Mary Lynn Dahl
(SitNews) Ketchikan, Alaska - In case you were thinking it would be simple to sign up for Social Security benefits at retirement, think again. It is anything but simple, unfortunately. Getting the wrong benefits can cost you a lot of money, now or later. Here are some issues to understand before you sign up for Social Security.
First of all, decide when you want to start getting retirement income benefits. It does not have to be the same date that you retire. You can start early at age 62 but your benefit amount will be reduced by 25%.You can wait until full retirement age, either 66 or 67, and receive your full benefit. Or you can wait until age 70 and get a benefit that is increased by 8% per year between your full benefit age and age 70. A majority of US citizens take their benefits early, at age 62.
If you are married and both of you are entitled to benefits from your own earned income, it may work out that one of you can start retirement income at age 62 and the other one wait until age 70, but you will need to crunch the numbers to see if this will work for you or not. If you are single, it does not work out to your advantage to start retirement income early, at age 62 unless you are suffering from a terminal medical condition that is likely to shorten your life. Otherwise, there is no good reason to start taking Social Security benefits at age 62 if you are single.
Next, find out if you are eligible for spousal benefits. If you were married for at least 10 years to someone who is entitled to Social Security retirement income benefits, you are entitled to a spousal benefit from his or her earnings, even if you also are entitled to benefits from your own earnings. Spousal benefits can be from your current spouse or a former spouse, alive or not.
A spousal benefit is equal to 50% of whatever your spouse will get, but it does not reduce his or her benefit; it is totally separate from his or her benefit. Compare the spousal benefit to your own before you make your choice and choose whichever benefit is larger. You can only take one benefit. If your benefit is $800 per month and your spouse or ex-spouse is entitled to $2,000 per month, you should choose the spousal benefit because it will be $1,000 per month, giving you an increase in monthly income of $200 per month in Social Security. I am always surprised to hear someone say that he or she did not know that spousal benefits were even available. YES they are. Check it out.
Another point to be aware of is that Social Security has changed their system of annual reporting to workers with benefits. Now, they only send out the annual statements of projected retirement income benefits to people who are at least 60 and have not yet filed or established an online Social Security account. Therefore, if you are under 60 and have not done either, you will not get annual statements and may not be aware if there are errors being recorded in your earnings record. To check your earnings record in this case, you need to contact Social Security and inquire about getting a statement or set up your account online, which you can check for the accuracy of your own earnings records. This is important, because it is your earnings record that establishes you income benefit at retirement. If it is incorrect, you may not get the income benefits that you are entitled to, so checking it is very important.
If you are over age 62 but still working, you need to know that your earnings benefit is a projection of your benefit at retirement, but the estimate does not include the additional benefits from earnings after age 62. Thus, it is going to be lower than actual benefits and will need to be recalculated for the income amounts that would be paid at older ages, like ages 66, 67 and 70.
Speaking of benefits at age 70, most people do not know that if you work past age 66 or 67 and take income benefits, your benefit may be reduced by $1 per $2 earned, or $1 per $3 earned, depending on your total income. If you continue to work past age 70, however, Social Security no longer deducts any of your benefit because of earned income and you will get your total benefit without penalty for working.
Social Security benefits may be subject to income taxes on some amount of those benefits, up to 85% of them, depending on your total taxable income. Many people do not pay any taxes on their Social Security income, however, because their total taxable income is below the amount that would trigger taxes on the Social Security portion of that taxable income. The lesson here is that higher earners do pay more income taxes in most cases, in spite of the popular belief that they avoid taxes just because they are high income. In fact, you have to be super rich, not just a high earner, to be able to legally avoid taxes using trusts, charitable donations and foundations.
Most people realize that Social Security does include a cost-of-living adjustment (COLA) annually, but in case you did not, you should know that the benefit does increase by the government’s estimate of the increase in the cost of living annually. Over the years, since 1975 that COLA has been 3.5%. It has been only 1.7% since 2007, however, due to lower interest rates and the government’s opinion that inflation has been much lower. Regardless of the actual COLA, it is helpful to know that this portion of your income is not fixed at a certain dollar amount and will increase annually. This does help in keeping up with the cost of many of your routine expenses in retirement. An often overlooked detail is the long term impact of inflation on your retirement income, so every percentage point of increase of income is, in fact, important.
Another piece of important information to have, especially if you plan to work past age 70, is how your continued earnings will impact your monthly Social Security benefit base amount. I do not think most people realize that continuing to earn income after 70 has the potential to increase your base benefit, particularly if your continued earnings is as much or more than prior year’s earnings. For higher income workers who work past age 70, their incomes, usually associated with self-employment or small business ownership, continues to increase year by year, regardless of their age. So, their earnings tend to increase also, and this is added annually to their benefit amount and recalculated. If they are owed more than had been estimated due to a presumption that they were over 70 and therefore retired, the additional amount(s) owed will be paid in a lump sum, usually within 6 months of it being overdue.
For example, if your benefit at age 70 was $2,500 per month for one year, it would only normally be increased by the COLA in the next year because Social Security assumes you would retire and have no further earned income. However, if you did not retire, you would accumulate the additional earned income and this might increase that benefit amount to $2,600 per month. In that case, if it had not been paid to you, you would be entitled to a check for $100 per month for as many months that it had not been paid.
Just so you know, make note that Social Security benefits are based only on earned income, not income from rental properties, investments, bank interest, annuity interest, income from retirement plans or inherited money. However, since alimony is deductible from earned income by the spouse who pays it and taxed as earned income by the spouse who receives it, it does count towards your record of earned income, so it will impact your benefits at retirement, something that divorced people often are not aware of at the time they agree to it. For example, if a person earns $100,000 per year for 5 years and agrees to pay alimony of $25,000 per year for 5 years and then retires, he or she will only be credited with earnings of $75,000 per year in earned income on their Social Security record of earnings. In addition, the spouse who received alimony in this example would be credited with $25,000 per year in additional income, which will increase his/her Social Security retirement income benefits. For some people, this is a surprise.
Many workers who are employed by government could also experience an unpleasant surprise when they retire; they may find out that their employer did not pay into the Social Security system and neither did they. This is unfortunate because if this is the case, Social Security retirement income benefits can be reduced as a result of those years of government employment. This reduction in retirement income benefits is the result of regulations called the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The WEP reduces Social Security benefits by as much as $443 per month and the GPO can reduce the spousal benefit for a spouse of a government employee. If you are a government worker, be sure that you know if your employer did or did not opt out of Social Security and if so, how it will affect you at retirement.
Self-employed workers and owners of small businesses that operate as sole proprietors or partnerships in their businesses also pay into Social Security and become eligible for benefits at retirement. In fact, they pay a higher tax than people who are not self-employed, because they pay both the employer portion of the tax and the employee portion of the tax. The total that they pay is about twice the rate of an employee. Their benefits are calculated in the same manner as employees of corporations and big businesses and they have the same choices to consider when planning for retirement at some point. Spousal benefits, early or late start dates, income taxes and deductions for various reasons; all are important to the individual retiring from a small business or self-employment.
Regardless of who you worked for all of your working years, knowing your estimated retirement income benefits, from Social Security and all other sources, is so important to a secure and comfortable retirement that it should be a priority on everybody’s to-do list. This is not a subject that should come as a surprise to anybody. If you are old enough to get those annual statements, study them and ask questions. If you are not old enough to get them, go online and set up your Social Security account, from which you can download an estimate of your eventual benefits at various retirement ages. Get educated on this complex subject, get professional advice if you need it and think long term, putting Social Security into perspective with every other source of income at retirement.
This is a major step forward in your overall financial plan, so get started today.
For more information on Social Security benefits and strategies, see additional articles by this author in prior MONEY MATTERS columns in the Sitnews archives of this publication.
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©2017 Mary Lynne Dahl, CFP® is a Certified Financial Planner ™ and partner in Otter Creek Partners, a fee-only registered investment advisor firm in Ketchikan, Alaska. These articles are generic in nature, are accepted general guidelines for investment or financial planning and are for educational purposes only.
Mary Lynne Dahl©2017
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