This is why it’s in your best interests to have a financial advisor who can make sure that you’re staying on top of your benefits and getting everything that is owed to you. Here are five Social Security rules that you probably don’t know and how they can affect your financial future.
1. Your benefits are smaller if you claim them early.
You can start claiming your Social Security benefits at age 62, but this doesn’t mean that you should. Full retirement age (FRA) is based on your birth year, and this is the age when you can claim your full benefits.
Full retirement age is between 66 and four months and 67 if you were born in 1956 and later. If you don’t want to wait this long, you'll be hit with a penalty for every month earlier you take Social Security. These penalties can add up and cause you to take home much less than if you would have waited.
2. Your benefits are determined by your 35-year work history.
The primary insurance amount (PIA) is the benefit you get if you decide to claim your benefits at your normal retirement age. Your PIA is a function of average indexed monthly earnings (AIME). It’s a good idea to know how your PIA is calculated so that you can make informed decisions regarding Social Security.
The Social Security Administration also considers your 35-year work history. You can boost your benefits by maintaining consistent employment and managing to work longer than 35 years. This way, you won’t have low-earning years to bring down your average.
3. You may have to pay taxes on Social Security.
Each state treats Social Security differently. Some treat it the same way as the federal government does, taxing every dollar based on the tax bracket you’re in. Other states only partially tax Social Security. And others, including New Jersey, don’t tax Social Security at all.
On a federal level, Social Security will always be a part of your taxable income. If you are a single tax filer with a provisional income above $25,000 or a joint filer with a provisional income above $32,000, some of your Social Security benefit will be taxed. Provisional income is taxable income. However, no one pays taxes on more than 85 percent of their Social Security benefits.
A financial advisor can help keep you up to date on the Social Security rules you need to know. Contact Leonard Financial Solutions for an appointment. We’ll be happy to look over your current financial status and how Social Security can boost your future savings.