Be sure you're aware of these issues before you begin
claiming Social Security
Morgan Stanley private wealth adviser Mary Deatherage joins
Barron's Roundtable to discuss what retirement savings options will help
generate income in a low-yield environment.
Social Security benefits can be a lifeline
in retirement, bridging the gap between what you have
saved and what you need to afford a comfortable lifestyle.
However, many retirees may be unknowingly sabotaging their
monthly checks. Approximately 37% of baby boomers say they expect Social
Security to be their primary source of income in retirement, according to a
report from the Transamerica Center for Retirement Studies. If you have similar
plans, it's especially important to ensure you're aware of a few of the ways
you could potentially lose your benefits.
1.
Working fewer than 35 years
To qualify for Social Security benefits, you typically have to
have worked and paid Social Security taxes for at least 10 years. However, if
you've worked fewer than 35 years by the time you begin claiming benefits, you
could receive smaller checks.
The Social Security Administration calculates your basic benefit
amount -- or the amount you'll receive by claiming at your full retirement age -- by taking an average of
your income over the 35 highest-earning years of your career and then adjusting
it for inflation.
If you haven't worked a full 35 years, you'll have zeros added
to your equation to account for the years you weren't working. That could bring
down your earnings average, which in turn will reduce your benefit amount.
2.
Not taking advantage of all the types of benefits you're entitled to
When you think of Social Security benefits, you may think
primarily of retirement benefits. However, there are other types of benefits
you may be entitled to, including spousal benefits, divorce benefits, or
survivors benefits.
If your spouse is the higher earner in the household and is
eligible for Social Security benefits, you may be eligible to collect spousal benefits. The maximum you can receive in
spousal benefits is 50% of the amount your spouse is entitled to collect at his
or her full retirement age. Similarly, if your ex-spouse is entitled to
benefits, you may be able to claim divorce benefits based on his or her work record
as long as you two were married for at least 10 years and you are not currently
married.
If you're eligible for Social Security benefits based on your
own work record as well, the Social Security Administration will pay out your
benefits first. Then, if you're entitled to more money in spousal or divorce
benefits, you'll receive a little extra each month.
Survivors benefits are typically available to
widows and widowers age 60 and older, but children, parents, and other family
members who were financially dependent on the deceased are also sometimes
eligible for these benefits.
3.
Forgetting about Social Security taxes
Even though you've been paying into the Social Security program
for years, Uncle Sam will still try to take a chunk of your benefits through
state and federal taxes.
Whether you'll owe state taxes on your benefits depends on where
you live because each state has slightly different laws. Some states won't tax your benefits at all, while others may
provide exemptions depending on your income.
For federal taxes, how much you'll owe will depend on your
"combined income," which is half your annual benefit amount plus your
other sources of income (excluding Roth IRA withdrawals). If you have a
combined income of more than $34,000 per year (or $44,000 per year for married
couples filing jointly), you'll owe federal taxes on up to 85% of your
benefits.
While you may not be able to avoid taxes on your benefits, you
can do your best to plan for them so you're not taken by surprise once you
retire.
How
to make the most of your benefits
Social Security benefits are an integral part of many
Americans' retirement plans. It's wise to take full advantage
of them. By ensuring you're working enough years to collect your full benefit
amount, filing for all the different types of benefits you're eligible for, and
accounting for taxes in your retirement plan, you'll be on your way to
achieving a more financially secure retirement.
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