How Will Social Security Affect Your Retirement?

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According to a recent CNBC article, Social Security is expected to be a primary source of retirement income for baby boomers—a full 69 percent of baby boomers expect Social Security to be a “major” source of retirement. Within the next ten years, 50 million of those baby boomers will turn 65, causing a major impact on the system. Yet despite the fact that many of these retirees will be extremely dependent on Social Security income, many do not understand the benefits available through Social Security. This lack of knowledge regarding Social Security can result in significant losses of money.

The Importance of When You Claim Social Security Benefits

Since only 28 percent of those surveyed believe they will receive any employer pension at all, Social Security is an extremely important retirement benefit to consider. Yet myths and misinformation abound regarding Social Security. As an example, many people believe the best course of action is to claim their Social Security benefits early. In fact, if you want to extract every possible dime you can from your benefits, waiting to collect those benefits is the best strategy. Depending on what year you were born, you will be unable to collect your full Social Security benefits until you are 66 or 67.

Benefits can increase by as much as 8 percent each year, if you can delay collecting your Social Security benefits until you reach full retirement age, or up to age 70. Should you begin collecting Social Security as soon as you turn 62, you are in essence, agreeing to a significantly lower monthly check for the remainder of your life. This is a decision you could certainly regret at some point down the line.

A second myth is that you must claim your Social Security retirement benefits as soon as you “officially” retire. In reality, even if you “retire” at age 65, you could potentially delay receiving your Social Security benefits until you reach full retirement age, or even 69 or 70. (There is no benefit to waiting beyond 70, as the benefits do not continue to increase).

When You File for Social Security Can Impact the Remainder of Your Life—And That of Your Spouse

Not only can delaying receiving your Social Security benefits affect how much you will receive over the remainder of your lifetime, it will also impact the spousal or survivor benefits your husband or wife will receive. If you delay claiming Social Security benefits until you reach the age of 70, your spouse could potentially realize a 40-50 percent increase in their surviving spousal benefits upon your death.

Lest you believe when you apply for Social Security benefits won’t really have that much impact on your life, consider this: The difference in a “good” and a “bad” decision regarding when you claim Social Security benefits could make as much as a $250,000 difference in lifetime benefits. There is a little leeway—but not much—if you file for Social Security benefits then realize you have made a mistake. You have one year to change your mind after filing for Social Security benefits. After that year, your window of opportunity has pretty much closed for good as far as making changes.

Never Assume Your Social Security Benefits are Correct

Your highest thirty-five years of earnings will determine your Social Security benefits.  While we might assume that the records of those earnings are accurate, in fact, mistakes are common. It is important that you keep a careful eye on your Social Security earnings since you are only able to request a change to those records within three years, three months and 15 days from the end of the taxable year when you earned the wages.

Will You Pay Taxes on Your Social Security Benefits?

More than half of Americans must pay taxes on their Social Security benefits, although the tax treatment of Social Security tends to be more favorable than that of 401(k)s or IRAs. Unless your combined household income following your retirement is less than $25,000, then up to 85% of your Social Security benefits could be taxed. A partial Roth conversion, along with delaying claiming Social Security benefits could allow you to potentially keep more of your Social Security income.

If your retirement income will be between $60,000 and $80,000 per year (for a couple), then converting a traditional IRA or 401(k) into a Roth could significantly reduce the tax you will pay for your Social Security benefits—particularly if you claim those benefits at age 70, rather than earlier. To reinforce the importance of this, remember that every year you delay past your full retirement age, you receive an 8 percent increase in annual benefits.

Contact a Martinson & Beason Attorney Today

If you are approaching retirement age, or you have a few years to go but want to maximize your future retirement benefits, a call to the experienced Martinson & Beason attorneys can make a huge difference. The Martinson & Beason law firm is smaller by design, allowing us to offer personal attention to every client. Contact a knowledgeable, dedicated Alabama attorney from Martinson & Beason today.