Quick Read
Social Security replaces only 40% of pre-retirement income, so retirees should verify their monthly benefit amount via their my Social Security account.
Working retirees under full retirement age lose $1 in benefits for every $2 earned above $24,480 annually under the Retirement Earnings Test.
Social Security benefits become federally taxable once provisional income exceeds $25,000 for single filers or $32,000 for married joint filers.
Many financial professionals are salespeople paid on what they push, not whether you end up wealthier. A fiduciary is the opposite. The SEC legally requires them to put your interests first. Advisor.com’s free matching tool pairs you with vetted fiduciaries from major national firms, all in under three minutes. See who you match with today.
If you are retired and relying on Social Security, you need to understand what your benefits will do for you and what kinds of decisions could affect the amount of benefits that you bring home.
There are four key numbers that you must know in order to make informed choices and avoid inadvertently making mistakes that undermine your financial security in your senior years. Here’s what they are.
Your monthly benefit amount
The first thing that you should know is how much your monthly benefit is, or how much it will be once you claim benefits.
Your monthly benefit is based on average wages in the 35 years your earnings were highest, after adjusting for wage growth. Specifically, you’ll receive benefits equal to a percentage of your average indexed monthly earnings (AIME).
This benefit may be lower than you expect, as Social Security is only intended to replace about 40% of pre-retirement income. You can check the amount you’ll receive, or are already receiving, using your my Social Security account so you can prepare for how much supplementary income you’ll need or how much income you have to spend.
If you haven’t yet claimed benefits, you can also see how claiming at different ages changes your monthly payment amount, as an earlier claim reduces your checks and a larger one increases them.
Are You Ready To Retire, Or Years Behind?
Most Americans suspect they’re behind on retirement and never find out. Advisor.com’s free matching tool pairs you in about three minutes with a vetted fiduciary advisor who can help you with investing, taxes, retirement, estate planning, and more. No minimums. No sales call. Find out where you stand.
Your annual COLA
Understanding the amount of your COLA, or cost-of-living adjustment, is also very important for retirees because this impacts how your benefits change over time and whether you’re able to keep pace with inflation.
Cost-of-living adjustments are supposed to help ensure seniors don’t lose buying power. They’re announced each October and calculated based on year-over-year changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Your benefit checks increase by the amount of the COLA, minus any added Medicare premiums if premiums increased.
Unfortunately, COLAs aren’t doing a good job of actually helping seniors avoid losing ground, as the Senior Citizens League estimates benefits have lost around 13.7% of buying power since 2016 alone. So retirees should check the amount of their COLA so they understand how much their payments are increasing and can budget accordingly.
The amount you can earn by working while collecting benefits
If you are under your full retirement age and you are considering working while collecting Social Security, it’s very important that you understand the Retirement Earnings Test (RET) and the key numbers that the test establishes.
Specifically, under the retirement earnings test, you are only allowed to earn up to $24,480 if you will not reach full retirement age all year. And your maximum earnings total $65,160 if you will reach FRA at some point during the year. Once you exceed these amounts, you’ll lose $1 for every $2 earned above the $24,480 threshold, or $1 for every $3 earned above the $65,160 threshold.
Eventually, you make up for the money Social Security withholds from you for working too much, as your benefits are recalculated at your full retirement age. But until that time, you can’t double dip, and both earn a big paycheck and get benefits, and you need to plan for that.
The thresholds when you owe taxes
Rix Pix Photography / Shutterstock.com
Finally, you must be aware of the threshold at which you’ll begin to owe taxes on your Social Security benefits, as you have to prepare to give the IRS a cut. This is based on provisional income, which is half your Social Security, all taxable income, and some non-taxable income like MUNI bond interest. Once your provisional income hits $25,000 as a single tax filer or $32,000 as a married joint filer, taxes are charged on the federal level on part of your Social Security.
Understanding these numbers helps you prepare for how much retirement income you have coming and what it can do for you, so be sure you’re aware of them if you’re retired and collecting benefits or if you’ll be retiring soon.
Are You Ready To Retire, Or Years Behind?
Most Americans have no idea where they actually stand. Most guess, or hope Social Security and a 401(k) will work out. Advisor.com’s new matching tool gives you a real answer, free.
They pair you with a fiduciary (required by law to put YOUR interest first) with questions related to taxes, estate planning, retirement, insurance analysis, and more. See you who you match with today, and get the answers you need.
Contact editorial@247wallst.com for any questions or corrections.
