The 5 Keys to Your Social Security Benefits
Social Security is a given for most people – we’ve all heard of it, and most of us probably expect it to be part of our lives at some point. But many people walk around without any real idea of how Social Security works, or how it can help you in retirement.
Read on for a brief intro into how Social Security can be a significant part of your retirement income plan – and how to get started in making it so.
1. Check in on your benefits
Unless you sign up for online statements, the Social Security Administration will mail a paper statement to you every 5 years. This document shows your qualifying earnings and the estimated benefits that you could receive at your full retirement age.
You can also access your benefits information online: just set up an online account and you’ll be able to view the most up-to-date information anytime you want.
Checking on your benefits is useful for several reasons:
- It can give you a baseline number to plan around as you build a retirement plan.
- You’ll be able to see if there are any errors or mistakes in your earnings history.
- You’ll get the benefit of seeing how your hard work impacts your potential benefits.
That said, it’s important to realize that your Social Security benefits are not set in stone.
They’re dependent on factors like:
- Your income over time: your earnings could grow or fall in the future, which could affect your retirement benefit amount.
- The age you choose to retire: if you retire early, your benefits will be lower, and if you delay you could receive a higher benefit.
- Changes to the law: there is no guarantee that benefits calculations won’t change over time.
- Outside pension plan, military service, or railroad employment, which could impact your benefit level.
So, take a look today and see what you can expect come retirement.
2. Keep inflation in mind
Now that you’re looking, it’s important to point out that the dollar amount of your estimated benefits is essentially what you would get right now if you were eligible for Social Security.
That means your benefits will be adjusted over time to keep up with inflation – so the actual dollar amount you’ll be eligible for at retirement age could be much higher than what you’re seeing on your statement.
However, it is critical to remember that this won’t represent any real growth in your benefits: the “growth” over time is simply an adjustment to your benefits so that they keep up with the overall price level in the economy.
In other words, you need to think about how far your estimated benefits would go today. Ask yourself:
- What percentage of your income or expenses would be covered by your Social Security benefit if you were able to take it today?
- Would you have a major shortfall in living costs that you need to make up elsewhere, or would it go a long way?
- Are you saving enough and investing in a way that can help you make up the shortfall?
- If Social Security benefits calculations change or benefits reduced, what would you need to do to make up for it?
These are key questions you need to address in making any kind of retirement savings plan. Having a sense of the answers will help you figure out how much you need to save and how you might need to invest to reach your goals.
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3. Maximize benefits with your spouse
While the basic rule of thumb when it comes to Social Security benefits is to delay as long as you can, that doesn’t always make the most sense.
Delaying your benefits raises them by about 8% per year until you reach age 70. Thus, if you’re an average Boomer and you wait until that point, you could increase your benefit by 32%.
This is great, of course, but if you’re married and one spouse has earned significantly more than the other over time, it could actually make sense to do something a little different.
In this situation, you might be able to maximize your joint Social Security benefits by having the lower-earning spouse take their benefits early while the higher-earner delays. Then, when the higher-earner’s benefits kick in, the lower-earner can switch to the spousal benefit instead. You get a little more income in the meantime, and a much bigger check for both spouses later on.
This is just one way to make the most of your Social Security benefits, but it isn’t the right answer for every situation. If you’re married, run the numbers based on your individual benefits, and if you need help reach out by phone or visit a local Social Security Administration office for assistance.
4. Remember to plan around death or divorce benefits
If you’re divorced from someone who is eligible for Social Security benefits, you could be eligible for spousal benefits.
You need to meet these qualifications:
- Your marriage lasted for more than 10 years.
- You’re currently unmarried (in most cases) and over age 62.
- Your ex is entitled to Social Security and your spousal benefit would exceed your individual benefit.
Similarly, if you’ve been widowed, you may be eligible for survivors’ benefits. You could be eligible for full benefits once you reach your full retirement age or if you’re caring for a child 16 years old or younger. There are also potential benefits available for divorced survivors, younger survivors, children, and other dependents.
Survivors’ benefits have to be arranged in-person at a Social Security Administration office. Contact yours to learn more.
5. Keep in mind: Your Social Security income could be taxed!
It’s a common oversight: you find your estimated benefits, plug them into your retirement income calculations, and build out a tentative savings and income plan to get there.
But you forgot all about taxes.
Depending on your total income, you may need to pay income tax on a portion of your Social Security benefits. This is a good time to point out that any withdrawals you take from a Traditional IRA or 401(k) are also taxable.
Thus, when building your retirement income plan, don’t forget to include estimated tax calculations based on your benefit amount and your total income. This will help you build a plan that generates enough income to pay both Uncle Sam and yourself.
Of course, there’s an important caveat that tax laws can and do change over time, which means your tax bracket could shift by the time you retire. There’s no foreseeing these things, so do your best using an assessment of tax rates today, and remember to adjust your plans over time with changes to the tax code.
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