As of 2020, a credit is defined by $1,410 in income, and you need to earn 40 credits to qualify for benefits.
Once you qualify, the Social Security Administration (SSA) uses a formula to determine your benefits. They look at your highest 35 years of average earnings. This is then used to determine your Average Indexed Monthly Earning (AIME). Once you have your AIME, you can apply it to the Social Security benefits formula.
3. When should I claim?
When you claim your Social Security benefits is completely up to you and is different for each person based on their unique financial history. If you claim at your full retirement age (FRA) you’ll get your standard benefit. Your FRA is designated by the law and is based on the year you were born. Filing even a month early could lead to early filing penalties which reduce your benefits. Waiting to claim past your FRA has advantages, too. If you wait, you earn delayed retirement credits every month until you turn 70—leading to a bigger check from Social Security.
4. Does working affect benefits?
Many retirees choose to pick up a part-time job after they’ve claimed their benefits. If you’ve reached full retirement age, you can work without affecting your Social Security benefits. However, if you’re under FRA and receiving your benefits, you could forgo a portion of your benefits (temporarily) if you’re earning too much. In this case, once you do reach FRA, your monthly check will be recalculated to account for the lost benefits.
5. How do spousal benefits work?
As with any aspect of Social Security, spousal benefits are a bit confusing and come with many stipulations. If you’re unfamiliar with spousal benefits, they work like this: current spouses and ex-spouses (who were married for over 10 years and are not remarried) are eligible to receive equal to half of what their spouse earns if it’s higher than their own.
In certain cases, when someone dies, their Social Security benefits may be available to their current or former spouse. You can also collect spousal benefits without a death occurring. In order to qualify for spousal benefits, the spouse with a work record must already be receiving their benefits and the other spouse must be at least 62. If your spouse dies, you can collect a survivor’s benefit as early as age 60.
6. Do I owe taxes on Social Security benefits?
You may owe taxes on your Social Security benefits based on your income. If it’s above a certain threshold, you could be taxed on up to 50% of your benefits.
If you’re a single filer, this threshold is $25,000 to $34,000 of countable income per year. If you make more than that as a single filer you could owe even more in taxes (up to 85% of your benefits). If you file jointly, this income threshold is $32,000 to $44,000. As with single filers, if you make more than that in countable income you’ll be taxed even higher.
Again, with any aspect of Social Security, tax rules for benefits are complicated and conditional.
When to claim, deciding to work after claiming, tapping into spousal benefits and understanding how your benefits will be taxed are all extremely important if you’d like to get the most out of Social Security.
Keep in mind that we’ve provided surface level answers to these common Social Security questions. Having a professional dive deep into each of these questions while keeping your unique situation and financial history in mind is the key to maximizing your benefits. SimplyAdvised can put you in contact with a knowledgeable professional who can help.
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