Understanding Your Social Security Benefits
Nick Covyeau, CFP?
I help families over Age 55 simplify their investments, lower taxes, and retire sooner
Social Security is a significant part of many Americans' retirement income, but understanding the nuances of knowing when to claim and how it will fit into your overall retirement plan can be tricky.
Speaking solely for the purposes of retirement planning, Social Security was designed to provide a guaranteed, inflation-adjusted, tax-favorable, source of lifetime income for retirees who meet certain criteria.
When executed correctly, Social Security can be an effective partner in helping boost your portfolio's longevity and shouldering the load to help manage inflation and market risk.
This week, we'll take a closer look at how Social Security benefits are calculated, break down the ideal time to claim, and explain how you'll be taxed when you begin claiming benefits.
Understanding Your Social Security Benefits
Your Social Security Benefits are based on two factors:
While you technically only need to have 40 quarters (approx. 10 years) of working history to qualify, the calculation of your benefits is based upon the highest thirty-five working years in your career.
??IMPORTANT REMINDER: If you are in your late 50's or 60's and have been working since you were a teenager, this is good news!
Why?
As you continue to work, your new wages (assumably higher) will push out your older (lower) wages and increase your total benefits.
Before we further break down your benefits, if you're curious to see how much you're on track to receive, head over to the Social Security website, create a profile, and get your statement --- ?https://www.ssa.gov/OACT/quickcalc/?
Knowing Your Full Retirement Age (FRA)
Though you can begin collecting benefits starting as early as age 62, your Full Retirement Age (FRA) is the age at which you’re eligible to start collecting the full retirement benefit you are eligible for.
As of 2021, the Full Retirement Age will increase by two months each year until it reaches Age 67 by the Year 2027, for those born in 1960 and later.
?? An easy rule of thumb, is to use Age 67 as the Full Retirement Age.
Why does this matter?
Think of your Full Retirement Age (FRA) as the line in the sand.
Your retirement benefits will either be adjusted upward or downward depending on when you choose to start collecting, relative to your FRA age.
Claiming Strategies from Shakespeare
The decision of knowing when to claim Social Security can quite literally be more than a hundred thousand dollar decision.
??Did You Know: Social Security will add an extra 8% to your benefits for every year you decide to delay taking Social Security after reaching your FRA age.
Said another way, your monthly benefit increases the longer you wait to claim.
The opposite is also true in that, for every year you take Social Security early, you’re penalized by having your benefits reduced.
领英推荐
Why is this important?
If you're fortunate enough to be in a position where you're healthy, have a history of longevity within your family, and have enough income from other sources to draw on in retirement, then postponing your Social Security until age 70 could significantly benefit you.
The decision to delay could result in much more retirement income down the road and less stress on your portfolio.
To learn more about Social Security "break-even" points and when it makes sense to delay versus taking the money early, click on the article below ??????
Continuing to Work While Collecting Benefits
Those who continue to work while collecting Social Security before their full retirement age may find that they must return a portion of their benefits if they earn too much
According to the Social Security Administration (SSA),
If you are younger than full retirement age (FRA) and earn more than $21,240, the amount of your benefits may be reduced.
If you are under full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above the annual limit of $21,240.
In the year you reach full retirement age, Social Security will deduct $1 in benefits for every $3 you earn above a different limit. In 2023, this limit on your earnings is $56,520.
Note: Benefits "lost" to earnings are not necessarily gone forever.
Once you reach FRA, your claiming age will be adjusted upward to account for the number of months' worth of benefits you lost, and your future benefits will be larger.
??Did You Know: After FRA, there is no reduction in your benefits!
This means that you can continue to work, without having your benefits penalized. Taxation of your benefits will still apply, however.
On Deck and Up Next Week: Healthcare Expenses in Retirement
Want More Information?
To receive your FREE copy of our eBook, "8 Steps to Building Your Ideal Retirement", click on the link below.
To a happy and successful retirement,
Nick Covyeau, CFP?
Family guy and financial advisor exploring the intersection of money and values. Curious about Enough. Founder of Fident Financial, LLC. Simul justus et peccator.
1 年Keep. it. up. By far the most powerful thing you can be doing.
Insurance Broker at The Canzone Group Insurance Agency
1 年Nice work Nick Covyeau, CFP?!
Merrill Financial Solutions Advisor at Merrill Lynch and Bank of America
1 年Nice work - asking for accountability is a brave and awesome move!