Whether you're already retired and receiving a Social Security payment, or you're growing ever nearer to the finish line of hanging up your work boots for good, chances are high that Social Security is going to play a substantive role in your household income during your golden years.
A Gallup poll conducted in October found that 59% of current retirees count on Social Security to be a major source of household income during retirement, with another 31% counting on it as a minor source of income. A separate study conducted by the Insured Retirement Institute that was recently released also found that 59% of baby boomers were counting on Social Security to be a "major" source of income in retirement.
Three important Social Security facts that are being overlooked
Yet for as important as this program is for current and upcoming retirees, some key Social Security facts continue to be overlooked, which could mean that retirees aren't getting as much out of the program as they possibly could. Here are three important Social Security facts that new retirees and pre-retirees simply have to know.
1. Yes, there really are do-overs
It's critical that early filers (i.e., those claiming benefits at age 62, or sometime before their full retirement age) are aware that there's a way to undo their claim filing within the first 12 months. This do-over is known as Form SSA-521, or officially "Request for Withdrawal of Application." As long as you file Form SSA-521 within the first 12 months of claiming benefits, and repay every cent in benefits you and anyone else may have received based on your earnings history, your claim will have been undone, and your benefits can continue to grow at a rate of approximately 8% per year.
When would a do-over make sense? If, for instance, you've entered retirement with little in savings and you've struggled to find work, you might consider filing for benefits early in order to get monthly income. Doing so with a birth year between 1943 and 1954 (thus a full retirement age of 66 years) could mean receiving as little as 75% of your full retirement benefit for life. Now, if you do land a well-paying job within those first 12 months following your claim, you can consider filing Form SSA-521, repaying the benefits you've received, use the wages from your new job to pay your monthly expenses, and allow your benefit to once again grow. This would be smart since you'll probably need as high a Social Security payment as you can get with little in retirement savings.
2. Your Social Security benefits can be taxed or withheld
Many people often overlook that the idea that just because payroll taxes are taken out of your paycheck during your working years, it doesn't mean your benefits are necessarily tax-free, or that they can't be withheld, in retirement.
For example, an individual with more than $25,000 in modified adjusted gross income (MAGI), and joint-filers with more than $32,000 in MAGI, could have at least 50% of their Social Security benefits exposed to federal taxation. Furthermore, if individuals earn in excess of $34,000 in MAGI, or joint-filers break $44,000 in MAGI, then 85% of their Social Security benefits become subject to taxation. On top of these IRS guidelines, which haven't been updated in 33 years, an additional 13 states also tax Social Security benefits, four of which do so without any exemptions.
On top of potentially paying tax on your benefits, retirees that sign up prior to their full retirement age (FRA) -- which is essentially 3 in 5 retirees -- could be in for a shock when they discover that the Social Security Administration could withhold benefits if they earn too much in a given year. Prior to reaching your FRA, the SSA can withhold $1 in benefits for every $2 in income you earn over $15,720 in 2016. In the year you'll reach your FRA (so age 66 for anyone born between 1943 and 1954), the SSA can withhold up to $1 in benefits for every $3 in income earned beyond $41,880 as of 2016. The good news is the SSA's withholding ends when you reach your FRA; but for early filers who are counting on an income boost alongside earnings from their current job, the withholding, which you'll receive back in the form of a higher monthly payment upon reaching your FRA, can make for quite the unpleasant surprise.
3. Your claim is probably about more than just you
Finally, unless you're a single individual heading into retirement, your decision on when to file for benefits is likely about more than just you. If you're married and/or have children, your decision on when to take benefits can affect your spouse or your kids.
In the March 2016 Monthly Statistical Snapshot from the SSA, we can see that 6.08 million people are receiving monthly survivor benefits based on the death of a working spouse, parent, or in rare cases a grandparent. Some 3.8 million widows and widowers, and 1.9 million children, receive benefits based on the work history of a now-deceased worker and when they filed for benefits. If a higher-income spouse files early for benefits, he or she could be dooming their lower-income spouse or children to a lower survivor benefit if they're the first to pass away. Thus deciding when to file is really a team decision.
If Social Security is going to play a substantive role in your retirement, then you absolutely need to be aware of these facts so you can get the most of the program for you and your family.