While these
questions—and the question of the system’s continuing reliability as
the ratio of beneficiaries to taxed active workers increases—are
debatable and debated by lawmakers, the most baffling for many individual
workers as they plan for the approach of retirement is: when
do you start receiving Social Security checks?
The answer, partly
rooted in changing regulations, is not easy. Nor is it the same for all
individuals.
Yet, it is very
important. On it depends not only when you start to receive checks,
how large your checks will be—the
earlier you start, the smaller your checks—and how much you may earn
from other work once you start, but also how much net Social
Security income you will have left after income taxes.
To understand how
these things are determined, you first have to understand the regulatory
concept of your "normal retirement age" (also called your
"full retirement age") at which your retirement benefits
equal your "primary insurance amount." For those born in
1937 or earlier, it is 65. For those born in 1960 or later, it is 67. For
those born in 1938 through 1959, it is in-between. (Useful tables which
spell out this and other relevant regulations appear on the Social
Security Administration’s Web site, www.ssa.gov).
If you decide to
start withdrawing Social Security before your "normal"
retirement age, you may retire as early as age 62, but your benefits may
be reduced as much as 30 percent if you were born after 1959 or 25 percent
if you became 62 in 2005—a reduction that shrinks your monthly checks
permanently.
If you decide to
defer getting Social Security past your "normal" retirement age
(delayed retirement credits), your benefits may be increased by
percentages depending on when you were born: from 3 percent if you were
born in 1917-1924 to 8 percent if you were born in 1943 or later. You
would receive your largest benefit by retiring at 70.
Whatever the SSA
determines you should get monthly (to be further adjusted annually for
inflation unlike most private sector pensions) may be (further) reduced if
you get work for pay before you reach your "normal"
retirement age: $1 in benefits for each $2 you earn above an annual limit.
Last year, that limit was $12,000; this year, it’s $12,480. In the year
you will reach "normal" retirement age, the reduction is less—$1
in benefits for each $3 you earn above $33,240 in 2006, until you reach
the point at which you can earn all you are able to without penalty. This
point is reached once the recipient arrives at their normal retirement
age.
For example, a
retiree with earned income of $25,000 and a Social Security benefit of
$1,000 per month would receive just $478 each month after a reduction due
to earnings. Done with the
SSA, you now emerge on the radar screen of the Internal Revenue Service,
which is required to get its share and finds you an especially fertile
target if you have substantial income beyond Social Security. A SSA Web
site calculator helps you to understand how the earnings test would apply
to you.
If you are filing a
federal income tax return as an individual and have "provisional
income"—defined as adjusted gross income plus nontaxable
interest (such as interest from tax-exempt bonds and income dividends from
municipal bond mutual funds) plus 50 percent of your Social Security
benefits—between $25,000 and $34,000, you may have to pay income tax on
that 50 percent. If your combined income exceeds $34,000, up to 85 percent
of your benefits may be taxable.
If you file a joint
return and you and your spouse have provisional income (as defined above)
of between $32,000 and $44,000, you may have to pay tax on 50 percent of
your Social Security benefits. However, up to 85 percent of your benefits
become taxable when your combined income exceeds $44,000. This is a
complex rule, so consider contacting the Social Security Administration or
your tax adviser for more information.
March 2006— This column is
produced by the Financial Planning Association, the membership
organization for the financial planning community, and is provided by
McGuire & Co., LLC, a local member of the FPA.
(Back to
Financial Planning Page)
