One of the realities you will face upon retirement is navigating the world of Social Security. The whole time you earn income, you’re paying into the system, and are entitled to receive some of that back when you retire. However, understanding Social Security basics, when to take benefits, and learning what happens if you don’t follow correct procedure, can be a daunting task.
Roger Whitney, a Certified Financial Planner and Accredited Investment Fiduciary, writes about retirement issues on his blog, The Retirement Answer Man.
And offers some insight into what you need to know about Social Security in order to get it right for your situation.
1. Should You Delay Withdrawing SS Income?
“Many people think of Social Security in one dimension,” says Whitney. “They look at it in terms of whether to delay or not, and there are a lot of other dimensions to it.”
First of all, you can’t decide when to take Social Security benefits if you don’t know what’s considered your “full” retirement age. Your full retirement age is based on when you were born, so you should check with the Social Security Administration to see what your full retirement age will be. No matter what your full retirement age is, you can start collecting benefits at age 62. However, if you start collecting your benefits “early,” before reaching your full retirement age, you will see a reduction in your monthly pay out.
You also need to consider what will happen if you decide to take your Social Security later, which means a higher pay out each month. “If you delay taking Social Security, you get a bump in payments each month,” Whitney says, “but that doesn’t matter as much if you don’t have the resources to put it off.”
In fact, if you aren’t careful, and start taking Social Security at age 62 — while you are still earning money — you could be in trouble. “If you take Social Security early and earn too much, your monthly benefit is decreased,” Whitney explains. “Once you reach full retirement age, your benefit is recalculated to leave out the months when benefits were withheld.”
Whitney also counsels those approaching retirement to consider the implication involving Medicare premiums. “When you’re taking Social Security, your Medicare premiums cannot increase more than your Social Security benefits. If you delay, though, Medicare premiums are subject to whatever the increase is. Once we’re no longer in a low-rate environment, that can become problematic.”
2. What About Your Spouse?
Another important part of basic Social Security planning is figuring out how to coordinate benefits with your spouse’s benefits. Whitney points out that there can be some strategy involved when deciding how to approach spousal benefits.
“You can either be receiving your own benefit, or receiving a spousal benefit,” says Whitney. “You can’t take both at once, but you can switch off, depending on your situation.”
“If you are a high-income earner, take the spousal benefit at full retirement at the lower earner’s rate,” suggests Whitney. “You have a choice, regardless of who’s earning. You can delay taking your own until later, but start on your spousal benefit.”
That way, you’re building up a monthly pay out, but still receiving some Social Security income. Whitney does point out that your spouse can’t claim a spousal benefit until you retire. “If you want to delay taking your own benefit, but would like it if your spouse could claim his or her benefit, you can file for benefits, and then suspend.”
He points out that many people don’t realize they can suspend their benefits, or delay them until a later age. So, even though you have filed for benefits, you don’t have to take them.
You can suspend, and your spouse can still get the spousal benefit, and you can benefit from an increased payout down the road. And, of course, you can switch things around, depending on your situation, figuring out a combination of regular and spousal Social Security benefits that works for your financial situation.
“When you’re married, there are these other things that come into play,” says Whitney. “It makes sense to run different scenarios and see what combination of you and your spouse can come up with to maximize every dollar you get.”
3. Are Social Security Benefits Taxable?
Many people don’t realize that Social Security benefits are taxable. These benefits are considered income, and you have to pay tax on them. If you know you’ll have to take required minimum distributions (RMDs) from a retirement account later, you might want to consider the impact of your income from a retirement account on the Social Security benefits.
There can also be complications from taking benefits early, especially if you’re still earning money. “If you take Social Security before full retirement age, the benefits are taxed, and your benefits can be decreased based on what you earn if you are over a certain income limit.”
Understanding the taxes involved is an important part of not being caught by surprise. “At first, it seems so simple,” says Whitney. “You get that statement in the mail each year, and they tell you about your benefit. But there’s a lot more that goes into it.”
Social Security is Not Guaranteed
Of course, the other important thing to remember about Social Security is that it can change. Nothing is set in stone, especially since Congress can change the way the retirement age is figured, as well as cut benefits, or change other aspects of Social Security.
The most basic thing to remember about Social Security is that the reality is that you probably need to rely more on yourself than on this program.
While it is unlikely that Social Security will disappear entirely, you do need to be prepared for the fact that it might change — and that means you are responsible for your own retirement success.