Social Security benefits remain a crucial financial resource for many retirees, yet understanding these benefits can be challenging. A financial adviser, who is currently receiving Social Security benefits himself, has highlighted key misunderstandings that many face regarding their entitlements. With over 50 years of experience in the financial services industry and personal knowledge of the system, he aims to guide others through this complex landscape.
The adviser emphasizes the importance of being informed about Social Security rules, especially as they frequently change. He offers workshops that attract numerous attendees seeking clarity on the nuances of Social Security. As a recipient of Medicare and a widower, he appreciates firsthand the intricacies surrounding these benefits.
His first piece of advice centers on the age at which individuals can begin to claim benefits. Those eligible can file for Social Security as early as age 62, but doing so results in a permanent reduction in monthly payments. To receive 100% of earned benefits, claimants must reach their full retirement age (FRA), which varies between 66 and 67, depending on birth year. Delaying filing past the FRA can lead to increased benefits, making it a worthwhile consideration for many retirees.
Understanding Marital Status and Social Security
Another critical factor is marital status, which can significantly affect benefit calculations. The adviser notes that the decision-making process regarding filing should involve coordination with one’s spouse. If one partner passes away, the surviving spouse will only receive the higher of the two benefits, while the lower amount ceases. This situation can be especially complex for divorced individuals, who may be eligible for spousal or survivor benefits if they were married for at least 10 years.
The adviser advises couples to disclose all marriage details to their financial adviser and the Social Security Administration (SSA) to ensure they maximize their benefits. Importantly, an ex-spouse will not be notified if benefits are claimed on their record unless explicitly communicated.
Working While Receiving Benefits
Retirees should also be aware that they can continue to work while receiving Social Security benefits, but this may trigger an earnings test. For those under their FRA, the earnings limit for 2025 is set at $23,400. Exceeding this threshold will result in some benefits being withheld, with the SSA deducting $1 for every $2 earned over this limit. For individuals approaching their FRA, a different threshold applies, with the limit increasing to $62,160 for the months leading up to their birthday.
Once individuals reach their FRA, the earnings limit no longer applies, and the SSA will adjust monthly payments to account for any funds withheld during the earlier period.
Another often-overlooked aspect is the potential taxation of Social Security benefits. Many retirees are unaware that their benefits can be subject to federal income tax. The IRS calculates provisional income, which includes adjusted gross income, tax-free interest, and half of Social Security benefits. For those filing as individuals, a provisional income between $25,000 and $34,000 can result in paying taxes on up to 50% of benefits. Joint filers face similar thresholds, with taxation potentially rising to 85% for higher incomes.
Strategizing for Maximum Benefits
In light of recent discussions during the 2024 presidential election, there have been proposals to eliminate taxes on Social Security benefits. Although not yet enacted, the potential for tax relief exists. Eligible taxpayers aged 65 and older may claim an additional deduction of $6,000 on their income tax from 2025 through 2028, depending on their income and marital status.
Finally, the adviser highlights that individuals have the option to withdraw their Social Security application within 12 months if they change their minds. However, this is a one-time opportunity and requires repayment of any benefits received.
Navigating Social Security benefits can be daunting, but retirees do not have to face this alone. The adviser recommends visiting the SSA website for foundational information and collaborating with a retirement specialist to ensure optimal decision-making. Understanding the complexities of Social Security can help individuals secure the benefits they have earned and safeguard their financial futures.
