If you’re like most people, as you approach age 62, you begin thinking about taking Social Security benefits. After all, you’ve spent years and years watching your paycheck reduced by Social Security Taxes, it’s time to reap the benefits. The main question is, how do you get the most out of your benefits? There are a few considerations to make before you decide.
- The most influential factor in the amount you’ll receive is what age your benefits start. You can claim benefits as early as age 62. If you’re nearing 62, and you need the Social Security benefits to support yourself, there isn’t much more to think about. However, if you have other sources of income, there could be advantages to waiting. Each year you can hold off will increase your benefit, until you reach age 70. A common saying in the financial industry is “Tell me when you’re going to die, and I’ll tell you exactly when to take Social Security!” It sounds like a sick joke, but there is a breakeven that determines the optimal time to begin. Your health and family history can affect this calculation. Talk to your financial advisor to determine the best time for YOU!
- Earned income may reduce your monthly Social Security benefit. As stated above, taking your benefit before full retirement age (FRA) will reduce the benefit received. If you plan to continue working, your benefit could be reduced even further. The 2022 limit on your annual earned income is $19,560. When you exceed this amount, SSA reduces your retirement benefit by $1 for every $2 you earn. It is important to note this is only a temporary reduction. Once you reach FRA, you can earn any amount of money, and it won’t reduce your monthly benefits.
- Deferring your benefits can also open up planning opportunities. Once you retire, your taxable income should decrease significantly. That is until you add in cash flows like Social Security and required minimum distributions (RMDs) from IRAs. You could potentially open up a window of ten years or more in a lower tax bracket. This window of time can be used to fill the lower tax brackets with Roth Conversions or realize capital gains in taxable accounts. Talk to your financial advisor to see how you could benefit from these strategies.
The bottom line is that Social Security benefits are an important tool in your retirement planning toolbelt. Knowing how they work, and what strategies can be used around them, can turn a good plan into a great plan. It’s important to discuss potential strategies with a financial professional, to understand how they will affect YOUR plan.
Matthew Cherry, CFP®
Financial Advisor
