Commentary by Joel Harris
Social Security is often one of the most overlooked aspects of proper retirement income planning. Here are some specific rules to keep in mind as you start factoring your Social Security benefits into your retirement planning.
You contribute 6.2 percent of your income
Workers pay 6.2 percent of their earnings into the Social Security system, up to $117,000 in 2014. Employers pay a matching 6.2 percent for each worker. Self-employed workers must contribute 12.4 percent of their income annually.
How your benefit is calculated
Social Security payments are calculated based on your 35 highest-earning years in the workforce, and are also adjusted for inflation. If you don’t have 35 years of earnings, zeros are averaged in for the years you didn’t pay into Social Security.
Know your full retirement age
You can collect the full amount of Social Security you have earned at what the Social Security Administration calls your full retirement age, which varies based on your birth year. It is very important to know when your full retirement age is because of earnings limit restrictions if you file early, potential spousal benefit strategies at or after full retirement age, and timing of benefits as part of your overall retirement income planning strategy. The current ages for full retirement benefits are 65 and 8 months for those born in 1941, 65 and 10 months if born in 1942, 66 for those born between 1943-1954, 66 and 2 months in 1955, 66 and 4 months in 1956, 66 and 6 months in 1957, 66 and 8 months in 1958, 66 and 10 months in 1959, and 67 for anyone born after 1960.
Know the income limitation rule
If you elect to take benefits before your full retirement age, please make sure you’re aware of the income limitation rule on earned income as it relates to benefits possibly being withheld. In 2014, $1 of benefits will be withheld for every $2 in earnings above $15,480. This rule is applicable every year until your reach full retirement age and can change each year. It is imperative to take this rule into consideration because the benefits you were expecting could be dramatically reduced.
You get bigger checks if you delay claiming
You can increase your Social Security checks by delaying when you sign up for Social Security. For example, people born in 1943 or later will get 8 percent larger payments for each year they delay claiming after their full retirement age, up to age 70. After age 70, there is no additional benefit to delaying claiming Social Security. Subsequently, your benefits could be reduced by as much as 25 percent if you elect to take them at 62 versus your full retirement age.
Married couples have additional options
Married couples are entitled to claim Social Security based on their own work record, or payments worth up to 50 percent of the higher earner’s benefit. And when one spouse dies, the surviving spouse will receive an amount equal to the higher earner’s benefit. Ex-spouses are also eligible for Social Security benefits if the marriage lasted at least 10 years. Couples who have reached their full retirement age can even claim spousal payments, and then later switch to payments based on their own work record, which will then be higher due to delayed claiming. Claiming spousal benefits, including file and suspend and claim now, claim later strategies can be really tricky, so please research your options carefully before electing your benefits.
Payments are adjusted for inflation
Social Security payments are adjusted each year to keep up with inflation, as measured by the Consumer Price Index. These cost of living adjustments will vary from year to year, so please pay close attention to how inflation can potentially impact your future benefits.
Social Security benefits may be taxed
Unfortunately, there really isn’t a way to get completely away from paying taxes to Uncle Sam. Please work with a competent professional to help you understand if your Social Security payments will be taxed.
View your Social Security statement online
The Social Security Administration has stopped mailing paper Social Security statements to most workers due to budgetary restrictions. If you want to view your complete earnings history, taxes paid into the system and get a personalized estimate of your expected payments, you’ll need to create a Social Security online account and log in to view your statement. You can do this by visiting www.ssa.gov. It’s a good idea to periodically check your statement to make sure your information is being recorded correctly and to make decisions about when to claim Social Security.