One of the most important decisions you’ll make in retirement is when to sign up for Social Security.
There are many factors to consider before you sign up, because your decision will have a significant impact on the amount of benefits you will receive.
Given that pensions are becoming less common, your Social Security decision is more important than ever. Here’s a look at five important things to consider:
- How many years of work are factored into your payments? Your Social Security payments are calculated based on the 35 years in which you earn the most. If you don’t work for 35 years, zeros are averaged into the calculation. That results in a lower payout. Like I teach my children, zeros hurt averages, so the more years you work, the better your payout should be.
- The advantages of delaying claiming. Social Security payments are reduced if you claim them before your full retirement age. Workers who sign up at age 62 in 2017 will get 25.8% smaller monthly payments than if they wait until their full retirement age of 66 and two months. Monthly payments increase if you delay starting them past your FRA — which would be between 66 and 67 for those born in 1955 and later — culminating in up to a 30.7% greater benefit if you sign up at age 70. Delaying payments even a year or two could have a large impact on the lifetime amount of your benefit.
- Spousal benefits. Married couples are eligible to claim a Social Security payment worth as much as 50% of the higher earner’s benefit, if that’s more than they can get based on their own work record. When the first spouse passes away, the surviving spouse will retain the larger of the two benefits, with the smaller benefit being eliminated. Make sure to know both your benefit and your spouse’s benefit before claiming.
- When Social Security benefits are taxed. Up to half of your Social Security income could be taxable if your provisional income falls between $25,000 and $34,000 if you’re single (for couples it’s between $32,000 and $44,000). Provisional income is defined as your adjusted gross income plus any tax-free interest plus 50% of your benefits. And the portion of your Social Security benefit that could be taxed rises to up to 85% if you go above those income limits. Understanding how taxes work and if it makes sense to utilize other assets could present a significant tax savings.
- Your break-even age. People who claim benefits early at age 62 may start getting their checks sooner, but they’ll be locked in at a lower payment than if they waited. Over the course of their lifetimes, this difference could add up to a significant amount of money. Those who start benefits at 70 get much larger payments when they finally do start claiming. Once you live until a certain age — the break-even point — the lifetime payment amount will be equal, whether you claim early or late, and if you live beyond that, you will come out ahead by delayed claiming. So, knowing your life expectancy, health and family history could play a role in the decision on when to claim benefits.
This is just the tip of the iceberg when considering your Social Security claiming options. Careful and thoughtful analysis should be applied and the help of a professional financial adviser could make the decision clearer.
Investment advisory services provided through New River Financial Group LLC, a registered investment adviser offering advisory services in the state of Virginia and other jurisdictions where exempted. New River Financial Group LLC d/b/a Martin Wealth Solutions.
Jim Martin is the president and founder of New River Financial Group with offices across Virginia. A Registered Financial Consultant and Accredited Asset Management Specialist, he has passed the Series 66 and Series 7 exams and is an insurance professional. Martin focuses on comprehensive financial planning to help individuals and business owners take control of their financial future.
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