Social Security represents the only guaranteed stream of income for many Americans, and throughout the years it has surprised me the lack of understanding that most people have about the social security system and how it works. The more knowledge you have, the better the choice you will make.
Americans pay into the system and may begin taking a stream of income at age 62.
If you are counting down the years waiting until that day to start taking your money, you may want to reconsider. First, if you begin taking Social Security at age 62, you can only earn up to a certain amount ( $14,160 for 2010) before your benefit is reduced. For every $2.00 you earn over the limit, your monthly income is reduced by $1.00. In addition, for each year you wait to receive your income after age 62, your monthly stipend will increase by 6%, meaning that if you wait until full retirement age of 66, you have essentially increased your payout by almost 25%.
(Full-retirement age has been 65 for many years. However, beginning with people born in 1938 or later, that age will gradually increase until it reaches 67 for people born after 1959. www.ssa.gov)
For each year you wait to receive income after the normal retirement age of 66, your income goes up by 8% per year. In addition, after the normal retirement age of 66, you may earn an unlimited amount of money each year and NOT have your Social Security benefit reduced. Please do not confuse the reduction of benefits with the taxation of benefits, as they are two entirely different matters.
The taxation of social security is somewhat convoluted, but I will attempt to briefly summarize.
The initial step is to determine your provisional income, which is done by adding up your adjusted gross income (AGI), tax- free income, and 50% of your social security benefit. If you are married and filing a joint return, and the sum of these three numbers is over $35,000, then at least 20% of your SS will be considered taxable. If your provisional income is over $44,000, then 85% of your SS is taxable. The results would be the same for an individual taxpayer, except the brackets are reduced. At least 20% of the benefit is taxed when provisional income is at $25,000, and 85% of the benefit is taxed when at $34,000.
If you are still working full time at age 62, it may not make sense to begin taking your SS income for three reasons.
One, the amount of money you can earn before your benefit is reduced is quite nominal (14,160 for 2010). Two, your benefit is at its lowest point, and waiting will allow the benefit to grow by at least 6% each year, and three, the taxation of the benefit may result in putting you in a higher marginal tax bracket and having your SS benefit taxed at higher rates.
There are many other resources that can be used to investigate this issue in greater detail. Speaking with the representative of the local SS office is always an option. Boston College’s Center for Retirement Research has many “white papers” definitionon Social Security, and there is always your local CPA who would be available to discuss the taxation issues involved with Social Security.
Important summary information from SSA.GOV
- If you are under normal (or full) retirement age (FRA):When you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2010 that limit is $14,160. Remember, the earliest age that you can receive Social Security retirement benefits remains 62 even though the FRA is rising.
- In the year you reach your FRA: $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach FRA. For 2010, this limit is $37,680.
- Starting with the month you reach FRA:, you will get your benefits with no limit on your earnings.
- If a child or spouse on your record works while receiving benefits, the same earnings limits apply to him or her as apply to you. If your child or spouse is eligible for benefits this year and is also working, you can use our earnings test calculator to see how those earnings would affect the child’s benefit payments. (Your child’s or spouse’s earnings affect only his or her own benefits. They do not affect your benefits or those of any other beneficiaries on your record.)