Most of us spend our entire working lives paying into the Social Security system so that we can receive benefits in retirement. How much the program will pay you is under your control to some degree, because there are ways to increase your Social Security benefits.
It's also within your control, at least to some degree, to make sure that you don't make choices that reduce the program's contribution to your retirement income. Here are three things that can cut into your Social Security benefits.
No. 1: Working too much in retirement
Your monthly benefit checks will get a haircut if you earn more than a certain amount while collecting benefits before your full retirement age. That's the age at which the government says you're eligible to collect what it defines as your full benefits, based on the year you were born. For most of us, it will be 66 or 67.
Here are the specifics, per the Social Security Administration: "If you're younger than full retirement age during all of 2019, we must deduct $1 from your benefits for each $2 you earn above $17,640. If you reach full retirement age during 2019, we must deduct $1 from your benefits for each $3 you earn above $46,920 until the month you reach full retirement age."
Before you start writing letters of outrage to Congress, know that this rule isn't quite as bad as it seems. The money deducted from your checks isn't lost forever -- it's just withheld. It gets factored into the benefit checks you receive later, which end up larger.
Once you reach your full retirement age, you can earn as much income as you're able to while collecting Social Security benefits, and your monthly payments won't be reduced.
No. 2: Triggering the taxation of your benefits
While the money withheld from your benefits checks discussed above should eventually find its way back to you, earning money while you're collecting Social Security can trigger taxes on those benefits. You will never pay taxes on more than 85% of your Social Security benefits, but you could be taxed on a significant portion of them, depending on your income.
If Social Security is providing most of your income, you likely won't pay taxes on it at all. The percentage of your benefits that is subject to income tax will be determined by your "combined income" -- that's your adjusted gross income ("AGI") plus non-taxable interest plus half of your Social Security benefits.
If those income levels seem rather low, there's a good explanation for that: The 50% thresholds were set way back in 1984(!) and the 85% ones in 1993. That's right -- half that table above is 35 years old and the other half is 26 years old. The thresholds were not mandated to increase in sync with the cost of living -- aka inflation. It would seem sensible for Congress to adjust them, but until that happens, year after year, the old numbers will apply.
To be clear, you won't always pay tax on 50% or 85% of your benefits. The "up to" is important, as if you earn only a little over those threshold amounts, you could end up paying tax on only a tiny fraction of what you get from Social Security.
Nevertheless, it's important to take taxes into account if you're planning on working while collecting benefits. The tax implications could make it somewhat less lucrative than you'd expect. Instead, if possible, consider delaying the point at which you start to collect your benefits; the longer you postpone beyond your full retirement age (up to age 70), the bigger your monthly checks ultimately will be.
Having to pay income taxes on your benefits isn't the worst thing, but don't let it catch you by surprise -- run the numbers first. You may want to skip the job, work fewer hours, or put off filing for Social Security a bit longer.
No. 3: Delaying when you start to collect benefits
Postponing the point at which you apply for Social Security benefits can be the right financial move if you plan to keep working part time during the early years of your retirement, but it's not necessarily the best move for everyone. Considerations of income and taxes aside, many people delay starting to collect because doing so makes their monthly benefit checks bigger. For every year beyond your full retirement age that you wait, (up to age 70), your checks will be increased by about 8%. Delay from age 67 to 70 and you'll get 24% more per month -- enough to turn a $2,000 benefit check into a $2,480 one. On the other hand, start collecting early and your benefits will shrink -- by as much as 30%, if you start at 62 (the earliest you can do so) instead of 67.
There's a catch, though: While you'll get bigger checks, you'll get fewer of them. There's a lot of actuarial science that went into the way Social Security calculates monthly payments, but they add up to this: The system is designed to pay out about the same total benefits to a retiree who lives to a typical age no matter when they start collecting.
If you live much longer than average, waiting for bigger checks will have been worth it. But by definition, a heck of a lot of us will live lives that are average or below-average in length. Thus, it can make plenty of sense to just go ahead and start collecting early -- that might get you the most dollars possible from of the benefit.
The more you know about the things that can influence your Social Security benefit, the better the decisions you can make related to it. And those informed decisions can lead to a more comfortable, and more secure retirement.
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