Social Security and Retirement - From Gratitude to Greatness: Brownlee Global's Path to a Purposeful LifeFrom Gratitude to Greatness: Brownlee Global's Path to a Purposeful Life

Enjoying a comfortable retirement is everyone’s dream. Social Security’s purpose is to help you secure your retirement dream.

According to the Social Security Administration, 9 out of 10 people over age 65 receive Social Security benefits. On average, Social Security counts for about 39% of total income during retirement. Thus, as you can see, Social Security can’t cover all your financial needs and expenses during your retirement years.

Furthermore, Social Security rules and decisions are complex. And, it is a challenging task deciding when to claim your benefits. When claiming benefits, it’s important to determine if it’s more financially beneficial to have income sooner by claiming it at early retirement age or wait as long as possible to receive a bigger benefit.

Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families. Social Security replaces a percentage of a worker’s pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits. However, you can becoming eligible for Social Security benefits in retirement working for only 10 years. You only need to accumulate 40 “credits” during your working life, and you can collect up to four credits each year.

The Social Security system works like this: when you work, you pay taxes into Social Security. Social Security Administration (SSA) uses the tax money collected to pay benefits to:

People who have already retired.
People who are disabled.
Survivors of workers who have died.
Dependents of beneficiaries.

The money you pay in taxes isn’t held in a personal account (or lock box) for you to use when you get benefits. We use your taxes to pay people who are getting benefits right now. Any unused money goes to a Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

There are advantages and disadvantages to taking your benefit before your full retirement age. The advantage is that you collect benefits for a longer period of time. The disadvantage is your benefit will be reduced. Each person’s situation is different.

You can start receiving Social Security benefits as early as age 62 or any time after that. However, you are entitled to full benefits when you reach your full retirement age. Full retirement age refers to the age when a person can receive their Social Security benefits without any reduction, even if they are still working part or full time. In other words, you don’t actually need to stop working to get your full benefits. If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.

If you start receiving benefits early, your benefits are reduced a percent for each month before your full retirement age. The longer you wait, the higher your monthly benefit will be, although it stops increasing at age 70. Your monthly benefits will be reduced permanently if you start them any time before your full retirement age.

Create a retirement plan

Planning is the key to creating your dream retirement. You’ll need to plan and save for years to achieve your retirement goals. While many factors affect retirement planning, it is important to understand what Social Security can mean to you and your family’s financial future.

On average, retirement beneficiaries receive 35% to 40% of their pre-retirement income from Social Security. As you make your retirement plan, knowing the approximate amount you will receive in Social Security benefits can help you determine when to claim benefits and how much other retirement income you’ll need to reach your goals.

Although the are thousands of options, you can consider the below three basic strategies for claiming Social Security benefits. When and how you file for Social Security can significantly impact your retirement income. You can take Social Security benefits between ages 62–70 but it makes a big difference in the amount of money you get. At 62, you receive 25% less than if you wait for full retirement age. Also, this would affect you down the road since your annual cost of living adjustments will be based on a smaller figure. For those who wait until they are 70, they would receive 32% more than at full retirement age (based on 66 years young).

Full Retirement Age: Full retirement age is the age when you will be able to collect your full retirement benefit amount. The full retirement age is 66 if you were born from 1943 to 1954. The full retirement age increases gradually if you were born from 1955 to 1960, until it reaches 67. For anyone born 1960 or later, full retirement benefits are payable at age 67. You can find your full retirement age by birth year in the full retirement age chart.
Early Retirement Age: You can get Social Security retirement benefits as early as age 62. However, your benefit is reduced if you start receiving benefits before your full retirement age. Understand how claiming retirement benefits early will affect your benefit amount.
Delayed Retirement Age: When you delay collecting benefits beyond your full retirement age, the amount of your retirement benefit will continue to increase up until age 70. There is no incentive to delay claiming after age 70.

Types of Social Security Benefits

Social Security offers three distinct types of benefits for retired workers and/or their spouses. In general, claiming strategies for couples will work to intentionally maximize each of the three types of benefits.

Retired Worker Benefit (which is based on his or her own earnings record) – Retirement benefits may be available as early as age 62. Your benefit amount is calculated based on a formula that incorporates your highest 35 years of earnings. If you claim benefits at Full Retirement Age, which varies from 66 to 67 based on your year of birth, you will receive your full benefit, which is known as your “Primary Insurance Amount” (PIA). If you claim early, you will receive a reduced benefit and if you delay, your benefit will be increased by 8% per year (pro-rated by months) of delay up to age 70.
Auxiliary Benefit (which provides a worker’s spouse or children with a benefit once the worker has claimed his own benefit) – The most common Auxiliary benefit for a married couple is the Spousal Benefit. Spousal benefits are generally available to the spouse of a worker who has been married to the worker for at least one year. The amount of the Spousal benefit is 50% of the worker’s Primary Insurance Amount if claimed at Full Retirement Age. Spousal benefits are reduced if claimed prior to Full Retirement Age, but do not increase if delayed past Full Retirement Age. When an individual is simultaneously entitled to both a Spousal benefit and a Retirement benefit, the Spousal benefit is reduced by the greater of the Retirement benefit or if a reduced Retirement Benefit is taken, the PIA.
Survivor Benefit (which provides a surviving spouse or certain other dependents with a benefit after a worker’s death) – The Survivor benefit is unique in that it is based both on when the deceased filed for benefits and when the Surviving spouse claims benefits. For example, if a higher wage earning spouse elects early, then dies, their spouse will be faced with a permanently reduced Survivor benefit, regardless of when they claim. If the higher wage earner delays claiming Retirement benefits, the available Survivor benefit is also increased.

Retirement Earnings Test for Social Security Benefits

You are able to work and receive Social Security retirement, spousal, or survivor’s benefits. However, you may be subject to a reduction in benefits if you haven’t attained full retirement age.

The Social Security Administration (SSA) will withhold benefits during the year in which you work assuming that you provide an estimate to the Social Security office about your expected earnings. If you do not report estimated earnings, the SSA will withhold your monthly payments in the following year until all benefits that should have been withheld are paid in full.

Social Security benefits can be withheld and taxed

Social security (SS) benefits are subject to taxes. For retirees who are still working, a part of their benefit is subject to taxation. The IRS adds these earnings to half of your social security benefits; if the amount exceeds the set income limit, then the benefits are taxed.

In 2020, you are allowed to earn up to $18,240 before benefits are withheld. For every $2 you earn above the exempt amount, $1 dollar will be withheld. This applies to all years leading up to the year in which you attain your full retirement age. During the year you attain full retirement age the exempt amount increases to $48,600 and for every $3 you earn over the exempt amount $1 will be withheld.

Even though your benefits are withheld they are not completely lost. Once you reach full retirement age, your benefits will be increased to account for the number of months that you did not receive a benefit. For example, if your full retirement age is 66 and you filed for benefits at 62 you received a reduction in benefits for taking benefits 48 months early. If 12 payments are withheld due to the earnings test, your benefits will be adjusted at your full retirement age and it will be as if you elected at age 63, or 36 months early.

What SSA considers income

If the retiree earns an income that exceeds the annual earnings limit, then the social security benefits are reduced until they attain the full retirement age. Note that investment income is not included in the annual taxable earnings. The only income involved comprises of wages or a salary earned from self-employment or when working for someone. For people who are self-employed only net earnings count. It is important to note that employee contributions to pension or retirement plans are included in gross wages. Income that is not counted as earnings include:

Government benefits,
Investment earnings,
Interest,
Pensions,
Annuities; and
Capital gains

are allowed to withdraw your Social Security benefits after enrolling.

If you start taking Social Security benefits before full retirement age, you can withdraw your benefits within the first year of claiming Social Security, no matter what your age. You must pay back any money you received; the Social Security Administration then treats it like you never enrolled, and your monthly check can continue to grow until you start taking benefits again.

Early retirement age to claim Social Security benefits is 62. Full retirement age is 66 for people born from 1943 to 1954 and gradually rises to age 67 for people born after that. You’ll earn an extra 2/3 of 1% for each month you delay after your birthday month, adding up to 8% for each full year you wait until age 70.

Every year you delay taking your Social Security benefits after age 62, you get a bump of 8% in your benefit until age 70.

Dependent children under the age of 18 or disabled before age 22 may be able to claim 50% of their living parent’s primary insurance amount (PIA} or 75% of their deceased parent’s PIA.

Social Security earnings are calculated the same way for most American workers The maximum Social Security benefit depends on the age you retire. For example, if you retire at full retirement age in 2020, your maximum benefit would be $3,011. However, if you retire at age 62 in 2020, your maximum benefit would be $2,265. If you retire at age 70 in 2020, your maximum benefit would be $3,790.

Social Security Problems

Social Security is facing funding challenges, largely because people are living longer. Currently, the average 65-year-old American is expected to live approximately 20 more years, so Social Security has to support people for longer.

Also, Social Security works because people currently working pay into the trust fund from which retirees are paid. Over time, the ratio of contributing workers relative to collecting retirees has shrunk. Because people are living longer and the ratio of people paying in has shrunk, the Social Security program will soon stop running a surplus, leading to potential problems down the road.

When you start collecting Social Security benefit checks may not make a significant difference with respect to the total benefits received. The system is designed for those who live average-length lives. This means that the total sum you collect will be roughly the same no matter when you start collecting benefits. Thus, if you delay receiving benefits until full retirement age, you will collect fewer benefit checks than someone who starts collecting smaller checks early.

References:

Like this:

Related