When we start thinking about retirement, the first thing comes to mind if we have enough money to support us when we stop working. Most of us will need some level of retirement income to last for our golden years. I think that Social Security paycheck will be the basis of many people retirement plans. The best part of Social Security that it will keep coming in as long as we live. That’s what it’s called a guaranteed income. The smart thing to do is to make your Social Security income as large as possible. The reason behind is that for many people Social Security will be the only guaranteed lifetime income they’ll receive.
When is the best age to apply for the Social Security benefits?
When we start working and earn an income, we pay a percentage of our paycheck into the Social Security system.
However, the amount of your paycheck is not determined by how much money you contribute to the Social Security system, but rather other factors:
- How much your earned income
- How long you worked
- The age you start collecting benefits
If you want to retire early, you can start taking your Social Security benefits at age 62. However, you will not be receiving the full payment. The paycheck will be reduced to up to 30%. And this reduction will be permanent.
If you start collecting Social Security at full retirement age, you will receive a “full” amount of Social Security benefits. Full retirement age is not the same for everyone. It is determined by your birth year.
If you can delay collecting Social Security benefits until you turn 70, your monthly payments will be increased by 8% for each year between full retirement age and 70. The benefit of waiting until as late as 70 is to get the highest Social Security paycheck for the rest of your life.
The Social Security website helps with the additional details about the retirement age and how it will affect your paycheck.
How much is your Social Security income?
Do you know how much is YOUR Social Security paycheck?
According to the statistics the average Social Security retirement income is approximately $1,400 monthly or $16,8000 annually. If you’re married, the combined income will be higher.
If you don’t know how much your Social Security income is, it’s a good idea to start looking at your statement from the Social Security Administration.
When you open the link to the website, sign in or create an account if you don’t have one. Your Social Security statement will show how much you could expect to receive at a different age. Depending on your birth date and year, you’ll see various numbers of expected income.
So if you start claiming your benefits at age 62, it will be your lowest income and at age 70 you’ll be your highest. Whatever age you decide to retire, be careful of claiming your benefit right away.
I love the idea of retiring early, but I know I will regret the decision to take the benefits before my full retirement age with a reduced paycheck. A good idea might be to still retire at 62, but delay claiming the benefits until the full retirement age.
We should always remember about health care cost and how it will affect our income. Medicare benefits start at age of 65. If you want to retire before you turn 65, you have to decide how you’re going to pay for health care expenses.
If you’re a woman like me, who wants to retire in 10 years, you’re facing a big decision to make based on these numbers. This decision is important because it will affect our lifestyle in retirement.
Do I need to pay taxes on my Social Security income?
Let’s be honest with each other, that we all hate to pay taxes. We spend most of our lives working and saving. The last thing we want is to give a large portion of our retirement income to the IRS.
Do I need to pay taxes on Social Security income?
The answer is: it depends on your income and tax bracket.
If Social Security paycheck is your only source of income, then you probably won’t pay any taxes in retirement. If you have other sources of income, then a portion of your Social Security income will be taxed.
The more combined income you get from your retirement accounts, pensions, annuities, dividends, capital gains and Social Security, the higher will be your tax bracket. The higher your tax bracket the more taxes you’ll pay in retirement.
If you are 5 to 10 years from retirement, it’s a good idea to start calculating the combined income you’ll receive when you stop working. If you expect to be in a high tax bracket, you need to structure your retirement income, so you pay fewer taxes in retirement.
There are some ways to minimize the amount of taxes you pay in retirement. It will take time to do research on your own or better talk to your accountant.
How working in retirement affects your benefits?
As a woman, I always worried about how we’re going to make ends meet until we start receiving our Social Security paycheck. My husband and I working right now, but life happens and we might lose our jobs or get sick and being pushed into early retirement. Hopefully, it is not going to happen to both of us at once. So, we’ll have to manage to live on less money or start collecting early retirement benefits with a reduced paycheck.
If you’re planning to collect Social Security while still working, you need to know how it will affect your combined income. There are some rules to follow and it all depends on your age.
If you decide to start collecting Social Security benefits at an early age of 62 and continue working, your monthly benefit will be reduced based on your earnings. There is a limit how much you can earn with no reduction in your Social Security income, but if you earn above that limit, then your income will be reduced.
For example, suppose you’re under your full retirement age and earn up to $17,040 in 2018, then your income will not be reduced. If you earned more than $17,040 in 2018, you’ll have $1 withheld for every $2 earned above the annual limit.
A simple way to look at these examples is that before full retirement age you’ll get paid reduced Social Security paycheck and your paycheck from work will be reduced even further.
If you wait until full retirement age, you’ll get paid 100% of your Social Security benefits and your paycheck from work will not be reduced. If you want to get more details on this topic, read “Getting benefits while working” on Social Security Administration website.
Benefits for a married couple
If you’re married or live with the partner, delaying and maximizing your Social Security income is the best approach for both of you. But life is unpredictable, and many things might happen which affect your income.
There are many situations where the husband is the main source of income. If a husband dies before his wife, it can put her in a difficult financial situation. She can apply for Social Security survivors benefit which is based on her husband’s benefit. You’ll get a reduced pay if you claim it early. You’ll get 100 percent of your late husband benefits if you wait until your full retirement age.
The spousal benefit is great for non-working spouses or spouses who had low income for many years.
How does a spousal benefit work?
You must be age 62 or older to receive a spousal benefit. You are not eligible to receive a spousal benefit until your husband or partner files for his own benefit first. When he does, you can start collecting a spousal benefit. You will get paid around 50 percent of your spouse’s Social Security monthly paycheck.
If you decide to collect the spousal benefit before your full retirement age, it will be reduced, because you’re filing early.
If you are qualified for your own Social Security benefit based on your own earnings, you should collect your own Social Security paycheck. But if it’s too small, you can apply for a spousal benefit. Social Security will calculate and pays a higher amount.
It’s a smart idea for a married couple to coordinate how and when they should each start collecting Social Security benefits. If you and your spouse are both eligible for Social Security and want to increase your paychecks, you should delay the claim.
Roman and I want to delay our claims. I am planning to start collecting the Social Security at my full retirement age and Roman will apply for a spousal benefit until he turns 70. After that, he will start collecting his own benefits. That way he will receive the maximum of Social Security paycheck and I will receive my 100 percent, so overall we will maximize our combined Social Security guaranteed income.
Retirement is one of the biggest life’s transitions we will face. We need to start preparing for that by looking into many factors and analyzing several scenarios before we make any decision.
If you’re fast approaching your retirement age, you’re facing a tough decision of when is the right time to start collecting Social Security. The decision is important because it will affect your lifestyle in retirement.
There are no easy rules of thumbs to follow. We are all different. Yet, every one of us should analyze our own financial situation and decide when is a good time to start collecting a paycheck.
With this post, I have tried to answer as many questions as possible as I had for myself when I first started research on Social Security and how it will affect my retirement years. But there is more to consider and decide before you set your decision in stone.
It’s always a good idea to consult with your financial planner or CPA about your strategies for maximizing the value of Social Security benefits.
Do you know how much is your Social Security benefits? Do you plan on collecting Social Security benefits early, at full retirement age or delayed? Share your thoughts.