When it comes to organizing your retirement, Social Security planning is one of the most important aspects to consider. Understanding how Social Security works and how it can benefit you in retirement is crucial. With that being said, let’s take a closer look at Social Security and how you can make the most of it in retirement.
This government-sponsored program offers financial assistance to retirees and those who are disabled. Payroll taxes from workers and employers fund the program. When you retire, you’ll receive a monthly check from the Social Security Administration (SSA) based on your earnings history.
It works like this:
Considering that Social Security benefits make up a large portion of most retirees’ incomes, it’s important to discern how the program works and how you can make the most of it.
You should have worked and paid into the system for several years. The number of years required depends on your age. For example, if you’re 62 or older, you’ll need to have worked for at least ten years. If you’re younger than 62, you’ll need to have worked for at least 20 years.
In addition to meeting the work requirement, you’ll also need to have earned a certain amount of money each year to qualify for benefits. The amount required varies depending on your age and the year you retire.
For example, in 2020, someone who was 62 or older and retiring needed to have earned at least $1,180 per year to qualify for benefits. If you don’t meet the work or earnings requirements, you may still be eligible for benefits if your spouse meets the requirements.
The amount you can receive from Social Security depends on your lifetime earnings. The SSA uses a formula to calculate your benefits. Generally speaking, the higher your payments, the higher your benefits will be. However, other factors can affect your benefits, such as:
You can use the SSA’s online calculator to estimate your Social Security benefits.
You can commence collecting Social Security benefits as early as age 62. However, you may want to hold out until later to receive the full amount of the benefits you’re entitled to. Should you retire at age 62, you’ll receive a reduced benefit.
Your benefit will increase each year you postpone after your full retirement, up to age 70. However, after age 70, there is no further increase in benefits.
The best time to receive Social Security benefits depends on your situation. For example, if you need the money to cover living expenses, you may want to start benefits as early as possible. But if you can wait, you may want to delay benefits to receive a higher monthly payment later.
Like other forms of income, your benefits are subject to taxation. The taxes you’ll pay on your benefits depends on your total income and filing status. For example, if you’re single and your total annual income is less than $25,000, you won’t owe any taxes on your benefits.
On the other hand, if you’re married and filing jointly, and your total annual income is between $32,000 and $44,000, you’ll owe taxes on up to 50% of your benefits.
It’s crucial to remember that Social Security benefits are often only taxed at the federal level. You won’t have to pay state taxes on your benefits unless you reside in one of the 12 states that tax this form of income. If you’re uncertain how much tax you’ll owe on your payments, you can use the IRS’s online calculator to get an estimate.
There’s so much you can do to ensure you’re getting the most out of Social Security. First, ensure you’re paying into the system for the required years. As we mentioned, you’ll need to have worked for at least ten years to qualify for benefits.
Second, try to earn as much money as possible during your working years. The amount of money you make each year will affect your retirement benefits.
Finally, make sure to check the SSA’s website regularly for updates on Social Security. Social Security rules and regulations can change over time, so it’s important to stay up-to-date on the latest information.
Following these tips can maximize your Social Security benefits and ensure you get the most out of the system. With a bit of planning, you may ensure that Social Security will be there for you when you need it in retirement.