Social Security is a valuable program that ensures retirees have an income to rely on in their golden years. However, many Americans do not understand how it works.
Just over a third of retirees-to-be (aged 55 to 65) failed and a further 18% achieved a D on a basic knowledge quiz about Social Security Retirement Benefits by means of Mass Mutual. Only 3% received an A+ by correctly answering all 12 true/false statements.
Knowing the ins and outs of Social Security will ensure you make the most of your benefits and avoid leaving money on the table. Here are nine facts about Social Security that you may not be aware of.
Social Security will not disappear
It is true that the reserves of the Social Security Trust Fund will be exhausted by 2035, and many Americans worry that benefits will no longer be available by the time they retire.
“This fear causes many people — to their detriment, most likely — to start collecting benefits as soon as they are able so they can get it while it lasts,” said Taylor Jessee, a CPA, CFP and the director of finance. planning for Taylor Hoffman Asset Management.
However, Social Security is largely financed by payroll taxes, which will be collected in the near future.
“I’m warning today’s retirees that Social Security probably won’t go away anytime soon,” added Jessee.
Social Security is not enough to live in retirement
Most people can’t get by on Social Security. It provides an average of 30% to 40% of your pre-retirement income.
“Nevertheless, Social Security benefits are still valuable, so you’ll want to do everything you can to maximize them,” said Jackie King, financial advisor at Edward Jones.
The more you invest in a retirement plan such as a 401(k) or IRA, the more flexibility you have in managing your retirement costs because you have more sources of income to combine with Social Security.
“So try to contribute as much as you can to these plans,” King said.
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Benefits are based on your highest income of 35 years
Worried that several years of lower pay will have a negative effect on how much you receive in Social Security benefits?
The good news is that the formula for calculating your benefits is based on your 35 highest-earning years, as well as the age at which you start taking Social Security, according to King. If you’re curious how much you’re expected to get, she said you can register to receive an annual statement from the Social Security Administration with an updated estimate.
Your personal situation is more important than your age
The longer you wait to take Social Security, the more money you will receive.
You can claim a reduced benefit from the age of 62. If you wait until you have reached full retirement age, you are entitled to your full benefit. If you wait until the age of 70, you will receive 132% of your full benefit.
But waiting as long as possible before claiming your benefits is not always the best move.
“Your needs come first,” says Stephan Baldwin, founder of Center for assisted living.
For example, he said that if your spouse has passed away, applying for survivor benefits rather than waiting for full benefits may make more sense. So be sure to evaluate all your options.
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You can claim your ex’s benefits
Even if you’re no longer married, Baldwin said you may be able to claim spousal support. To be eligible, your marriage must have lasted more than 10 years, you must be at least 62, and you must not remarry. You can also claim 100% of the survivor benefit if your ex-partner has passed away, Baldwin noted.
You keep the greater advantage if your spouse dies
If both spouses in a marriage receive Social Security benefits, the smaller benefit disappears when one person dies. It doesn’t matter who dies first – the surviving spouse will receive the larger of the two benefits.
“That’s why couples should focus on increasing the higher benefit,” said Jeremy Keil, a retirement-focused financial planner with Keil Financial Partners and host of the Retirement revealed blog and podcast. “It is the one who will stay the longest and be there to help the widow(er).”
Some of your benefits may be withheld
If you claim your benefits before you reach full retirement age, are still working and earn more than the annual income limit, some of your Social Security benefits may be withheld.
The cap is $19,560 for 2022, and you would lose $1 in benefits for every $2 in earnings above the maximum.
But you don’t really lose the advantage. “You don’t get it if you’re under full retirement age; but once you get to that age, Social Security will recalculate and give you credit for those dollars,” Kell explained.
You can reverse a decision about applying for Social Security benefits
If you’ve decided to claim your benefits and then realized you should have waited, the Social Security Administration will allow you to withdraw your one-time transfer application.
“There are plenty of reasons why someone might regret the decision to start taking Social Security,” said Jordan Kahn, a CFA and chief investment officer for HCR Wealth Advisors.
For example, you may decide to take a part-time job and no longer need the extra income. Or maybe you didn’t realize how much more money you could get by waiting a few more years.
“If a person makes this decision within 12 months of submitting their first application, they can stop receiving benefits and continue as if they never claimed them,” Khan said.
But you must repay any benefits you received during that time.
You may be required to pay taxes on Social Security benefits
Many Americans pay taxes on their Social Security benefits. The exact amount you have to pay will depend on your total income.
“It doesn’t take a lot of income to tax your benefits,” Kahn said.
If you are a single filer and earn between $25,000 and $34,000, you may be required to pay income tax on up to 50% of your benefits. If you earn more than $34,000, up to 85% of your benefits may be taxable. For joint filers, if you and your spouse have combined income between $32,000 and $44,000, you may be required to pay income tax on up to 50% of your distributions. If your combined income is more than $44,000, up to 85% of your benefits may be taxable.
In addition to paying federal income tax on your benefits, Kahn noted that 12 states also impose income taxes on Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
If you’re concerned about your tax bill when you retire, it’s a good idea to talk to a professional who can help you find ways to lower your taxable income.
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This article originally appeared on GOBankingRates.com: 9 Things Most Retirees Don’t Know About Social Security