Most workers are eligible to create a my Social Security account and get a personalized estimate of their future Social Security payments at various ages. However, your Social Security benefit could end up being less…
Most workers are eligible to create a my Social Security account and get a personalized estimate of their future Social Security payments at various ages. However, your Social Security benefit could end up being less than the amount listed on your statement. Here’s why you might get a reduced Social Security benefit in retirement.
Early claiming. Your Social Security statement provides as estimate of how much you are likely to receive at your full retirement age, age 62 and age 70. However, if you sign up for Social Security at another age, you will receive a different amount. Monthly Social Security payments are reduced if you claim them before your full retirement age, which is 66 for most baby boomers and 67 for everyone born in 1960 or later. “In the case of anyone retiring prior to their Social Security full retirement age, they should count on their actual benefit to be lower than the benefit stated on the Social Security statement,” says Charles Green, a certified financial planner and principal at Springboard Asset Management in Cheshire, Connecticut.
Your earnings changed. Your Social Security payments are calculated based on your 35 highest earning years in the workforce. If you don’t work for any of those 35 years, zeros are averaged into the calculation, which reduces your monthly payments. The Social Security estimate listed on your statement assumes that you will continue to earn your current salary. If you stop working or take a pay cut, your benefit payment is also likely to decrease. “If you worked some years at a very low level, for instance you worked part time so that you could provide care for a family member, those low-earning years will bring down your average,” says Alexandra Baig, a certified financial planner at Companions On Your Journey in Brookfield, Illinois. “If you worked less than 35 years, Social Security will use $0 for years you did not work, also bringing down the average.”
Medicare Part B premiums withheld. Most Social Security beneficiaries have their Medicare Part B premiums withheld from their Social Security check. The standard Medicare Part B premium is $134 per month in 2018. Medicare Part B premiums are prohibited by law from reducing benefit payments for most existing Social Security recipients. So, a Medicare Part B premium increase won’t further reduce your Social Security payments after you have enrolled in both programs, but could claim part or all of your annual Social Security cost-of-living adjustment. Retirees with incomes that exceed $85,000 as an individual or $170,000 as part of a married couple pay higher Medicare Part B premiums. “If people are having Medicare Part B and/or Medicare Part D withheld from their Social Security checks and their modified adjusted gross income crosses one of the income related monthly adjustment amount thresholds, it could unexpectedly cause their Social Security benefits to decrease, especially if this happens in a year where there was no cost-of-living increase to Social Security,” says John Stanton Burns, a certified financial planner at Oakview Wealth Solutions in St. Charles, Missouri.
Medicare Part D premium increase. You can elect to have your Medicare Part D premiums withheld from your Social Security check. These premiums vary based on the plan you select and can change each year. “My mother chooses to have her Medicare Part D prescription drug monthly premium paid directly from her Social Security benefit, so her monthly deposit is less because of that insurance cost, but she has one less bill to pay,” says Cynthia Taradash, a certified financial planner at Milne Financial Planning in West Danville, Vermont. Medicare Part D premiums are not prohibited by law from decreasing your Social Security payments, so a premium increase could result in a smaller Social Security check. Retirees are allowed to switch plans each year during the open enrollment period.
Tax withholding. If Social Security is your only source of retirement income, you probably won’t pay taxes on it. However, if you have another source of retirement income, you might have to pay taxes on a portion of your benefit. Social Security payments become partially taxable if the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 as an individual and $32,000 as a married couple. Retirees can elect to have federal taxes withheld from their Social Security payments. Beneficiaries can choose to have 7, 10, 12 or 22 percent of their benefit withheld for taxes using IRS form W-4V, but cannot choose a different percentage.
Working after starting benefits. Social beneficiaries who are younger than their full retirement age and continue to work after signing up for Social Security might have part or all of their Social Security benefit temporarily withheld. Social Security recipients who are younger than their full retirement age and earn more than $17,040 in 2018 will have $1 withheld for every $2 earned in excess of the earnings limit. “This reduction formula applies every year until the year of your full retirement age, when a different formula is applied,” Baig says. “Note that you will ‘make up’ the amount of the reduction starting from when you reach full retirement age, but the make up will be spread out over the rest of your actuarial life expectancy.” Once you turn your full retirement age there is no penalty for working after claiming benefits, and your benefit will be recalculated to give you credit for your withheld payments and continued earnings.