In an era when pension plans are fading, Social Security remains an important pillar in the three-legged stool of retirement.
About 65 million Americans depend on $1 trillion dollars in benefits, according to the Social Security Administration. But some Americans may be missing out on several key tricks to plan their retirement strategy around Social Security.
Here’s what you should know.
Don’t depend on your spouse’s benefits
If you’re married and your partner passes away, don’t expect to receive their Social Security benefits, especially if you were the higher earner.
“We find that a lot of couples don’t understand what happens to their Social Security payments after one spouse dies,” said Matthew Hyland, financial advisor at Arnold and Mote Wealth Management. “The surviving spouse will receive the higher of the two payments, but not both and not the highest plus spousal benefits.”
Hyland’s advice to those planning out their retirement strategy is to account for a potential income drop. This means reducing expenses or potentially withdrawing from investments to fill the loss.
Keep your modified adjusted gross income in mind
It’s key to plan for taxation in retirement.
Some retirees have to pay federal income taxes on Social Security benefits usually when they have other substantial income — such as wages, self-employment, interest, dividends or other taxable income — in addition to their benefits.
“How much Social Security is taxed is based on your MAGI, modified adjusted gross income and as your MAGI increases, [more] of your Social Security income will be taxed,” Hylland said.
Keep tabs on your benefits estimates
To help you calculate how much you’ll get in benefits, grab a copy of your Social Security statement of your earnings history and check it for accuracy. Make sure your benefits are not understated. This is especially important if you feel your wages will grow in the future.
“The benefits shown in your Social Security Statement are based on a number of assumptions,” Wade Pfau, program director at the American College of Financial Services, said. “These include that there is no future wage growth or inflation in the economy, and that benefits are expressed in today’s dollars.”
Take advantage of the ‘do over’ if needed
Experts often advise retirees to wait until 70 to collect benefits in order to maximize your Social Security benefits. Your benefit will increase 8% per year until age 70 if you do so. On the other hand, if you take Social Security at age 62, but your full retirement age is 66, you’ll get 25% less.
The good news is that the Social Security Administration provides a way to re-do their selection, an option many Americans might overlook.
“Several pre-retirees claimed Social Security benefits earlier than planned as a result of the pandemic,” said Kelly Campbell, a certified financial planner and CEO of Campbell Wealth Management. “But there is a ‘do over,’ which as long as you have not taken more than 12 payments, the Social Security Administration allows you to pay it back and act as if you never even started receiving benefits.”
Read more information and tips in our Retirement section