Social Security is a big topic on a lot of our clients’ minds. The rules can be confusing, but the good news is you have a lot of choices that can really help in retirement.
Here are five important Social Security facts for retirement to keep in mind:
1. Social Security becomes a more important retirement income source later in life
For most retirees, Social Security becomes a larger portion of their retirement income as they age. In fact, for 65 percent of elderly beneficiaries, Social Security provides the majority of their cash income, and for 36 percent, it provides more than 90 percent of their cash income.1 If you expect to live a long life (and therefore be elderly for more years), it’s important to base your social security decisions more on the later years of your retirement than the earlier years. For more on these decisions, see our article, Claiming Social Security Later May Optimize Your Benefits.
2. Spousal benefits can provide a big boost
You can collect a Social Security Spousal benefit of up to 50% of your spouse’s full retirement age benefit, even if you have little or no work history. In order to start collecting, you have to wait until the working spouse starts his or her own benefits. However, a working spouse can “File and Suspend” his or her benefit, allowing the other spouse to start the spousal benefit while the working spouse delays starting. This provides a supplemental stream of income while the working spouse delays payments and accumulates delayed retirement credits.
3. Social Security can be even more important for women
Because women tend to live longer lives, the inflation-adjusting income they receive adds up over more years, making it an extremely valuable benefit. Women who outlive their spouse (or men who outlive their spouse, for that matter) can collect a survivors benefit equal to the higher of her own retirement benefit or her spouse’s retirement benefit. What’s more, the “higher of” formula includes any delayed retirement credits the deceased spouse accumulated by delaying the start of retirement benefits during his life. Unfortunately, this cuts both ways: if the deceased spouse had started retirement benefits early, the survivor benefit may be reduced. The combination of survivor benefits and delayed retirement credits can be very important for survivors’ income later in life.
4. A divorced spouse may be eligible for benefits
If you are divorced, you may qualify for Social Security benefits based on your ex-spouse’s work record. To qualify, you need to:
- Have been married to your ex-spouse for at least 10 years;
- Have been divorced two years or longer;
- Be at least 62 years old and unmarried; and
- Not be entitled to a higher Social Security benefit based on your own work history.
If your former spouse is deceased, you may still be able to receive benefits as a surviving divorced spouse. If you remarry before the age of 60, you will lose the ability to receive a survivor benefit from your deceased ex-spouse. The good news is that your benefits are not affected by the decisions your ex makes, such as starting benefits early or re-marrying.
5. How much benefits are taxed depends on your income
How much of your Social Security benefit is taxed depends on your income. There are three tiers of income that, when reached, cause more of your benefit to be subject to tax. So income from, say a withdrawal from a traditional IRA or dividends from investments can boost you into a higher tier, and cause more of your benefit to be taxed. This can have big implications for whether you choose to work in retirement, how your assets are invested, and the timing of withdrawals from retirement accounts. For more on how to find the right balance of income in retirement, see our article, How do I create an effective retirement income strategy?
If the Social Security rules seem complicated, it’s because they are! However, we’re here to help you navigate these and other important Social Security facts for retirement. Please contact our office for one of our Certified Financial Planner® Practitioners to help guide you with choosing the best strategies for Social Security and your retirement.
1Income statistics: www.cbpp.org/research/policy-basics-top-ten-facts-about-social-security