If retirement is on your near-term radar, then congratulations! You've worked hard during your working years; now, it's time to live life on your terms.
Before simply calling it quits and then initiating your Social Security retirement benefits, however, there are a few things you ought to know about the program and its payments. You might want to revise your plan a little -- or maybe even a lot -- to make sure you live out your golden years as comfortably as you can.
1. Some of this income might be taxable
If you thought your tax-paying days would soon be over, then bad news -- they may not be. If you have enough income in retirement, at least some of your Social Security benefits could be taxed.
It's not a terribly complicated calculation. Individual filers with annual income of less than $25,000 won't owe any taxes on their Social Security income. For people earning between $25,000 and $34,000 per year, as much as 50% of your benefits can be taxed at regular IRS tax rates. Single filers earning more than $34,000 per year once they've claimed benefits may owe income tax on up to 85% of their Social Security payments. For joint filers, those thresholds are upped to $32,000 and $44,000.
To be clear, you won't owe taxes to the tune of 50% and 85% of this income. Only that percentage of your Social Security payments is subject to regular income tax rates, which are obviously lower.
There is a bit of a catch, however: Income from sources other than Social Security counts as income toward your total earnings. If you've got an IRA, pension, dividends, and the like, they may well push your total income to the point where much of your Social Security benefit becomes taxable.
2. Your payments are adjusted to reflect the impact of inflation
It's not all bad news in retirement, however. At least your monthly payments will increase to protect some of your overall buying power. This annual COLA (cost of living adjustment) is typically announced in October, based on the Bureau of Labor Statistics' measure of inflation for the prior 12 months. Last year's bump was a healthy 8.7%.
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It's not an entirely fair way of implementing such an increase since the boost to your benefits only comes after your living costs have already increased.
Nevertheless, the Social Security Administration's COLA calculation is reasonable enough. Although it doesn't raise payments every year, it also doesn't lower payments in years when the cost of living actually declines.
3. You can still work, but it might impact your benefit
While working after you've begun collecting Social Security retirement benefits doesn't make you ineligible to continue receiving those payments, it could reduce the benefits you remain eligible to receive.
And your age has a lot to do with whether or not working in retirement is worth it.
If you've not yet reached your full retirement age (66 to 67 years old depending on your birth year) but are already receiving benefits, the Social Security Administration will deduct $1 from your benefits for every $2 you earn above an annually adjusted limit. For this year, that limit is $21,240. In the year in which you're going to turn your full retirement age, the terms improve as Social Security will allow you to earn up to $56,520 before reducing your benefits by $1 for every $3 you earn above that limit.
Are you already at or beyond your official full retirement age? Then the good news is you can earn as much as you want doing a job without it adversely impacting your benefits amount.
Better still, as you continue to pay Social Security taxes on your wages even after you begin collecting benefits, the Social Security Administration regularly recalculates your monthly benefit to see if it should increase based on your most recent earnings.
4. It won't be a huge amount of money either way
Last but not least (and perhaps most important), know that your Social Security checks are unlikely to be very large. This year, the average monthly check is only worth around $1,800.
And that's not a number skewed downward by a significant number of people collecting small checks. More than two-thirds of Social Security retirement beneficiaries are bringing home less than $2,000 per month. More than 87% of them are banking less than $2,500 per month.
This is not meant to be discouraging information, either. More than half of all retirees are also banking more than $1,500 per month from Social Security. That's good.
Rather, the big takeaway is that whatever checks you're due probably won't fully replace your current income. You might struggle to maintain your current standard of living on Social Security income alone. That's why you'll want to save for retirement above and beyond the Social Security taxes being taken out of your paychecks while you're working. Of course, the sooner you get started doing this and the more you save, the better.
