If you are nearing retirement age or planning for retirement is on the horizon, you might be wondering about how Social Security fits into your future. For the majority of Americans, Social Security is a major source of income in their golden years. But even if it will only account for a small part of your overall retirement income, Social Security is a benefit you’ve earned, one you are entitled to collect, and it will factor into important decisions you make about your senior lifestyle.
However, Social Security is not as simple as you might think; in fact, most people find navigating the Social Security system to be frustratingly complicated. The sooner you understand how Social Security works, the better. Knowing the ins and outs of the program will help you avoid costly surprises and unnecessary mistakes.
Here are some of the most common questions we get asked related to Social Security:
1. What will I earn from Social Security?
A number of factors go into how your Social Security income will be calculated. Your personal benefits are determined by your average wage earnings over your lifetime of work and will be based on your 35 highest-earning years. The age at which you choose to retire makes a difference as well. As of now, if you retire at 62 your monthly income will be less than if you retire at 67, and it will be more if you retire at 70.
Overall, Social Security is intended to provide a modest income to cover basic living expenses. According to the Center on Budget and Policy Priorities, the average benefit is about $17,000 per year. The Social Security Administration has a calculator you can use to get a rough estimate of what your monthly benefit amount will be.
2. When should I start Social Security?
Many people look forward to getting Social Security as soon as possible; however, if you want to avoid shortchanging yourself, we recommend taking a more strategic approach. Some variables to consider include your overall retirement income sources, marital status, health status, and cost of living.
More often than not, retirees are better off claiming the maximum benefit at age 70 rather than a reduced benefit at age 62. When factoring low-interest rates against Social Security’s inflation adjustments, waiting until 70 to start Social Security puts the math in your favor. If you are in poor health, it probably makes sense to claim early. If you are in good health and still able to work or have solid assets, it might make more sense to delay your benefits until full retirement age.
3. If I start Social Security early, can I change my mind?
Many people are unaware that they are potentially shortchanging themselves by claiming Social Security early. If this is something you’ve done, the good news is you have options. In some cases, it is possible to withdraw your application, repay your benefits, and reapply again in the future. In other cases, you can withdraw your application, suspend your benefits, and earn delayed credits. Your options depend on your current age and how recently you originally applied, and you can only withdraw your application once.
4. Can I go back to work after starting Social Security?
Yes. It’s important to understand how going back to work affects your Social Security benefits. Even though your benefit may go down or be suspended temporarily, you aren’t penalized for going back to work. In fact, in some cases, it’s possible that going back to work will raise your benefit in the future.
For example, if you start claiming Social Security before full retirement age and then go back to work, your benefits may be withheld, depending on what you earn. When you reach full retirement age, your benefit will be recalculated based on the age at which you went back to work. Then you can suspend your benefit at full retirement age to earn annual delayed credits on the newly adjusted amount. Finally, when you reach 70, you could be earning over 15% more per month than your original benefit at 62.
5. Am I eligible for Social Security spousal benefits if I was not the primary breadwinner in the household?
This question is most common for women who are homemakers or stay-at-home moms that did not work outside of the home for a wage, but of course, it applies to households where the wife is the primary breadwinner as well.
If your spouse is eligible for Social Security benefits, you may be entitled to up to 50% of their benefit at your full retirement age once your spouse has applied for benefits. You will only receive spousal benefits if theirs are higher than your own would be. For example, if your own monthly benefit would be $1,000 based on your work record, but half of your spouse’s benefit is $1,200, you would receive the higher amount.
6. If I am divorced, can I still claim Social Security benefits as a spouse?
If you are divorced, you might be able to claim Social Security benefits based on your ex-spouse’s work history. Your marriage must have lasted at least 10 years and you cannot be remarried at the time you claim or receive benefits. You do not need your ex’s permission and you don’t need to make them aware that you are filing; you simply have to prove your eligibility to the Social Security Administration.
7. If my spouse dies, will I be eligible for Social Security survivor benefits?
If your spouse dies before you do, you can claim a survivor benefit starting as early as age 60. But keep in mind, if you claim before your retirement age, you may receive a reduced amount permanently. If you wait until full retirement age, you will get 100 percent of what your spouse would have received at the time of their death.
More than likely, one spouse will outlive the other. When the higher-earning spouse dies first, the surviving spouse is entitled to a benefit equal to what they would’ve received. This is why it is often beneficial to delay the highest earner’s benefits until age 70 -- to maximize benefits to the survivor.
8. How much of my Social Security income can be taxed?
Some people believe that Social Security income is not subject to federal income tax. This might have been true for your grandparents, but the rules changed in 1984. Now, a portion of your Social Security income is taxable if you have other income sources that reach certain thresholds.
To minimize the impact of tax liability in retirement, carefully consider when to withdraw from retirement accounts such as IRAs, Roth IRAs, and 401Ks. Also, take into consideration that some states tax Social Security benefits as well; and if you are planning to retire overseas, you may be subject to foreign tax codes.
9. Does Medicare affect Social Security benefits?
Social Security and Medicare are separate programs, but they are intertwined. It’s important to understand how your Medicare coverage intersects with your Social Security benefits. For example, you might want to consider having your Medicare premiums deducted directly from your Social Security, as this provides certain protections from possible financial harm as a result of Medicare increases.
Summary
As you can see, Social Security is more complicated than you might have thought. Decisions you make can affect your financial circumstances for the rest of your life. As early as possible, begin talking to a financial advisor about common questions, such as when to start claiming benefits, how much you will get to take home, and how your overall Social Security benefit is impacted by your other retirement income or your spouse’s income.
If you’re close to filing for Social Security, here is a quick checklist of what to keep in mind as you’re going through the process.
Russell D. Rivera, CFA, CFP® is the Founder and President of Voice Wealth Management (Voice) in New York, NY. He also likes to think of himself as a Personal CFO and Financial “Therapist” for entrepreneurs, young professionals, and their families. He helps clients make prudent financial decisions regarding spending, saving, investing, and planning while giving a voice to the individual client's financial priorities and experiences.
Content in this material is for general information only and are not intended to provide specific advice or recommendations for any individual.