In the game of Financing Retirement, our sources of Money In aren’t as flexible as they were during our working years.. For example, two possible sources of income in the US have important rules governing when they are available, and for one, how much is available. These are IRA and 401k savings plans, and Social Security.
I’ll discuss my take on the savings plans in more detail in another financial post, but basically, they set aside an allowable amount of income each year “tax deferred,” reducing current taxable income. This means you don’t pay taxes on that income until you take it out of the account years later, when you are likely to be in a lower tax bracket. There are early withdrawal penalties for younger people, and minimum required withdrawals later.
The second benefit is Social Security. To keep things simple, in this discussion I won’t cover the disability aspects of this program. I want to concentrate for now on the basics of the retirement benefits, which are confusing enough! Setting aside (for the moment) the political questions of viability, how much do you really know about Social Security and the related Medicare benefits?
Here are a few questions every US citizen over 50 should be considering:
When can I take Social Security? Many of us grew up thinking of 65 as Social Security’s magic retirement age. That has changed. For people born in 1938 and later, the age to receive full benefits gradually increases to 67. For most “baby boomers” (born 1943-1954) the age is 66. However, if you are willing to take a reduced benefit, you can begin as early as age 62. For a boomer, that would mean a 25% reduction in monthly payments, but four additional years of benefits. See the tools available on the SS website to calculate your options and apply online.
When should I take Social Security? That’s a very personal decision. If, for example, you have been unemployed for some time or need cash flow, you may want to start early. For every month you wait, however, your benefit increases, all the way until age 70. Personally, I’m hoping I can wait – that if I need additional income between now and 66+, I can work part-time to make up the difference. That means I’ll have 25%+ more to work with each month later, when part-time work will be less possible. The Social Security Administration website has more detail to help with this decision.
How much can I expect from Social Security? The Social Security Administration has made your account info available by mail for years. Now, they offer it online. The projections are based on what you and your employers paid in over the years, what you expect to continue earning, and your planned retirement age. This is a good document to review regularly, if for no other reason than to assure the data matches your own records. We’ve reviewed ours regularly for the last fifteen years. You can also use the online estimator the SSA provides to see scenarios of payouts at different ages and retirement dates.
Is anything different for married couples? Well, yes and no. Each person’s account is his or her own – there isn’t a “marriage penalty.” However, if one of you dies, things can change. The survivor will not continue to receive both checks every month. However, if the person with the larger benefit dies first, the survivor’s benefits can increase. If the surviving spouse has taken Social security before his/her full retirement date, the amount of the spousal benefit will be reduced somewhat, but is still available. By the way, this spousal survivor benefit is also available to qualified divorced spouses.
Can anything else reduce my monthly Social Security benefits? Besides taking benefits early, there are a few other things that limit or reduce payments. If you work while taking retirement benefits, especially before your full retirement age, there will be adjustments. However, your benefits will be increased a little later. Benefits also became taxable on a limited basis in the 1980’s – so when you are planning your Money In, you must also account for the tax Money Out. Last, there is a maximum amount that can be earned by the formula, which changes whenever benefits are adjusted. This affects those who have been at the high income end.
When do I sign up for Medicare? Generally, we become eligible for Medicare at 65, and you can apply online 3 months ahead. It’s a good idea to learn about current options at least that far ahead, as it allows some time to evaluate them – and they need some review. This should be done even if you are still working with benefits at 65. Information is available at the Social Security website.
Overall, it’s helpful to spend time surfing the Social Security site regularly, starting at age 50 or earlier, for updated information, planning tools, and links to other sites. You will also find help in financial publications, on brokerage sites, and at AARP.org. Of course, you can also call or visit your local Social Security office. Hopefully, these sources will help unravel the various aspects of Social Security to allow for the best possible decisions for this piece your retirement plan – and mine!
Next: Will Social Security stay Viable??
Following are a few related articles and sites:
- Your Social Security Statement is Now Online (answers.iquote.com)
- Social Security Administration (socialsecurityhome.com)
- How Social Security Income is Taxed (turbotax.intuit.com)
- AARP Home»Work & Retirement»Social Security (aarp.org)
- How Work Affects Social Security (socialsecurity.gov)
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