For many people reading this, Social Security is your largest retirement asset. For decades you have likely seen payroll taxes debited from each paycheck. Here are a few things everyone should know about Social Security benefits.
- Marital Status Could Impact Your Benefits
Those who are married should coordinate with your spouse as to when you will both begin claiming Social Security benefits. The choices you make today could affect your combined retirement incomes, the taxes you may on Social Security benefits, or what income will be left when one spouse dies.
While the surviving spouse can keep the higher of the two Social Security benefits, the smaller check will go away. For those on fixed incomes, this can be a devastating financial blow. So, making smart choices now with the higher earner’s benefits and claiming strategies can be a lifesaver for the surviving spouse down the road.
While we are on the topic of marital status, divorce and remarriage can change the benefits for which you are eligible. For couples who were married for at least ten years before divorce – each (ex)spouse can potentially get spousal Social Security benefits. This option goes away if the spouse looking to get spousal benefits has remarried.
Working While Claiming Social Security
A whopping 34% of women and 61% of men claim Social Security at 62, according to 2019 Social Security Administration (SSA) statistics. Many of these people are likely fully retired, but some are probably working part-time to earn extra money. Others are likely still working full-time but couldn’t resist the allure of a monthly check from the government.
Anyone old enough to claim Social Security can do so, but depending on your age and income, you may be subject to a Social Security annual earnings test. Essentially, this is how it works if you are taking Social Security benefits before your full retirement age (FRA) – the SSA will deduct $1 for every $2 you earn above its annual earning threshold. In 2021, the SSA earning threshold was just $18,960. The threshold is higher the year you reach your FRA, and then it goes away.
Social Security Taxes
You can thank Ronald Reagan for the massive tax increase on Social Security benefits. Until 1984, Social Security benefits we not taxed at all. As it stands now, how much taxes you on your Social Security benefits will be dependent on your total income from all sources.
Depending on your income level (and marital status), 50-85% of your Social Security income could be taxable. For those with incomes between $25,000 and $34,000, 50% of your Social Security benefits will be subject to income taxes at the federal level. If your income is above $34,000, 85% of your Social Security benefits will be subject to federal income taxes. If your financial advisor isn’t helping you minimize taxes on your retirement income, it may be time to find a tax-planning expert to help you keep more of your retirement income.
The good news is a majority of states do not tax Social Security benefits. Check with your amazing financial planner or tax pro to find out if your state will be taxing your Social Security benefits in retirement.
Social Security Inflation Protection
In theory, the Social Security Cost of Living Adjustment (COLA) helps protect your benefits from inflation. The reality is more of a mixed bag. As benefits increase, you will likely owe more in taxes (both income taxes and sales taxes). Likewise, many seniors have complained that the inflation estimates used by the SSA don’t truly reflect the increases in their spending.
In case you were wondering, it has been estimated that the Social Security COLA for 2022 could be as high as 6.2%
How Social Security Benefits Are Calculated
To put it as simply as possible, your Social Security benefits are based on your lifetime earnings. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.
Maximum Social Security Benefit 2021
For 2021, the maximum Social Security benefit is just $3,011, per month, at full retirement age. Those who wait to claim benefits at age 70 could receive as much as $3,895 per month. In case you were wondering, the average Social Security benefit was just $1,543, per month, in 2021.