There is a common misconception that Social Security benefits are the same for everyone. The truth is Social Security benefits are not cut and dry. You have options and how you manage these options will play a big roll in your retirement income process.
Back to the Basics
First, let's take a look at some stats from the Social Security fact sheet. In June 2020, it was estimated that 65 million Americans received $1 trillion dollars in Social Security benefits. But of those 65 million people only 73% of the benefits were paid to retired workers and their dependents. Another 15% was paid to disabled workers and their dependents, so as you can see, Social Security is more than just retirement. It also benefits disabled workers and survivors of deceased workers.
Click HERE to access your Social Security account. If you don't already have one, you can create a new account on the website and check your Social Security statement. This can be done at any age!
Understanding Your Income Benefits
In order to qualify to receive Social Security benefits, you must be fully insured. But what exactly does fully insured mean? The SSA requires you to earn a certain amount of credits in order to be insured. Most workers need 40 credits which is 10 years of work. For example in 2021, one credit recorded for every $1,470 you earn in a year, and with four credits for the entire year if you earn $5,880 or more.
Now that we know how you qualify for benefits, let's take a look at how your benefits are calculated. This is based on your primary insurance amount (PIA), and it is the amount you receive at your full retirement age (FRA). Your average indexed monthly earnings (AIME) are used to calculate your PIA. Here's an example. If you were born after 1929, you will use your highest 35 years of income to calculate your benefits, and your actual earning are "indexed" to account for average wage changes from the year you received your earnings. Depending on when you start taking your benefits will also impact the amount you receive. If taken prior to your FRA, your benefits will be reduced. Benefits are adjusted up if you delay your start of benefits.
For a majority of beneficiaries, Social Security benefits are income-tax-free, but it is important to understand if you have higher total incomes your Social Security benefits may be subject to federal income tax. This can take some people off guard. How do they determine if your retirement benefits will be taxed? It is all based on your combined income, or the sum of your adjusted gross income plus nontaxable interest plus one-half of your social security benefits.
Here's a breakdown to give you a better understanding. If you are single or Head of Household (HOH) and your combined income is less than $25,000, you may not have to include any of your benefits received as part of your taxable income for the year. If you are married and filling jointly (MFJ), a combined income of $32,000 or less means you will not have to include any of your benefits as taxable income. Individuals who have a combined income between $25,000 and $34,000, filing single or HOH, may be responsible for including up to 50% of their benefits received as part of their taxable income for that year. MFJ taxable incomes between $32,000 and $44,000 fall within the same percentage. Lastly, combined incomes over $34,000 for single or HOH individuals will likely need to include up to 85% of your Social Security benefits received. This percentage also applies to those MFJ with combined incomes over $44,000.
Many Moving Pieces
It is no secret there are many moving pieces when it comes to your social security benefits, which is why it is crucial to take time to sit down and clearly understand each of these key pieces. With are strong understanding, you can be sure you are getting the most out of your benefits. It's time to enjoy your years of hard work and dedication!