As you think about retirement, it can be natural to look at how much you will receive from Social Security. If you’ve worked and paid enough Social Security taxes to qualify for benefits, you can expect to get Social Security checks starting between ages 62 and 70, depending on when you decide to begin taking payments. The amount you get may or may not cover all your expenses.
To find out if Social Security benefits will cover your retirement bills, you can:
— Estimate your Social Security benefit.
— Evaluate your retirement expenses.
— Review income sources you will receive in retirement.
— Understand Social Security benefits and taxes.
Use the following criteria to help determine whether Social Security will cover all your expenses during retirement.
Estimate Your Social Security Benefit
You can check out your Social Security statement by creating a my Social Security account or use a Social Security calculator at the Social Security Administration website to predict how much you can expect to receive every month. To qualify for benefits, you’ll need to have earned at least 40 Social Security credits. These credits are earned as you work and pay Social Security taxes. In 2021, you can earn one Social Security credit for every $1,470 you make during the year. You can earn up to four credits for the year and will need to make $5,880 to receive them.
Once you qualify, Social Security benefits are determined by applying a formula to up to 35 years of earnings. If you work more than 35 years, the benefits will be based on your 35 highest earning years. There are also adjustments and limits built into the benefit. If you start payments at age 62, you’ll receive a reduced benefit. If you wait until after your full retirement age, the benefit will increase up until age 70.
Evaluate Your Retirement Expenses
Your existing bills are likely to continue in retirement. You will need to make mortgage payments if you have not paid off your home. Also think about auto and transportation expenses, utility bills, grocery costs, entertainment and travel. You can then compare the total expenses to your Social Security benefit.
If the benefit will cover your ongoing expenses, you’ll be able to support your lifestyle with Social Security checks. “I have seen people live comfortably on just Social Security,” says Kevin Chancellor, a certified Social Security claiming strategist and financial advisor at JAG Financial in Melbourne, Florida. “It all boils down to the budget.” If you head into retirement without any debt, own your home and have a low cost of living, the benefit may cover your monthly costs.
Review Income Sources in Retirement
If your monthly expenses are higher than your Social Security benefit, you’ll need to plan on bringing in other income from different sources to fill the gap. “Social Security was never designed to be your primary retirement plan,” says Chuck Czajka, a certified Social Security claiming strategist and CEO of Macro Money Concepts in Stuart, Florida. You might receive additional income from a workplace pension plan, retirement accounts, side jobs, annuities or other investment vehicles.
The amount you receive from a combination of Social Security and other sources of income needs to be enough to cover all your expenses in retirement. Many people receive income from multiple sources in retirement, and Social Security is just one component of a retirement financial plan. You may need to rely on other sources of income to make up the difference between what Social Security benefits cover and your regular expenses. “When you’re creating your retirement plan, Social Security should only account for 35% of your retirement plan,” Czajka says.
Understand Social Security Benefits and Taxes
Once you know all your sources of income for retirement, you can determine if you will need to pay taxes on your Social Security income. If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit adds up to more than $25,000 ($32,000 for couples), you will need to pay tax on part of your Social Security benefit. “If this sum is more than a certain limit, you will need to pay at least some tax on Social Security,” says Sara Hornick, a financial advisor at Hudson Wealth Management in Traverse City, Michigan.
If you stay under the limits, your Social Security benefit won’t be taxed at the federal level. There are other ways to reduce or avoid taxes as well, including withdrawing from a Roth IRA. Roth IRA distributions are not taxable income.
Even if you do pay taxes on your Social Security benefit, there are certain advantages that come with bigger Social Security checks. “Once you claim your benefit, the income lasts for the rest of your lifetime,” Czajka says. “The longer you delay taking benefits, the more your benefit will be.” Your Social Security benefit may also support a spouse via spousal benefits and survivor benefits.
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