As you already know, Social Security is one of the greatest assets you’ll have in your retirement. By the time you reach your retirement age, you’ve been paying into the system for years. Your Social Security benefit is your right, and at REAP Financial, we want to make sure you get the most out of your Social Security benefits. Keep reading for the best tips on Social Security options and an overview of a little-known strategy that can be extremely lucrative.
Contents
- Social Security: A Benefit You’ve Earned
- A Coordinated Claiming Strategy: Your Best Tool
- Voluntary Suspension for Married Couples
- Some Common Pitfalls of Social Security Claims
- The Final Pitfall of Social Security Claims and Why You Need a Coordinated Strategy
- Maximize Your Retirement Planning with REAP Financial
If you think back to your first job and the day you got your first ever paycheck. On that day, between you and your employer, 12.4% of your salary went towards the Social Security system because of FICA. 12.4% of your salary over your lifetime has likely gone into this system, and you don’t have a choice in the matter. Because of this automatic salary reduction, you’ve paid a lot of money into the Social Security system over the years. When it comes time for you to retire and you reach eligibility for Social Security benefits, you need to have a real understanding of all the money you’ve paid into the system and how it can be one of the greatest assets you have in retirement.
For those of you who are married, between you and your spouse you will likely withdraw hundreds of thousands, even up to over a million, dollars in Social Security benefits during your retirement. Most of you won’t have paid nearly that much into the system over the years leading up to your retirement, which is why Social Security is one of the greatest assets you have in retirement. How and when you take your Social Security will dictate how much money you get out of the system.
A Coordinated Claiming Strategy: Your Best Tool
In the past, most concerns about Social Security had to do with the tips and tricks to get more out of the system. However today, most of those strategies have been taken off the table. Today, the greatest concern people talk about is legislative or governmental risk. When you look at your Social Security benefit of ssa.gov, you will see the site recognizes that we have a solvency problem with the system. If the government doesn’t address this solvency issue, they may cut your benefits by 24-26% in 2033.
At REAP Financial, we believe the government will do something to fix the system. Perhaps, they will tax more, so workers pay more into the system. Or, they might means test the benefits, so that you see a reduction in benefits. There are many things that could happen in the coming years, but we want to make sure you start with following a coordinated claiming strategy. If you’re married and you’ll get double the Social Security benefits, there are still Social Security strategies open to you. One is known as the voluntary suspension strategy.
Before we get into that, you should be aware that your Social Security will more than likely be taxed. Because of this, your timing is very important. For example, if you’re still working and decide to start receiving your Social Security benefits, you may be giving a lot of your benefit back to the government owing to your higher tax bracket while you’re still earning a salary. In this case, if you wait to claim your benefit for a few years, after you’re no longer earning a paycheck, you’ll give your Social Security benefit time to grow in deferment and you’ll lose less in taxes, owing to your lower income. For this reason, you need to understand that taxes on your benefit are inevitable for most people; it’s crucial that you pay attention to how you’re timing your Social Security benefit to get the most out of it over time.
Voluntary Suspension for Married Couples
The little-known strategy for optimizing your Social Security benefit is called voluntary suspension. Although this strategy is not brand-new, we guide our clients on this strategy at REAP Financial because it is one of the last remaining strategies for getting the most out of your Social Security benefit. It’s a very flexible strategy, particularly for married couples.
Here’s how it works:
If you were to take Social Security today, at age 63, you have a twelve month period where you can change your mind. During those twelve months, you can decide to turn off your benefit at any time, for any reason. The difficult part about this is that you have to pay the government back for every dollar you received during the period of time you had your benefits turned on. It can be quite a big payment, so you’ll want to consider if you have the funds to do that and if you want to. However, for some of you, it may make sense!
Now, let’s look at a different scenario. Let’s say you missed the 12-month window, so you take Social Security at 62 and you never turn it off. You’ll be getting a smaller check because you took it early, but you’ll get it over more years. Once you hit 67, you can now leverage voluntary suspension, by turning off your Social Security benefit. You may be wondering, why would I do that? Perhaps you wanted to supplement your income and not draw heavily on your portfolio in the early years of your retirement. Or maybe you want to turn it off because you or a spouse have gotten employment and you don’t need the income anymore. An important thing to remember in this scenario is that you took your benefit early, meaning your checks are smaller over time. However, when you do voluntary suspension at 67, your benefit starts growing in deferral again by 8% a year plus cost of living adjustments. From 67 to 70, you could easily recoup 20% or more.
This is where voluntary suspension comes into play for married couples. If you retire at 62, one person can turn on their benefit, while the other lets their benefit grow in deferral. Once you turn 67, the spouse who was in deferral can turn on their benefit while the other puts theirs in voluntary suspension. This allows you to ladder your Social Security income and stretch out your deferral credits. Though it is a powerful strategy, it is not the right strategy for everyone. We find it to be most powerful for families that are married, who have access to each other’s benefits. If it makes sense for you, we encourage you to look into it and see if it fits your situation.
Now, let’s discuss a few pitfalls you’ll want to avoid! The average American takes their Social Security benefit at age 62 and the average benefit is around $23,000 annually. That may seem low, and it is because so many people decide to take their benefit early. The second pitfall is not understanding that there is an earnings cap. If you make over approximately $20,000, you can get hurt with an earnings cap, where you’ll get charged $1 for every $2 you make over the earnings cap. If you’re still working or receiving an income and you take your benefits, you’ll likely see them whittled down to very little. However, the difficult part is that this won’t register until you file taxes for the first year you took Social Security while you had an income. Once the government realizes that, they’ll back-charge you accordingly, and it can be a large amount. If you can’t afford to pay them back, they’ll withhold your Social Security to cover it, which can cause a gap in income when you need it most.
Another pitfall is not understanding that your income dictates how much you’ll pay in taxes. It is critically important to consider how you’re saving and building in your Social Security benefit so you can hold onto the most value. In fact, for some, it is a mistake to defer taking social security. Depending on your net worth, it can make sense to take your Social Security benefit as early as possible. The higher your net worth, the more likely it is that you should take Social Security early. There are a number of reasons for this, but two of the most common are:
- You’re in a higher tax bracket in retirement, due to higher required minimum distributions, so it benefits you to take it earlier.
- You want supplemental income to maintain your lifestyle, without touching your portfolio too heavily.
With this in mind, you’ll want to think about your net worth and whether you could be a candidate for early claiming.
The final pitfall of Social Security is not understanding what your true net benefit is going to be, once you’ve paid for taxes, Medicare A premiums, and other Medicare premiums. Once you get through all those costs, that average $23,000 may be dwindled to $12,000 or $14,000. Since the net benefit can vary so widely, you want to make sure you’re diving in with a coordinated strategy with your retirement target and income required to maintain your lifestyle. If you want to learn more about whether or not you could be a candidate to take Social Security early, check out our website at reapfinancial.com or our YouTube channel for more tips and strategies!
Maximize Your Retirement Planning with REAP Financial
Voluntary suspension might not be the ideal strategy for everyone. Your unique situation and various other factors will determine the best approach. To dive deeper into Social Security benefits and optimizing your retirement funds, explore our website and extensive YouTube channel for updated tips and advice.
Retirement & Financial Planning in Austin, Texas
For those in the Austin, Texas area seeking a skilled financial planner, our expert team at REAP Financial is here to help. We specialize in crafting personalized retirement strategies tailored to your financial goals and lifestyle aspirations. Let us to navigate the complexities of retirement and financial planning to ensure a prosperous future for you and your loved ones. Contact us today for a consultation and start your journey toward a secure and peaceful retirement in Austin.
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