Did you know that many workers lose retirement money every year just because of the decisions they make? For example, one of the biggest mistakes is claiming Social Security while still in employment. We get the allure of the additional income, but there are three ways that this mistake costs you money!
Social Security Earnings Test
Firstly, the Social Security earnings test could mean a reduction to your benefits while still under the full retirement age (FRA). For example, in 2021, the earnings limit is $18,960. For every $2 you earn over this amount, the Social Security Administration takes $1. Now, what if you reach FRA during this year? Well, every $3 earned over $50,520 will cost you $1 in terms of Social Security benefits – this only applies if you earn this amount before your birthday in 2021. Those in full-time employment are likely to fall foul of these restrictions.
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Reduced Lifetime Benefit
When some people see that Social Security benefits are available at 62, they think it’s normal to start claiming immediately. The truth is that this just isn’t a good decision if:
You don’t need the money
You expect to enjoy a long life
You’re still in employment
For current workers, FRA is between 66 and 67. Either way, claiming under this age can reduce the amount you’ll earn each month. For those claiming as soon as eligible at 62, you’ll only receive 75% or 70% of the originally scheduled payments (depending on your birth year).
Every situation is unique, and some people won’t mind the smaller checks when they have a shorter life expectancy. However, those expecting to live beyond 85 will be better off waiting until at least FRA or maybe even beyond to claim Social Security benefits.
If you manage to wait until 70, you’ll get 24% or 32% more than originally scheduled, depending on whether your FRA is 67 or 66, respectively. It’s about weighing the balance between receiving checks for a shorter period or getting more overall if you live a long and healthy life. The earlier you claim, the more you’re reducing your lifetime benefit. Wait as long as possible to enjoy bigger checks later in life.
Increased Taxes
This is a phrase that will scare anybody into reconsidering their position, and claiming early on Social Security can indeed lead to higher taxes. If you’re still working, the government taxes based on AGI (adjusted gross income) and any non-taxable interest as well as 50% of all benefits from Social Security. If this so-called ‘combined income’ is above $32,000 for couples or $25,000 for individuals, you’ll pay more tax.
Ultimately, the tax you pay depends on how much you’re earning now compared to how much you earned while working. If working income were higher than current retirement income, you wouldn’t pay as much in tax. It’s worth working with a financial professional to calculate how much you’ll pay in additional taxes by claiming at various ages.
Should You Claim While Working?
This is a good question, and the answer depends on your unique circumstances. If you’re still working beyond 70, it’s normally fine to start claiming Social Security. Once you reach 70 years of age, your checks won’t keep growing; therefore, there’s little point in delaying. It might come with extra taxes, but this is outweighed by the amount you’ll receive in benefits.
Likewise, those that need assistance in meeting the cost of living should also consider claiming Social Security while working part-time. Perhaps you’re dipping your toes into the retirement water and maintaining a part-time job? If this is the case, you might need to claim to pay expenses. You’ll need to consider the benefits and drawbacks if you’re still under your FRA.
Lots of people start claiming Social Security benefits only to quickly realize that it was an unnecessary move – unfortunately, it’s difficult to reverse such a decision. Before anything, speak with a financial professional who can consider the intricacies of your unique position and help to make a decision that suits both you and your family.