In last month’s newsletter, we touched on taxes on Social Security benefits. This month, we will take a step back and talk about Social Security more broadly. Did you know that according to the Social Security Administration, Social Security was never intended to be the only source of income in retirement? That said, of individuals aged 65 and older, more than half rely on Social Security retirement benefits for most of their income, and more than 20% rely on it for 90% or more. With people living longer and rising health care costs, Social Security payments are becoming more important than ever. Deciding when to start taking Social Security is one of the most important considerations for those approaching retirement age. Unfortunately, there is no single correct answer to this question, as it depends on your specific retirement situation. However, below, we list a few of the more common points for consideration:
Eligibility
Generally speaking, you must be age 62 or older and have 40 quarters of credits (based on your work history and earnings) to be eligible for retirement benefits. However, not all work performed accumulates credits (for example, some state and local governments do not participate in Social Security). Social Security uses your highest 35 years of earnings to calculate your benefit amount, but if you have fewer than 35 years of earnings, each year with no earnings is counted as zero. That said, you can increase your benefit by replacing a zero or low-income year with a higher-income year (possibly even by working part-time). If you plan to rely on Social Security in retirement, you can create an account and review your qualification status and estimated benefits here.
Full Retirement Age (FRA)
Your FRA is the age at which you’re entitled to 100% of the Social Security benefits you’ve earned. FRA is 67 for those born in 1960 or later. If you take benefits before your FRA, benefits will be reduced. For example, if you file at age 62, benefits will be as much as 30% lower. On the flip side, Social Security retirement benefits are increased by a certain percentage for each month you delay starting your benefits beyond full retirement age (up to 8% per year) – up to age 70. The bottom line: if you take benefits before your FRA, your benefit will be less, but you will receive it for a longer period. If you take benefits at your FRA or later, you will receive a larger monthly benefit but for a shorter period.
Working in Retirement
Are you planning to continue working while collecting Social Security? If so, be aware that if you are younger than your FRA, there is a limit to how much you can earn without negatively impacting your payment. This could be as much as $1 for every $2 earned above the applicable annual limit.
Taxes on Social Security Benefits
As we covered last month, in addition to wages, if you have other reportable income, which in this case also includes interest, dividends, and other taxable income (like RMDs), you may have to pay taxes on up to 85% of the Social Security benefits you receive. The amount you pay is based on your income and filing status.
As you can see, the program is very complicated. An experienced financial planner can examine your situation more thoroughly and help you determine when to begin taking Social Security.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.