It’s trickier than many realize
Although Social Security benefits aren’t likely to make up a sizable part of your retirement income, your planning wouldn’t be complete without getting a good grasp on how much you’ll be receiving and, if you plan to work part-time after retirement, the impact of your earnings on your benefits.
What is your full retirement age?
“Full retirement age” is the moment when the Social Security Administration considers you to be retired, entitled to your normal and unreduced retirement benefit, regardless of whether you are still working. Those born in 1953 reach their full retirement age of 66 this year. Those born in later years will have to wait a bit longer for unreduced benefits. Two months are added to full retirement age each year, starting for those born in 1955. Those born in 1960 and later years have a full retirement age of 67.
Receiving benefits early
You can begin receiving Social Security benefits as early as age 62. If you do begin receiving benefits early, they will be reduced permanently, based upon the number of months that you receive checks before you reach full retirement age. For example, if your full retirement age is 66, and you retire at age 62, there is about a 25% reduction in your benefits.
In an actuarial sense, early retirement gives people about the same total Social Security benefits over their lifetimes as retirement at the full age, but in smaller amounts so as to take into account the longer period during which they will receive them. In a personal sense, it all depends upon how long you live. It will take about 16 years of full benefits to recoup the deferred early benefits, so the breakeven age is about 84.
Starting benefits after full retirement age
Social Security benefits are increased by a certain percentage if you choose to delay receiving them. These increases will be added automatically from the time that you reach your full retirement age until you start taking your benefits, or until you reach age 70. The percentage varies depending on your year of birth but is 8% per year for those born after 1943. If you decide to delay your retirement, the Social Security Administration strongly urges you to sign up for Medicare at age 65.
Working while collecting benefits
You may continue to work and still receive retirement benefits. Your earnings in or after the month that you reach your full retirement age will not affect your Social Security benefits. However, your benefits will be reduced if your earnings exceed certain limits for the months in the calendar year before you reach full retirement age.
Example: In 2019, if you’re under your full retirement age, $1 in benefits will be deducted for each $2 in earnings that you have above the annual limit of $17,640. In the year that you reach your full retirement age, your benefits will be reduced $1 for every $3 that you earn over a different annual limit, $46,920 in 2019, until the month that you reach full retirement age. Then your earnings will no longer affect the amount of your monthly benefits, no matter how much you earn. The annual limits increase each year as average wages increase.
Note: “Earnings” are not the same as “income.” Earnings are limited to wages and remuneration received for services. It’s a test of whether you are really retired. If you have $100,000 of investment income from dividends and interest (“unearned income”), that will not reduce your Social Security benefit at all.
Taxation of benefits
Under legislation enacted in 1983, the Social Security Trust Funds receive income based on Federal income taxation of benefits. The funds receive taxes on up to 50 percent of benefits from single taxpayers with incomes over $25,000 and from taxpayers filing jointly with incomes over $32,000. “Income” in this context includes tax-exempt municipal bond income but does not include Roth IRA distributions.
Legislation enacted in 1993 extended taxation of benefits. The legislation increased the limitation on the amount of benefits subject to taxation from 50 percent to 85 percent for single taxpayers with incomes over $34,000 and for taxpayers filing jointly with incomes over $44,000. All additional tax income resulting from the 1993 legislation is deposited in Medicare’s Hospital Insurance Trust Fund.
Read your Statement
You may obtain a Social Security Statement that provides a record of your earnings, estimates of your Social Security benefits for early retirement, full retirement, and retirement at age 70. Your statement also provides an estimate of the disability benefits that you could receive if you become severely disabled before you’re eligible for full retirement, as well as estimates of the amount of benefits paid to your spouse and other eligible family members as a result of your retirement, disability, or death.
The Social Security Statement can be a valuable tool to help you in planning for retirement. It can serve another purpose as well. Because the Statement includes a full record of when you contributed to Social Security as well as the amounts that you contributed, you have an opportunity to spot and correct any inaccuracies prior to the time that you want to begin receiving benefits. For more information, visit www.ssa.gov.
You may be entitled to make a retroactive claim for your Social Security benefits, up to six months before the month you file. When you take this approach, you may get a lump sum payment for the months in the retroactive period.
Although some retirees may find this attractive, it is not “free money,” it comes with a cost. Your benefits will be computed as of the retroactive date, and all credits for delayed retirement will be lost. The loss is permanent, it affects the amount of benefits collected for the rest of your life.
At The Trust Company of Kansas, we help people. We promise to minimize the burden of wealth management and bestow the freedom to enjoy everything else. The officers at The Trust Company of Kansas are always willing to discuss your financial goals with you and help you to create a plan that is well-aligned with your wishes. If you have a specific question about retirement planning, please contact us at (800) 530-5254 or visit tckansas.com/contactus, and one of our Certified Trust and Financial Advisors will be happy to assist you.