On this episode of A Wiser Retirement Podcast, Casey Smith, Matthews Barnett, CFP®, ChFC®, CLU® and Brad Lyons, CFP® talk about the highlights of social security, how it works, and how to maximize it in retirement. It is important to research your social security options in advance, so you are prepared for the future. It’s never too early to get started!
Social security can be defined as a government program that provides monetary assistance to retired individuals. However, it is not free. Social security is paid throughout your life; it is taken out of each paycheck you receive during your working years. When you claim your benefits, the social security administration averages 35 years’ worth of your highest earnings. Then, they use that average to calculate the monthly payment you will receive. Be sure to double check those calculations because sometimes the company records it incorrectly. Most importantly, consider it as an additional source of income rather than the primary source of income.
Delay Social Security
There are three main reasons as to why you should delay your social security benefits. The first reason is so you can increase your annual payments. The second reason is if you wait until age 70, you can manage your taxable consequences from ages 66 to 70. The third reason is if you wait until age 70, you can benefit from an 8% increase in payments per year. The downside of taking it early, at age 62, is that there will be a penalty. This penalty amounts to 5-6% each year until you reach full retirement age, which is age 67. It is important to decide on the right time to claim these benefits, so you can have additional income in retirement without penalties.
Do Your Due Diligence
Do your due diligence when it comes to claiming your social security benefits. Some agents will give you different estimates; they’re not experts. Try to meet face-to-face so you can receive more accurate calculations. If you live in a big city, drive to the outskirts. The process tends to be less rushed in person. It’s worth it to know you will be receiving the max benefit for your individual circumstance.
Taxes on Social Security
In the past, social security was tax-free, but that has changed. Most people who claim social security must pay taxes on their benefits. These taxes are based on your provisional income. If you and your spouse have a combined income of under $32,000, you will not be taxed, $44,000 will be taxed at 50%, and anything above $44,000 will be taxed at 85%. It is important to be mindful of this information because taxes matter in retirement; they can affect everything.
A great added benefit of social security is the spousal benefit. This gives you the option of choosing between either your own earnings or 50% of your spouse’s. It is recommended to pick whichever is greater. The requirements of this option are that you must be of retirement age and your spouse must claim retirement benefits. Another option is if your spouse is younger than you, and you are of retirement age then they can receive 50% of your benefit until they are of age to claim their own benefits. To receive the spousal benefit, be proactive and speak with a social security agent to further explore your options.