Social Security Retirement Benefits - Things to Know
There are five key things you should know about your Social Security retirement benefits; things like how working affects your benefits if you will have to pay taxes on Social Security benefits, and how collecting benefits early affects you and your spouse.
How Age Affects Your Social Security Benefits Eligibility
The first of the five things is knowing how your age affects the amount of benefits you will get. Social Security formulas use something called your "full retirement age" to calculate the amount of monthly income you will receive.
Full retirement age (FRA) is based on your year and day of birth - which means not everyone has the same FRA. Younger folks have a higher FRA than those already claiming Social Security.
Your FRA determines when you are eligible for what is called your full benefit amount or primary insurance amount. If you begin benefits before your FRA, you will have to take a reduced benefit, and if you begin benefits after your FRA, you become eligible for delayed retirement credits.
It's also important to note that there is a different FRA schedule for your benefits than for widow/widower benefits.
What Are the Consequences of Claiming Social Security Early?
Wondering if you should start taking Social Security at age 62? It's only natural to ask this question. After all, age 62 is the earliest age you can begin drawing on Social Security benefits, and like many people, you are probably inclined to start drawing benefits as soon as you can.
Before you head to your nearest Social Security office to apply, evaluate all your options. Starting Social Security is almost an irrevocable decision - once you start collecting Social Security, you can only stop benefits if you are within the fist 12 months after starting and in that case you have to repay what you received so far. Your other option for pausing benefits is once you are over your full retirement age you can suspend benefits (sometimes called a voluntary suspension).
Claiming early benefits has consequences; if you are married, you are forever reducing the survivor benefit available to your spouse (if your benefit amount is greater than theirs).
Another consequence of taking Social Security early is the way any additional earned income you have might affect your benefits. We cover that in the next step.
The Earnings Limit Affects Those Who Start Social Security Early
If you claim your Social Security benefits early (before your full retirement age) and continue working and make too much, then your benefits can be reduced. This reduction only applies until you reach your full retirement age.
The reduction is based on your earnings. Your earnings can't be over the Social Security earnings limit. The good news is investment income does not count toward the annual earnings limit; the only income that counts is income you earn by working.
Some 62-year-olds start benefits unaware of this rule. They keep working, or go back to work a year later, and then whey they file their tax return if their earnings are over the limit they get a demand letter from Social Security to pay back the required amount (it is based on a formula requiring you to pay back up to $1 for every $2 earned over the limit).
Once you reach your full retirement age you can make any amount and no reduction applies.
Yes, Social Security Benefits Are Subject to Taxes in Retirement
Many people assume Social Security benefits are income tax-free. Under current tax law, 15% of your benefits received are tax-free - but the other 85% may be taxed unless you have almost no other sources of income.
If you have sources of income in addition to Social Security, then you may have to pay taxes on your Social Security benefits. The additional sources of income that Social Security looks at include items such as wages, self-employment income, interest and dividends, and pension income.
There is a formula that is used to determine the amount of benefits subject to taxation. It depends on your marital status and how much other income you have.
Many retirees find out about this taxation only after they start pensions or begin IRA withdrawals - at that point, their "other income" goes up and thus some or more of their Social Security becomes taxable. They are often shocked at the increase in their tax liability.
Married or Divorced? Check on Spousal Social Security Benefits
Even if your spouse never worked, they can still be eligible for a Social Security spousal benefit.
***Alert - Above option is true. On Oct 28, 2015, new legislation changed Social Security rules so some options mentioned below may no longer work. Read New Social Security rules before developing any claiming plan.***
If your spouse did work and is eligible for their own benefits, but on average was the lower earner between the two of you, then it may still make sense for them to claim a spousal benefit for a few years - and then switch to their own benefit amount when they reach age 70.
If you are divorced but you were married for over ten years, and you are currently not married, you can still be eligible for a spousal benefit on an ex's record (even if they are deceased). Taking this benefit has no effect on your former spouse's benefit or on their current spouse's benefit if they remarried.
If you are married, it is especially important to understand how a spousal benefit will be affected if you take your Social Security benefits early. By doing so, you may forever reduce the amount of survivor benefit available to your spouse.
Too many couples make their Social Security claiming decision independently of one another and miss out by not understanding how they could have taken advantage of spousal benefits.