Many misconceptions are floating around when it comes to Social Security. From “bonuses” to “bump up” payments, it can be hard to decipher fact from fiction if you solely rely on the opinions and plans of friends and family.
While we agree, getting opinions and ideas is great, we want to remind you of the importance of getting the facts and leaning on the appropriate source for financial information. Let’s set the facts straight about how Social Security works and what truly impacts your monthly payment.
How Social Security Actually Works
It's important to understand how Social Security benefits are calculated. Your benefit amount is based on your average earnings over your 35 highest-earning years, adjusted for inflation. Beyond your income history, when you start receiving benefits also affects the payment amount. You can start receiving Social Security benefits as early as age 62, but your benefit amount will be permanently reduced. On the other hand, if you wait to start receiving benefits until after your full retirement age (which is currently 66 or 67, depending on your birth year), your benefit amount will be permanently increased.
So, what about this supposed Social Security bonus? The truth is, there is no such thing. However, the idea of a Social Security bonus may come from the fact that waiting to start receiving benefits can result in a higher benefit amount than if you start earlier.
Let’s quantify the effect of collecting early vs waiting until you’re 70. If your full retirement age is 67 and you start receiving benefits at age 62, your benefit amount will be reduced by about 30%. But if you wait until age 70 to start receiving benefits, your benefit amount will be increased by about 24%. This increase is not a bonus, per se, but rather a reflection of the government rewarding you for pushing out your Social Security recipient start date.
The math behind the reduction and increase is supposed to create an even playing field for Social Security recipients. A person who starts collecting at age 62 will see a smaller amount each month, but overall, will receive more monthly payments than someone who waited until they are 70.
Other Factors Impacting Your Social Security Benefit
It's worth noting other factors can affect your Social Security benefit amount, such as whether you continue working while receiving benefits and whether you are eligible for spousal or survivor benefits. So while there is no such thing as a Social Security bonus, there are still strategies you can use to maximize your benefits.
Often the most impactful strategy is to delay starting Social Security benefits as long as possible, particularly if you are in good health and expect to live a long time. By waiting until age 70 to start receiving benefits, you’ve maximized the monthly payment amount. Your benefit amount increases every month you delay until you reach 70 years old.
Spousal benefits also come into play. Whether you’re married or divorced, you may benefit from reviewing your options, especially if your spouse or ex-spouse was a higher income earner than you. Here are a few key facts about Spousal Social Security Benefits:
You are eligible for spousal benefits if you are 62 years old and your spouse or ex-spouse is collecting Social Security.
You can receive up to 50% of the retired individual’s full retirement benefit.
If you have your own work history and are eligible for your own Social Security benefit, you will receive whichever option is higher (your own Social Security or 50% in spousal benefits).
As a surviving spouse, you are eligible to receive your spouse's full retirement benefit.
If you are divorced and currently unmarried, you qualify for spousal benefits if you were married for at least 10 years.
Spousal benefits are considered taxable the same as your own benefit.
Do I Have to Pay Taxes on My Social Security?
As a Social Security recipient, you still need to be conscious of income taxes. Your annual income and filing status determine what percentage of your Social Security benefit is taxable. Here’s a high-level guide:
50% of your benefit may be taxable if:
Filing Single with an income of $25,000—$34,000
Filing Jointly with an income of $32,000 to $44,000
85% of your benefit may be taxable if:
Filing Single with an income of more than $34,000
Filing Jointly with an income of more than $44,000
Take Time to Understand Your Social Security Benefit
Take the time today to log into your personal Social Security account. Once you’re logged in, you’ll see a personalized screen showing your estimated benefit amount based on your future salary expectations and the age you choose to begin collecting.
*Image for example purpose only and not a guarantee of income. Source: mySocialSecurity
So while there is no “Social Security bonus”, you can see it is important to create a plan to maximize your benefit. After all, you’ve worked hard and have likely contributed your fair share to the program over the course of your career. If you have questions or would like to discuss when may be the best time for you to start collecting Social Security, reach out and schedule an appointment with us today.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website,Past performance is not a guarantee of future results.