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.

While many choose different paths for their retirement, there is one thing that stays constant: taxes. No, taxes don’t stop once you’re retired. They’re probably even more important to keep an eye on during retirement as you’re on a fixed income—meaning you don’t want to pay the IRS any more than need be.  Let’s start with the basics—what’s taxable and what isn’t? The short answer is basically everything. This includes work income, regular investments, IRAs and 401(k)s.  When you’re planning for retirement it’s important to understand exactly what and how things are taxed. Whether you’re just starting the planning process or already retired, there are things you can do to lower your taxes and keep more of your hard-earned money. 

1. Have a variety of retirement accounts.

By having a diverse pool of retirement accounts, you can use them to balance your withdrawals in a tax-friendly way. If you have a mix of taxable and non-taxable accounts, you can pull from your non-taxable accounts when your income is high and draw from the taxable accounts when it’s lower. Basically, you want to draw money from your sources in a way that cuts your taxes in the best way possible.

2. Minimize taxes on Social Security.

Depending on your income, your Social Security benefits can be taxed. If you’re single and your income is less than $25,000, or if you’re married and your income is less than $32,000, your benefits aren’t taxable. If you make more than this amount, you can be taxed on up to 85% of your benefits.  You can avoid this by either not working, only working enough to make less than the amounts listed above or by delaying your benefits for as long as possible. 

3. Plan for estate taxes.

Estate planning can be complicated, but avoiding it can result in a nightmare for your loved ones. It’s important to have a plan in place that’s mindful of estate tax—it can be as high as 40%. Considering this, structuring your estate plan in a way that reduces the amount of potential taxes your estate will owe is crucial. Proper planning can keep your assets in the hands of your heirs and not tax collectors. 

4. Pay off your mortgage before retiring.

A great way to minimize your expenses and therefore taxes, is to pay off your mortgage before retiring. A mortgage payment is often a person’s largest monthly expense. By eliminating this expense, you’ll reduce how much income you’ll need to achieve within a tax year. It will also allow you to have more flexibility in retirement as it’s difficult to minimize your taxes when you need to withdraw a large amount of money each month to pay your mortgage. However, we know that for some this is no easy feat. Another option is to try and get your mortgage payment down as much as possible.  

5. Choose where you live wisely. 

Some retirees decide to relocate for various reasons—wanting to be closer to family or friends, wanting better weather or perhaps for a change of pace/scenery. Whatever the reason is, it’s important to be smart when choosing this location as it can affect your taxes. Some states have lower income levies combined with fair rates for sales and property taxes, while others don’t impose income taxes at all! While taxes shouldn’t be an end-all be-all reason for moving somewhere, they’re worth taking into consideration.

While these are just a few options, there are a plethora of ways you can get your taxes in check during retirement. Keeping your taxes low means you’ll have the ability to spend your retirement income exactly how you’ve always wanted to. Consulting a professional to really drill down into your unique situation is extremely worthwhile if you’re not well versed in the world of taxes. SimplyAdvised can help you find a local, knowledgeable and trusted financial expert to guide you through the tax minimization process.