Retiring can possibly cause you to feel as though you have been placed in an especially vulnerable position. And while this may be true to a certain extent, having a good grasp of how the Social Security program works prior to retiring can exponentially improve your quality of life during your actual retirement. As such, here are 5 important factors to place under consideration for before you claim, as well as for when you have already begun claiming Social Security.
When to begin claiming benefits?
Aside from your lifetime earnings, the age at which you begin claiming benefits is arguably the most important factor used to determine how much you will receive from the Social Security Administration (SSA) in benefits. This is because of the policy of a “full retirement age”.
The full retirement age is the age at which you qualify to receive 100% of your benefits. While Social Security can be claimed from age 62, claiming at this age will lock you into a reduced benefit. The amount by which your benefit will be reduced for claiming early is determined relative to the number of months between your current age and your full retirement age — with the maximum possible deduction being 30%. The full retirement age is currently 66-67.
On the flip side, if you delay claiming beyond the full retirement age to when you are 70, you will receive a much higher benefit. For every year that you delay claiming, you receive an additional 8% in benefits. As such, if you claim at age 70, you will receive 124% of your benefit.
Filing do-overs
If you claimed benefits early but have decided against this for whatever reason, you will be allowed one do-over. You may retract your claim and resubmit it at a later stage provided that a full year has not yet passed since your initial claim. You will also be required to return the benefits that you have already received and this do-over can only be used once.
Impact of marital status
If you are married, coordinating your claim with your spouse can actually make a world of difference as it impacts both the income you will receive as a married couple, as well as the income the surviving spouse will receive when the other spouse passes on.
When a married couple is both receiving Social Security benefits and one spouse dies, payments for the lower of the two benefits is almost immediately stopped. Furthermore, there are a number of rules that will impact the surviving spouse such as age when the spouse died, disability status, or if they are caring for a child from the marriage who is under the age of 16 or who has a disability that began before the child turned 22.
Divorced spouses also face rules that allow them to file for a spousal or survivor’s benefit on their ex-spouse’s record. The caveat to this is that the couple would have had to be married for a minimum of 10 years.
Working while claiming benefits
You are well within your rights to continue working while claiming Social Security benefits and if you have already reached full retirement age, your benefits will not be reduced regardless of what your work income amounts to. However, if you have not reached retirement age and are working while also claiming Social Security, you may be subject to a retirement earnings test.
If your income exceeds the stipulated thresholds, your benefits will be reduced. However, it is worth noting that this reduction is temporary and will end once you reach full retirement age. If you have not reached FRA and will not reach it for the full year, for every $2 you earn above the $23,400 earnings limit, $1 of your benefit will be reduced.
If you have not reached FRA but will do so within the year, the limit is higher and for every $3 you earn above $62,160, $1 of your benefit will be reduced.
Benefits can be taxed
Up to 80% of your benefit income may be subject to taxation if your combined income exceeds certain thresholds. According to the SSA, recipients can be subject to taxation of “up to 50 percent of benefits from single taxpayers with incomes over $25,000 and from taxpayers filing jointly with incomes over $32,000.”
Additionally, taxation of up to “85 percent for single taxpayers with incomes over $34,000 and for taxpayers filing jointly with incomes over $44,000” is also applicable as per the 1983 Amendments.