Connecticut Estate Planning Attorneys Blog
Many people mistakenly assume that Social Security is a fairly cut-and-dry proposition. You turn 62 – you get your long-awaited Social Security benefits. Right?
Well, it is not that straight-forward.
It is actually a very complex system that is best navigated under the guidance of a professional who knows something about the more than 8,000 different ways to claim Social Security.
As they say, the devil is in the details.
A single blog post cannot cover all the intricacies of Social Security or explain how to avoid the many potential pitfalls that can arise. But we can highlight three of the primary points to consider as you begin to devise a plan to maximize your Social Security benefits while avoiding heavy taxes and other losses.
When you file for Social Security matters.
It’s all about the timing.
One of the first decisions you have to make about Social Security is when to start taking it. The vast majority of retirees opt to start taking Social Security the minute they are eligible, when they turn 62. In addition to welcoming the additional income, many of these early subscribers are worried about the long-term viability of Social Security. They figure they’d better collect while they can, in case it’s not there later on.
Unfortunately, what many people don’t realize is that choosing to file for Social Security earlier rather than later can have grave consequences.
From the full retirement age (FRA) of 66 to age 70, you earn a delayed retirement credit of 8% per year. This could add up to a 32% increase for life and is 76% higher than if you were to claim early at age 62.
As an example, someone who filed at age 62 could increase their monthly benefit from $750 to $1,000 by waiting until age 66 to start taking Social Security. That difference can really add up! And, if that same individual could wait until age 70, earning a full delayed retirement credit, the benefit would almost double to $1,320 per month.
Think Social Security is tax-free income? Think again.
Another common misconception about Social Security benefits is that they are not taxed. That isn’t entirely true. In fact, up to 85% of Social Security benefits may be taxed depending on your specific circumstances.
The taxes on Social Security are based on provisional income taxes which are calculated based on your adjusted gross income combined with any tax-exempt interest and 50% of your Social Security benefits. The tax liability ranges from 50% to 85% depending on income and marital status. The provisional income taxation thresholds can be triggered by a variety of income sources including distributions from 401(k) or IRA accounts; wages or pension; interest from CDs, savings accounts, and other such sources of income; and dividends from various sources.
There’s something to be said for working past retirement age.
How long you are willing and able to work is another factor that is often overlooked. Social Security benefits are based on calculations that look at your 35 highest years of earnings, including an inflation factor for every year up to age 60.
After age 60, the inflation factor is not applied, which means that Social Security uses your actual wages from that point on. What this means is that each year you continue working past age 60 replace earlier years in which you earned less. In the overall calculation, this typically results in a higher average earnings rate. By combining this higher average with the delayed retirement credits (a 32% increase), you can give your Social Security income a nice boost.
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There are hundreds of other nuances that can affect your short- and long-term Social Security income potential. Spousal benefits, for instance, require precise coordination to avoid unintentional losses. And did you know that divorced spouses who were married for 10 or more years might be eligible to collect spousal benefits, even if the other party has remarried?
Other factors that come into play when devising a strong Social Security strategy include personal finance, current and future health, life expectancy, considerations for widow or widower benefits, and so forth.
There’s more to collecting Social Security benefits than you might think! It’s a complicated undertaking, so be sure to learn all you can about your options before applying for Social Security. After all, you want to get the very most you can!
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