For better or worse, deciding how and when to take Social Security is a complicated decision. This is unfortunate because many individuals, when faced with a difficult decision, shut down rather than ask the questions that can help them avoid mistakes. Due to the long-term payouts associated with Social Security, mistakes made at the beginning compound over many, many years, making them very costly. Below are five ways to simplify social security to help you avoid making a mistake.
1.) Look at how many years of work are factored into your payments.
Social security is calculated using a 35-year-cycle. This means your best 35 years of earnings will be used to calculate your benefit. Since many people have their best, high paying years later in life it might make sense to work another year or two in order to bring up your average.
2.) Procrastinating Can Help
Studies show those who sign up earlier can get less in payments. Here’s a very basic example of how that works. Let’s say your retirement benefit is $2,000 per month at age 62 and $3,000 per month at age 65. Collecting $2,000 per month for three years ahead of full retirement age is $72,000 extra dollars. However, by waiting and collecting $3,000 per month, this $72,000 is made up in just under six years. With life expectancies at about 79 years, waiting to collect benefits can have a huge impact on your overall benefit.
3.) Remember it’s a Partnership
It used to be a ‘no-brainer’ to have the wife take the 50% spousal benefit because her Social Security earnings were modest in comparison to her husband’s, and 50% of his benefit would easily exceed 100% of what she might get. Now however, women are retiring with years, sometimes decades of highly paid work under their belt and the decision to take the spousal benefit is much more nuanced. In fact, there are a variety of strategies that involve delaying the benefits of one spouse to increase the overall benefits the couple will enjoy together. Realizing the benefits of these strategies however takes planning, communication, and many times, input from a financial advisor.
4.) You Will Likely Pay Tax on Your Social Security
Yes- you get taxed during your working years, and in your retirement years. And remember, there’s an employer contribution to Social Security that equals your contribution, and the dollars the employer puts into the system might otherwise have gone into your pocket over 35 years. There’s a large body of work that supports the argument that we would be better off investing our own social security savings instead of giving it to the government. Whether your Social Security benefits are taxed depends on your so-called “provisional income,” which introduces complexities beyond the scope of this article. However, determining whether or not you will owe taxes on your Social Security can be forecasted with some degree of accuracy. And if your payments will be taxed, this liability needs to be incorporated into your overall plan for retirement.
5.) Know Your Break Even Age
The break-even age is when your Social Security income from two retirement options is the same. Everyone has an age that is different, and many financial advisors can help you determine when you will break even. In this calculation, be sure to include your family health history and longevity the same way insurance companies assess this when pricing your policy. This is an important factor to be mindful of while deciding on the right age for you to collect.
In conclusion, signing up for social security is a highly-complex subject that you need to be educated on. There are many variables that play into the decision to retire. The good news is asking the right questions to a qualified financial advisor can help you avoid costly mistakes.
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