Two ways you could risk losing your Social Security | personal financing
Social Security benefits are an integral part of many seniors. In fact, 44% of baby boomers expect Social Security to be their main source of income in retirement, according to a 2021 survey from the National Retirement Institute.
While Social Security was not designed to be the only source of income, it can provide a more comfortable retirement. However, it is crucial to make the most of the benefits.
There are many factors that affect how much you get each month, and these two factors can result in you collecting less Social Security than you might expect.
1. State and Federal Taxes
Even in retirement, your Social Security benefits may be subject to state and federal income taxes.
Your state’s taxes will depend on where you live, and the good news is that only 12 states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. If you live in one of the other 38 states, you don’t have to worry about state taxes on your benefits.
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Even if you live in a tax-free state, you can still pay federal taxes on your benefits. Your federal taxes will be based on a number called “combined income.” This is half the amount of the annual benefit plus your adjusted gross income and any non-taxable interest.
If your combined income is above $25,000 per year (or $32,000 per year for married couples applying together), you will owe federal taxes on up to 85% of your benefits.
You may not be able to change whether or not you owe Social Security taxes, but you can be prepared for these expenses. When you are aware of the taxes you may owe in retirement, it will be easier to budget for them so that you are not surprised.
2. Not filing at the appropriate age
One of the biggest factors affecting the amount of the benefit is the age at which you begin to claim it. Age 62 is the earliest you can file for Social Security, but if you apply at this age, your benefit amount will be reduced by up to 30%.
You can also delay benefits and get bigger checks. By waiting until age 70 to file, for example, you’ll get the full benefit amount based on your work history plus up to an extra 32% each month.
In theory, you should collect the same amount over a lifetime, regardless of when the claim was made. You will either get smaller checks but more of them or larger or lower payments. However, in some cases, you can apply at a certain age.
For example, if you end up living a much longer life than average, you can collect more over a lifetime if you delay benefits. Conversely, if you live a shorter life, an early claim may be in your best interest.
For most people, the break-even point (or the age at which you’ll get more overall by delaying benefits) is somewhere in the late 70s or early 80s. If you’re over that age, delaying Social Security could be a smart financial move. But if you have reason to believe you won’t live long, you may be better off claiming early.
Each person’s situation is different, so the best strategy for one person may not be right for you. But the more you understand how your benefits are calculated, the easier it will be to get the most out of them.
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