By FPA member Scott M. Kahan, CFP®
Last Updated: July 28, 2011
As you near retirement, it is important to have a clear picture of how your Social Security benefits will fit into your overall income in retirement. An understanding of the various factors that can affect the amount you receive will allow you to put a plan in place that maximizes your benefits.
Some of the factors you'll want to take into account:
- How collecting before your full retirement age (FRA) could affect your benefit
- How your spouse or your ex-spouse's benefits can affect what you receive
- How your benefit could increase if you delay collecting your benefits after your FRA
- Whether continuing to work could affect your benefit
- How starting and stopping your benefits and/or instituting a buyback can affect the amount you receive
- If you'll have to pay taxes on your Social Security benefits
For most, eligibility actually starts as early as 62. For individuals who are widowed it's even earlier at age 60, and for widowed individuals with a disability it's 50. But just because you're eligible doesn't necessarily mean you should start collecting. Before you make a decision about when to start your benefits, you should begin by verifying your FRA because for every month you collect before you hit FRA, your benefits are permanently reduced by a fraction of a percent.
Example: If your FRA is 66 and you decide you want to retire at 62, you will actually collect 25 percent less each month than you would have if you waited until your FRA.
On the flip-side, you can also increase the amount of monthly benefit by holding off on collecting your benefits until after you reach FRA. For every month you delay, your benefit amount increases capping out at age 70, whereby the benefit will no longer continue to increase.
Example: If your FRA is 66 and you wait until 70 to start collecting, you will actually get 132 percent more of the monthly benefit you would have received.
Your marital status can affect the amount of benefit you receive. If you are married, each spouse is entitled to their own benefits based on their earnings; however as a couple you may be entitled to receive even more. If the equivalent of half of your spouse's benefit is higher than your own benefit, then you are entitled to the higher of the two, and the spouse still receives his/her full benefit amount.
If you're divorced and were married for at least 10 years, you may find you're entitled to increased benefits through the record of your ex-spouse. You will need to explore if you are eligible to qualify for this, but it's definitely worth the effort.
Whether it's because you want to or you have to, you can work after you start collecting benefits. Once again, there are a number of factors you need to be aware of before you choose to take this route. For individuals who have not reached FRA, there is an annual limit you can earn before you may have to pay back some of your benefits. The good news is that if you have reached your FRA, you can collect your benefit and not have to worry about earnings limits.
There is a lot of confusion behind whether or not your benefits are taxable. At the federal level, up to 85 percent of your Social Security benefits may be taxable. Taxation at the state level varies, so be prepared to research your state's tax rules.
To figure out if your benefits will be taxed at the federal level, you need to calculate your "provisional income," which is your Adjusted Gross Income (AGI) plus one half of your Social Security benefits plus any tax free income (like tax free bonds).
Example: If your provisional income is more than $34,000 (single) or $44,000 (married filing jointly), up to 85 percent of your Social Security benefits will be taxable. If your provisional income is between $25,000 and $34,000 (single) or $32,000 and $44,000 (married filing jointly), up to 50 percent will be taxable. The rules also change for married filing separately.
It was too good to be true. Before December 8th 2010, an option existed allowing someone to pay back the Social Security benefits they had previously received. Once this was done, they could now begin collecting a higher benefit as of their current age. As of December 8th 2010, it was changed that you could only “buy-back” the past 12 months. So once you begin collecting, you have 12 months to pay back what you collected. After 12 months, this option is not available.
When you're ready to start exploring your Social Security options, you should start by bookmarking the Social Security Administration website. The website contains a wealth of information, calculators and FAQs. You may also want to make an appointment at your local Social Security office to visit with a claims administrator to help you through the application process. And, if you haven't already done so, you should enlist the help of a financial planner so he or she can take a look at your entire financial situation to see how Social Security fits into your retirement income.
FPA member Scott M. Kahan, CFP®, has devoted his career since 1982 to helping individuals, families and small business owners reach their financial goals. Scott is president and founder of Financial Asset Management Corp. (FAM), a New York City based fee-only wealth management and financial planning firm. He regularly serves as a valuable source for such media outlets as The Wall Street Journal, The New York Times and ABC Evening News.