For most Americans, Social Security retirement benefits are a significant retirement asset. However, there are a number of things to consider before you start claiming your Social Security income. These choices can make a material difference in the amount of income you receive over the course of your retirement years. Here are 5 things to think about when considering Social Security retirement benefits and claiming strategies.
Know your Social Security benefit eligibility.
Your eligibility for social security benefits and how much your benefit will be depends on your earnings over your working career. The Social Security Administration explains that they will “base your benefit payment on how much you earned during your working career. Higher lifetime earnings result in higher benefits.” You may also be eligible for an amount allocated to married couples, called “spousal benefits,” or the reassessment of benefits to a surviving spouse, called “survivor benefits.” If you had wages from work not covered by Social Security, it is possible that the Social Security Administration's estimates of your benefits may be substantially too high.
Consider when to begin taking Social Security benefits.
When you elect to begin receiving Social Security payments is important. Although benefit eligibility begins at the age of 62 (the earliest retirement age), this is not always the best age to begin claiming Social Security benefits since your monthly benefit is reduced for beginning prior to your full retirement age. The Full Retirement Age (FRA) for anyone born between 1943 and 1954 is age 66. The age for Full Retirement increases incrementally for those born between 1955 and 1960 to 67 years old. If you claim benefits earlier than your FRA and continue to have more than a modest amount of earned income (e.g., wages and salary), you may lose some or all of your Social Security benefits. In addition, if you delay taking benefits beyond your FRA, your lifetime monthly benefit will increase until the age of 70. The incremental increase in benefits occurs on a monthly basis, so even deferring the start of benefits for a partial year can increase the monthly income you will receive from social security for the rest of your life. The age at which you begin will impact your benefits for the rest of your life – and potentially benefits available to your spouse if you are married.
There are several factors that should be considered before selecting the optimal date to begin benefits. These include your health status, life expectancy, need for income, any plans you may have to continue working, and how concerned you are about running out of money in your lifetime. Knowing that you permanently reduce your monthly income benefit by claiming Social Security at a younger age, you may want to continue working or drawing on other retirement income before using Social Security retirement benefits.
Social Security income should only be a part of your retirement plan.
While having a strategy for when to begin Social Security benefits is important, it is critical to consider Social Security benefits in conjunction with all of your retirement assets for an optimal strategy. Incorporating your benefits into an overall retirement income plan may make a material difference in the amount of income available to you in retirement.
Don’t forget about taxes on Social Security benefits.
Many people are not familiar with taxation on Social Security benefits. If Social Security was your only income, benefits would not be taxable. But for most people with other income, including income from a pension, withdrawals from a 401(k), IRA, or investment income, taxes may be owed on up to 85% of your benefits. There is a range of income where the amount of benefits subject to taxation increases to between 50% to 85%. The actual tax rate that will be applied on this taxable portion of social security depends on your marginal tax rate. This tax effect can make a significant difference in the Social Security benefit you will “keep” after taxes and may suggest that you consider an alternate claiming strategy.
Professionals can help you understand these Social Security benefit strategies.
Your Social Security claiming strategy should be created to balance two equally important yet separate goals: obtaining the most lifetime income and offering income protection if you live longer than expected. While getting the highest cumulative lifetime benefit may initially seem most important, taking both criteria into account is prudent in the event you live longer than projected.
As part of our financial planning service to our clients, we can illustrate the impact of the timing of your decision to begin Social Security benefits and provide you with the information that can help you decide the best strategy for your situation. Our tools allow you to compare claiming strategies to identify the optimum selection for your situation, based upon the information available.
Marshall Financial Group is a registered investment adviser. Information presented is 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. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.