Retirees continue to lean on Social Security benefits in order to fund retirement. According to the Social Security Administration, it is expected that 38 million retired workers will collect annual benefits totaling more than $550 billion this year.
For 52 percent of married couples and 74 percent of unmarried persons, Social Security payments represent 50 percent or more of their retirement income. Despite the important role Social Security plays for the average retiree, many Americans make poor choices when it comes to selecting their benefits. This is often because of misinformation on how to best maximize your benefits. An awareness of the following Social Security myths may help reduce the likelihood of a major retirement mistake.
•Social Security benefits are tax-free: While a tax-free Social Security payment in retirement would be nice, it is not always the case. In fact, up to 85 percent of your Social Security benefits could be taxable.
Add half of your Social Security benefit amount to your other income — including dividends, interest, retirement account distributions, W2 wages and even tax-free municipal bond interest — if the amount is less than $25,000 for single filers or $32,000 for married couples filing jointly, your benefit should not be taxable. However, single filers with income from $25,000 to $34,000 and those married filing jointly with income between $32,000 and $44,000 will pay tax on 50 percent of their Social Security benefits. Additionally, single filers with income greater than $34,000 and those married filing jointly with income above $44,000 can expect 85 percent of their Social Security income to be taxable. Budget carefully and be sure to calculate the net amount that you can expect to receive in benefits.
•I will receive full retirement benefits at age 65: If you ask pre-retirees when they plan to retire, oftentimes age 65 is a common answer. However, full Social Security benefits are not available until you reach your Normal Retirement Age (NRA) which may be a later date.
So what exactly is “normal retirement age?” NRA is known as the age when you are eligible to receive full Social Security benefits and varies depending on your date of birth. While age 65 was the NRA for those born 1937 or earlier, retirees born later will have to wait longer to claim full benefits. For example, retirees born between 1943 and 1956 have an NRA of age 66 while those born after 1960 will not receive full retirement benefits until age 67. It is important to be aware of your NRA, as claiming benefits early will result in a reduction in the amount you may receive.
•I should take Social Security benefits as early as possible: Despite what your NRA may be, retirement benefits can be claimed as early as age 62 and retirees often grab the money as soon as possible. While this may be advantageous for some, claiming early comes at cost — reduced payments. For example, if your normal retirement age is 66 and you begin Social Security at age 62, you can expect to receive 75 percent of the benefit you would have received if you waited until full retirement age. This is because you will be getting benefits for an additional 48 months.
For each year that you postpone Social Security up to age 70, the benefit increases. For example, at age 65, you will get 93.3 percent of the monthly benefit. Each year that benefits are postponed after reaching your NRA will result in an 8 percent raise (until age 70) — not too shabby.
The decision of when to take benefits often comes down to a break-even calculation that is heavily dependent on life expectancy. For example, when determining whether to take benefits at 62 or 66, some estimates assume you would have to live beyond age 77-78 to benefit from waiting. Additionally, you might have to live beyond age 83-84 to come out ahead when taking benefits at age 70 vs. 66.
While life expectancy is a critical component, other factors such as income, taxes, current expenses and spousal benefits should all be considered when determining the optimal age to begin benefits. Consider visiting SSA.gov to review calculators that may help.
•I cannot receive Social Security while continuing to work: While you can receive benefits if you are still working, you must be careful of your age and your earnings. For example, if you take Social Security early — say age 62 — you can expect to see your benefits reduced by $1 for every $2 you earn above $15,480 in 2014. In the year you reach NRA, you can expect a reduction of $1 for every $3 you earn above the limit. After NRA, you are will not see a reduction in Social Security for earning more than $15,480. Bottom line, be careful taking Social Security early if you plan to keep working as you may not realize a substantial benefit.
There is nothing simple about Social Security. From spousal and widows benefits to break-even calculations and other complex strategies, there are many things to consider when determining the optimal time to begin Social Security. Since everyone’s situation is unique, consider speaking to your tax and financial adviser to determine the most appropriate strategy for you.
Kurt J. Rossi, MBA, is a Certified Financial Planner Practitioner and Wealth Advisor.
He can be reached for questions at (732) 280-7550, kurt.rossi@Independentwm.com or
www.Independentwm.com. LPL Financial Member FINRA/SIPC.