For many Americans, Social Security benefits can be a very crucial component of their retirement income. It is projected that about half the Boomer generation will rely on it as their primary source of income during their retirement.
If you might be in that boat, you will want to ensure that you can get as many benefits as you can. We will go over some rules that will help you.
The first significant rule is that how much you receive monthly is based on when you start claiming your Social Security benefits. The minimum age you must be to be able to receive your benefits is 62. However, the payments will be much lower than what you would get if you claim your benefits at your full retirement age. Also known as FRA, your full retirement age will be from 66 to 67, depending on the year you were born. For those that can push off claiming Social Security past their FRA, they will receive an 8 percent increase for every year they delay until they are 70 years old.
For instance, if Joan decides to claim her retirement at FRA of 67 and was going to receive $1,800 monthly, her amount would have been 30 percent less ($1,260) if she started her claim at 62. If she decided to take advantage of the 24 percent increase of waiting until age 70 to claim, she would be receiving a monthly check of $2,232.
Though it is best to maximize your monthly amount, the best time to start your benefits is based entirely on your personal circumstances. For example, if you are healthy with a family history of people living until their late 90s and you have a small amount of retirement income outside of your Social Security benefits, it may be in your best interest to push off your claims until you are 70 (at max) or until you need it. However, if you are diagnosed with an illness or have a family history of premature death, it may be best to start your benefits as soon as possible.
It may be a good idea to work with a financial expert to assist you with uncovering your needs and providing you with the best strategies when you should start your benefits.
Another thing to consider is the taxes your benefits may be liable for both at the Federal and state level. If you receive a significant amount of income during retirement, you will be subject to federal income taxes. Still, there are exemptions available for those that make less than the taxable limit.
However, the state you plan to retire in may also tax your Social Security benefits. If this income stream is one that you mainly or solely rely on, having to pay taxes on it may make it harder to live your retirement comfortably.
Thankfully, there are only 13 states that tax these benefits to a certain extent, but it is a good idea to research this topic about the state you will be in when retired. Some people even decide to move to a state that does not tax Social Security along with lower taxes on estate and property.
Going back to federal income taxes, based on your combined income, you may be subject to taxes. Your combined income is made up of 50 percent of your yearly benefit and any other income you may receive.
If your combined income is less than $25,000 as a single filer, you will be exempt from paying federal income taxes. Those that file jointly will be exempt if you have a combined income of less than $32,000. Single filers may be liable to pay taxes on up to 50 percent of their income if they have an income of $25,000 to $34,000. Up to 50 percent of a joint filing can be taxed if they bring in $32,000 to $44,000 a year. If a single filer has more than $34,000 in yearly income, up to 85 percent can be taxed. Joint filers with over $44,000 can have up to 85 percent of your benefits taxed.
You can also increase the amount of your benefits if you extend your work years or if you receive higher earnings.
Your benefit amount is calculated with the average highest-earning years of 35 consecutive years. You can increase this average by earning more or working longer.
If you work longer than planned, the earliest years of a lower payment would be replaced in the benefits calculation. Others will increase their benefits by bringing in more income with another job or side gigs. It is recommended to do whatever is possible to increase the amount of your Social Security payments, especially if this will be your main source of income in retirement.
Though SS benefits can be hard to understand, it is very important to learn as much as possible as knowledge is power. The more you know, the more you can do to prepare and maximize these benefits.