Only working hard and saving money for retirement isn’t good enough today. A satisfying, comfortable, and secure retirement nowadays requires meticulous and smart financial planning. Building a financial cushion to fund your golden years is not a simple process. Rather, it is a multi-faceted one. And just like the time frame and retirement goals, the tools for building your retirement fund are equally essential.
Social Security benefits are one such important tool. Statistics show that Social Security benefits have touched nearly 64 million American lives, out of which approximately 48 million people are retirees. Social Security benefits may not be your only source of income during retirement, but it can surely offer you the security of a certain percentage of your pre-retirement income, based on your lifetime earnings.
Here are a few Social Security tips and traps can that help you utilize these benefits to your advantage.
Since the entire scheme of Social Security is dependent on your age, it is important to have a clear understanding of your full retirement age. Calculation of your Social Security benefits is entirely dependent on the amount of earnings you make during your highest-paid working years. Furthermore, you are only entitled to receive benefits after you reach the eligible full retirement age.
The full retirement age of an individual is dependent on their year of birth. Here’s a table of eligible retirement ages as per your birth year.
|Birth year||Full retirement age in years|
|1937 or earlier to 1942||65 to 65 and 10 months|
|1943 to 1954||66|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
The Social Security administration provides every member with an annual earnings statement. It is very critical that you accurately review this document every year for two principal reasons. Firstly, the document will help you evaluate the quantum of your retirement benefits once you reach the full retirement age. This can help you gauge your overall retirement needs. The closer you get to your retirement age, the more accurate the estimate will be.
Secondly, the document presents you with an opportunity to rectify some decisive errors, such as an error in your yearly income. For instance, your benefits may get affected if your annual income is reflected incorrectly as $48,000 instead of $84,000 in the statement. Amending this kind of error is absolutely essential since your Social Security benefits are entirely dependent on your 35 highest-paying job years. An error like this or a miscalculation for just a couple of years can result in decreased benefits through no fault of your own.
Depending on your eligibility, the Social Security Administration also provides for several other benefits, but only if you sign up for them. Features such as spousal benefits, dependent benefits, and survivor benefits are a few things you can avail along with your Social Security. Make sure you check the eligibility of each one of them and sign up for the additional benefits that apply to you.
There is a simple rule - the more you delay your retirement, the better are your chances to enhance your Social Security benefits. If you choose to work beyond your full retirement age and delay availing Social Security, your overall benefits are likely to increase by a certain percentage depending on your year of birth. For instance, if you decide to enroll for Social Security benefits in your early 60s, the benefit is likely to be minimal in your 70s. However, if you apply for the benefits post your full retirement age, say in your late 60s or early 70s, then the overall benefit is likely to increase by 8% for a year. Alternatively, you could also enjoy a 76% higher monthly payout.
Therefore, with each extra year of work beyond the retirement age, the total earnings of your Social Security record also increase. Higher lifetime earnings can also translate to above-average benefits when you retire.
Social Security is a regular flow of cash during your non-working days. But the timing of availing these benefits is significant, solely because it has a direct bearing on your monthly benefits. One can start availing the benefit as early as at the age of 62. But for each month you file ahead of your full retirement age, your benefits will decrease. For instance, if you apply for Social Security benefits at the age of 62, with a full retirement age of 66, then you should expect to lose 25% of your benefits. And if you file with a retirement age of 67, you can expect a 30% loss. But the most critical part is that this reduction has a permanent impact, until and unless you withdraw the application within a year and repay every penny.
In order to maximize your Social Security benefits, you must ensure that your income doesn’t fall into the taxable bracket. Ideally, if your earnings cross a certain level, up to 85% of your Social Security, your benefits may be taxed. For instance, if your taxable income, tax-free income, and half of your Social Security benefits exceed $25,000 ($32,000 for married couples filing jointly), then you would have to pay taxes on your Social Security income.
Once you cross the 70.5 age mark, you need to make regular distributions or RMDs from your tax-deferred retirement accounts. This can be an additional source of income for you, but it is also treated as an ordinary income during tax calculations. Therefore, it is important to consider the impact of your RMDs on your total earnings, as it can push you above your usual tax threshold.
If you have worked across many different organizations during your work life, and if a couple of them didn’t withhold Social Security taxes from your salary, then you need to prepare yourself to receive a reduced Social Security benefit. This happens because some jobs have a non-covered period.
Social Security benefits are an essential tool for your retirement planning. If used judiciously, it can go a long way in ensuring that you have an enjoyable and comfortable retirement life. If you are aware of these simple yet crucial points, you can easily maximize the potential of your Social Security benefits.
To ensure a comfortable, well-planned, and secure retirement, seek guidance from professional Financial Advisor.
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