Three Important Questions to Ask About Social Security
Dear Rich Lifer,
I’ve noticed a lot of people try to boil down Social Security to one question:
To delay or not?
While this an important question to ask, it’s not the only one you should be considering.
According to the Social Security Administration (SSA), more than three out of every five retired workers rely on SS benefits for at least half of their monthly income.
While delaying benefits will result in a bigger payout, there may be circumstances where delaying might not be in your best interest. I’ll get to that in a minute.
First, I think it’s important you understand how the SSA calculates your benefits. This will lay the groundwork for the questions you should also be asking.
In general, the SSA uses four factors to determine your monthly benefit at full retirement age.
Factor 1: Work history
Factor 2: Earnings history
These first two factors are tied together, I’ll explain.
When the SSA determines your monthly benefit, they calculate your 35 highest-earning, inflation-adjusted years.
To boost your payout, you’ll want to make as much money as you can in those 35 years.
If you work less than 35 years, you’ll receive $0 for income earned in each of those years, this will be averaged into your monthly benefit calculation.
Factor 3: Birth year
The SSA also takes into account the year you were born to determine your full retirement age.
Most baby boomers will have a full retirement age around 66 or 67. Everyone else born in or after 1960 will have a full retirement age of 67.
As you know, if you start taking benefits before your full retirement age, your monthly payout will be less. The flip side, however, is if you delay, your monthly benefit grows.
Factor 4: Claiming age
The final factor is the age you begin claiming benefits. While you can start claiming at age 62, like I said, there’s incentive to wait.
For every year you delay claiming benefits, your payout grows by about 8%, up until age 70.
This means, someone claiming at age 70 could clear 76% more per month than someone who claims at age 62.
Now that we’ve covered the basics, let’s talk about some other questions you should be asking before claiming SS.
Question 1: How Will This Affect My Taxes?
Believe it or not, SS benefits are taxable. And more likely than not, you’ll owe some federal tax on your benefits when you retire.
Single taxpayers whose modified adjusted gross income plus one-half of their benefits exceeds $25,000, and married couples filing jointly in excess of $32,000, will be taxed on a portion of their benefits.
Additionally, there are some states that have high individual exemptions. Kansas, Rhode Island and Missouri, have exemptions of $75,000, $80,000, and $85,000, respectively. For most Americans living in these states they won’t have to worry about paying state-level tax on their benefits.
However, states like West Virginia, North Dakota, and Vermont mirror the federal tax schedule, which often leads to double taxation, so beware.
Knowing how SS will affect your taxes is important so you don’t get caught off guard by an unexpected tax bill.
Question 2: Am I Healthy?
While no one can predict how long they’ll live for, there are some signs of what might lie ahead.
For instance, if you know your family health history, you have a pretty good indication of what kind of genetic makeup you are subject to. That’s not to say your fate has been decided.
But, if you have one or more chronic diseases, and you know immediate family members who have suffered similar illnesses, it could be in your favor to claim benefits sooner rather than later.
The age where total benefits received becomes equal, regardless of when you claimed benefits, is around 78 and 80. If you don’t think you’ll make it to this age range, you’re better off taking SS earlier.
Similarly, if you have longevity on your side and your doctor has given you a clean bill of health, delaying your payout will lead to bigger monthly cheques.
Question 3: How Will This Affect My Spouse?
If you’re married, deciding who takes SS first can mean the difference between a comfortable retirement and not so comfortable.
There are all kinds of strategies for approaching spousal benefits. My recommendation, if you’re a high-income earner, take the spousal benefit at full retirement at the lower earner’s rate.
It doesn’t matter who’s earning, you still have a choice. Delay taking your own until later, but start on your spousal benefit.
This way, you build up your monthly pay out while enjoying the benefit of guaranteed income.
One way to do this is by having your spouse claim their benefit while you file for your own benefits, then you suspend.
Not many people know that you can suspend your benefits, or delay them until a later age.
Even though you’ve filed, you don’t have to claim.
But this is just one option. Figure out different combinations of regular and spousal SS benefits that work for your situation.
Deciding when to claim benefits can also affect your partner’s survivor benefit. If you start before reaching your full retirement age and you’re also the household breadwinner, your spouse can’t maximize their survivor benefit should you pass away first.
On the other hand, if you wait until your full retirement age to begin payouts, you’ll give your spouse the option to maximize their survivor benefit.
As you can see there are more nuances to claiming SS than simply deciding whether or not to wait to take it.
Keep these questions in mind as you prepare for years of guaranteed income ahead.
To a richer life,