By Katie Seay on March 11, 2016
As you make key decisions regarding Social Security, here are the top five things you should be aware of in order to get the most out of your benefit.
1. Estimating Your Benefit
Your retirement benefit is based on two factors: Average monthly earnings during the 35 years in which you earned the most, and the age at which you begin taking Social Security. You can take benefits as early as age 62; however, your payment will be reduced if you take it prior to your Full Retirement Age (FRA). You can also delay benefits until age 70 and earn delayed retirement credits by doing so.
Visit www.ssa.gov to access calculators that can help you estimate your retirement benefit in various scenarios.
The most accurate way to estimate your Social Security benefit is to review your Social Security statement. Your statement outlines your earnings history and provides an estimate of eligible benefits. You can receive your statement online by registering for a “my Social Security” account at www.ssa.gov.
If you aren’t registered online and aren’t currently receiving benefits, you will receive a paper statement by mail every five years starting at age 25, and an annual statement starting at age 60.
2. Working in Retirement
Your Social Security benefit will be negatively affected if you haven’t reached your Full Retirement Age (FRA) and continue to work while receiving Social Security retirement benefits. If you are under your FRA and earn more than the annual earnings limit ($15,720 in 2016), your Social Security benefits are reduced by $1 for every $2 over the earnings limit. For the year you reach FRA, your benefit is reduced by $1 for every $3 over a different annual earnings limit ($41,880 in 2016) until the month you reach FRA.
What Is Your Full Retirement Age (FRA)?
|If you were born in...||Your full retirement age is...|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 and later||67|
Note: If you were born on January 1 of any year, refer to the previous year.
If you’re impacted by these rules, the Social Security Administration will recalculate your benefit at FRA. Once you attain FRA, earnings don’t impact your benefit.
3. Recent Changes
The Bipartisan Budget Act of 2015 closed perceived loopholes in the Social Security system. The legislation included provisions to eliminate two Social Security strategies: file-and-suspend and restricted application.
File-and-suspend allowed one spouse to file for benefits at FRA and immediately request that these benefits not be paid. By doing so, the other spouse could then file for spousal benefits.
Restricted application involved one spouse filing for his or her own retirement benefit while the other spouse filed for spousal benefits at FRA and then switched to his or her own record, typically at age 70, in order to earn delayed retirement credits.
For anyone turning 62 after 2015, these strategies are no longer available. These people now fall under the deemed filing rules, which means married couples can’t pick and choose which benefit to receive or delay during the suspension period.
For those already at least 62 in 2015, restricted application will remain available going forward. However, file-and-suspend will only remain available until April 29, 2016, which means this strategy will remain valid for anyone who has already fully implemented it or does so before the end of April.
4. Taxability of Benefits
If you have other sources of income, including earned or investment income, you may have to pay income tax on your benefits. Depending on your income level, up to 85% of your benefit may be taxable. If Social Security is your only income source, your benefit generally isn’t subject to income tax.
5. Challenges Ahead
If you’re currently retired or close to retirement, your benefits probably won’t be affected by imminent changes to the Social Security system; however, the younger you are, the more likely you are to be impacted. Social Security is a pay-as-you-go system, with today’s workers paying the benefits of today’s retirees. As life expectancy increases and the birth rate in the United States decreases, fewer workers will have to support more retirees. However, we will likely see Social Security reform efforts in the near future.
Ultimately, there are many unknowns for the Social Security system in the years ahead. In the meantime, work with your financial advisor to focus on savings and consider a variety of income scenarios to make sure your retirement plan stays on track.