Your Guide to Retirement Benefits

Retirement is a major milestone that millions of workers eagerly anticipate. And once you reach it, there’s a host of benefits you stand to capitalize on. If you’re eligible for Social Security benefits, you’ll likely find that they’re a major source of retirement income.

Medicare provides vital healthcare coverage to replace the insurance you had as a worker. And if you’re set to receive an employer pension, that could go a long way toward bridging the gap between your living expenses and the income you get from Social Security.

Here, we’ll review everything you need to know about Social Security, as well as the other retirement benefits you stand to receive.

Social Security benefits
Social Security provides critical benefits for about 63 million Americans, 43 million of whom are retirees.

In addition to traditional retirement benefits, the program also pays survivors benefits and disability benefits.

Retirement benefits account for about 72% of the total benefits paid each year.

Who’s eligible for Social Security?
To be eligible for Social Security retirement benefits based on your personal work record, you’ll need to earn 40 “credits” throughout your career. For 2018, you’ll receive one credit for every $1,320 in earned income. You can only earn up to four credits per year, and the earnings threshold to receive a single credit tends to increase year after year. Nevertheless, if you’ve worked for at least 10 full years in your life, then you’ll almost certainly qualify for retirement benefits.

Once you’ve reached 40 credits, you can begin collecting Social Security upon turning 62, though as we’ll review shortly, waiting until a later age to file is often advantageous. Additionally, if you never worked but are, or were, married to someone who’s eligible for Social Security benefits in retirement, then you may be able to collect spousal benefits based on your spouse or former spouse’s work record.

How is Social Security calculated?
The way Social Security benefits are calculated is a little tricky, but in a nutshell, your base monthly benefit — the amount you’re entitled to collect at your “full retirement age” (FRA), which I’ll explain shortly — is based on your income during the 35 highest-earning years of your career. The higher your average earnings during those 35 years, the greater your monthly benefit (up to a limit). If you don’t work for at least 35 years in your lifetime, you’ll have a $0 factored in for each year without an income attached to it. So if you only worked a total of 32 years, then the Social Security Administration will factor three years of zero income into your average, which will ultimately reduce your benefit.

Along these lines, there’s a maximum Social Security benefit that retirees are eligible for each year. For 2018, the most a senior can collect at full retirement age is $2,788 per month. As such, if you’re a higher earner, you won’t pay Social Security taxes on all of your income. For the current year, only your first $128,400 of earnings are considered for Social Security purposes.

When to file for Social Security
Since Social Security will likely be a major source of your retirement income, it’s crucial to file for it at the right time, because the age at which you claim benefits will determine the size of your monthly checks. You don’t have to file at your “full retirement age,” which is 66, 67, or somewhere in between depending on when you were born. You can file as early as 62 and as late as 70, and the longer you delay retirement benefits within that eight-year window, the bigger your monthly Social Security checks will be. While you’re not required to claim benefits at age 70, there’s no reason to wait any longer than that, as you’ll be eligible for your maximum retirement benefit.

Smack in the middle of that window is full retirement age. That age is based on your year of birth, as follows:

If you first file for benefits at your full retirement age, you’ll get the full monthly benefit amount your earnings record entitles you to. But for each year you file for benefits ahead of FRA, those payments will be reduced by a certain percentage: 6.67% for the first three years you file early, and then 5% for each year thereafter.

Let’s imagine you’re entitled to a monthly benefit of $1,500 at a full retirement age of 67. If you file at 62, you’ll reduce your monthly payments by 30% to just $1,050 a month instead.

Now on the flip side, if you hold off on taking benefits past your full retirement age, you’ll accrue delayed-retirement credits that boost your monthly payments by 8% for each year you wait. If you’re looking at a monthly benefit of $1,500 at a full retirement age of 67, but you wait until you turn 70 to file, you’ll increase your monthly payments by 24% to $1,860 for the rest of your life.

Delayed retirement credits, however, stop accumulating at age 70, which is why that’s generally considered the latest age to file for Social Security. Furthermore, because of those delayed-retirement credits, someone with an FRA of 66 who files at 70 this year could conceivably collect as much as $3,680 per month.

So when should you claim your retirement benefits? There are multiple factors that will influence that decision, such as your health, financial situation, and goals.

At first glance, you might think that filing for benefits at 62 is a bad idea, but in some cases, it’s actually a smart one. If you find yourself out of work at 62 and need money, you’re often better off claiming benefits than racking up costly debt to pay your living expenses. Similarly, if you’ve amassed a substantial nest egg by the time you turn 62 and therefore don’t need your Social Security benefits to pay the bills, but rather you want the money to use for leisure, then there’s no harm in getting that cash a bit early, even if it means taking a hit to your monthly benefits.

Furthermore, if your health is poor and you expect to pass away at a relatively young age, then it generally pays to file for Social Security as early as possible. You see, Social Security is designed to pay you the same lifetime total regardless of when you initially file — if you live to the Social Security Administration’s life expectancy estimate for your peer group. In theory, if you file early, the greater number of checks you receive will be offset by the reduced dollar amount, while if you delay benefits, the reduced number of checks you receive will be offset by the larger amount you receive each month. However, this is all based on the assumption that you’ll live to your average life expectancy.

According to the SSA, the average American woman turning 65 today can expect to live to age 86.7, while the corresponding man can expect to reach age 84.3. If you have reason to believe that you may pass away much earlier than that, then it pays to get your hands on your benefits as early as possible. On the flip side, if you have a family history of longevity and your health is great, it may be best to hold off on filing as long as possible to get the most money from Social Security in your lifetime.

Along these lines, when trying to figure out when to take benefits, consider your breakeven age, which is the age at which you’d collect the same lifetime benefit in two separate filing scenarios. Say your FRA is 67, at which point you’re entitled to $1,500 a month in benefits. Filing at 62 will reduce your monthly benefits to $1,050, but you’ll collect more individual payments. If you end up living till just over 78-1/2, you’ll break even with a lifetime payout of about $209,000 regardless of whether you file at 62 versus 67. But if you pass away at 74, you’ll come out roughly $25,000 ahead by filing at 62 instead of waiting five more years.

Before deciding when to file, ask yourself these questions:

  • Have I reached full retirement age yet?
  • Do I need the money right away?
  • How heavily will I depend on Social Security to pay the bills?
  • How will my decision impact my spouse (keeping in mind that if he or she claims spousal benefits, that benefit will be based on the amount you collect)?
  • How likely am I to live a long life?

Answering these questions will help you arrive at a smart decision. Keep in mind, too, that while 62, 66, 67, and 70 are among the more common ages to take benefits, you can file at any point during that eight-year window. This means that if you decide to file at 64, for example, you’ll take a hit on your monthly payments, but not the same sort of hit you’d face by filing at 62.

Keep in mind that you’re allowed one do-over, so to speak, when it comes to Social Security. If you file at 62, or any age prior to FRA, and realize after the fact that you filed too early, you have the option to withdraw your application for benefits, pay back all the money you received to the Social Security Administration (SSA), and start from scratch at a later age. But you only have a year from when you initially file to take such action. If you don’t, you’ll continue receiving that lower monthly payment. In other words, your benefits won’t go back up to their full amount once you reach FRA.

How to file for Social Security
Claiming Social Security is fairly easy. You can apply online by creating an account at https://www.ssa.gov/, in person at your local Social Security office, or over the phone at 1-800-772-1213.

Keep in mind that it takes a little time to process a Social Security application, so it’s generally wise to file for benefits a couple of months before you want to start collecting the money. This way, you have time to address any problems that may arise with your application.

Social Security COLAs
The monthly benefit amount you start collecting from Social Security is essentially the amount you’ll continue to receive for the rest of your life (unless you wind up withdrawing your benefits application, as discussed earlier). That said, your payments may go up slightly year after year. Social Security beneficiaries are entitled to annual cost-of-living adjustments, or COLAs, that have the power to raise those payments by a certain percentage.

The purpose of COLAs is to help recipients retain their buying power in the face of inflation, and while they can be helpful, they’re not guaranteed. In fact, over the past decade, recipients saw no COLA at all for three separate years.

Here’s how a COLA might work in theory. Let’s say your monthly benefit payment starts out at $1,500, and the Social Security Administration gives beneficiaries a 2% COLA the following year. This means that in theory, your monthly benefits could climb to $1,530. Keep in mind, however, that many Social Security recipients pay their Medicare premiums directly from their Social Security benefits, and if those premiums go up more than the amount of your COLA, you won’t see that increase in your pocket.

Taxes on Social Security benefits
Unfortunately, the money you receive from Social Security may be subject to taxes. There are 13 states that currently tax Social Security benefits to varying degrees:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Most of these states, however, offer some sort of exemption so that if you’re not a higher earner, you might avoid those taxes.

Meanwhile, you may see your Social Security benefits taxed at the federal level if your income exceeds a certain threshold. To see if this applies to you, you’ll need to figure out your provisional income, also known as your combined income.

To arrive at that figure, take your gross income not including your Social Security benefits. Then, add in any tax-free interest you collect, such as municipal bond interest. Finally, add in 50% of what you receive in Social Security benefits.

If your total is between $25,000 and $34,000 and you’re a single tax filer, or between $32,000 and $44,000 and you’re a married couple filing jointly, then you could be taxed on up to 50% of your benefits. And if your provisional income exceeds $34,000 as a single filer or $44,000 as a joint filer, you could be taxed on up to 85% of your benefits. Be sure to plan for these taxes accordingly so you’re not caught off guard.

Social Security’s role in your retirement
Social Security helps millions of seniors stay afloat financially in retirement, and chances are, it’ll come to do the same for you. But don’t make the mistake of thinking you can live on those benefits alone, because you can’t. Social Security will only replace about 40% of the average recipient’s pre-retirement income. Most retirees need more like 70% to 80% of their former earnings to live comfortably. While you should absolutely factor those benefits into your retirement plan, you should also save independently to ensure that you have enough money coming in to fund your golden years.

Other retirement benefits
In addition to Social Security, there may be other benefits you’ll be eligible for later in life, such as Medicare and an employer pension. While the former will help you cover your healthcare needs when you’re older, the latter will provide income that helps you pay your bills.

Medicare benefits
Medicare eligibility begins at age 65, though you can enroll up to three months before the month of your 65th birthday. Keep in mind that it’s possible to collect Social Security well before Medicare, so if you leave your job at age 62 and file for benefits at that time, remember that you’ll need to cover the cost of health insurance until Medicare kicks in.

Medicare will serve as your health insurance during retirement, and while it might pick up a large chunk of the tab you incur in medical services, you’ll still be responsible for some costs yourself. Just as you’re subject to a deductible and copayments with regular health insurance, you’ll have to pay these as a Medicare enrollee.

Medicare has three distinct parts. Part A covers hospital visits and does not charge a monthly premium if you or your spouse paid enough Medicare taxes during your working years. Part B, meanwhile, covers doctor visits and diagnostic services, and it does impose a monthly premium. The monthly premium that most enrollees pay now is $134, but that number could go up depending on your income. In fact, you could pay as much as $428.60 a month if your income is is above $160,000 and you’re a single tax filer, or above $320,000 for joint filers.

Furthermore, you’ll risk increasing your Part B premiums for life if you don’t enroll in Medicare on time. Your initial enrollment window begins three months before the month of your 65th birthday and ends three months after the month you turn 65. If you don’t sign up then, you’ll risk a 10% upcharge, or penalty, on your Part B premiums for every 12-month period you were eligible for coverage but didn’t enroll.

Then there’s Part D, which covers prescriptions. Part D also charges a premium, though the amount you’ll pay will depend not only on your income, but also on the specific drug plan you choose.

As is the case with Part B, you might pay a surcharge on your premiums if your income is on the higher side. The challenge is picking a Part D plan is figuring out which one offers the best coverage for the medications you specifically take. Furthermore, drug plan formulas can change from year to year, which means the Part D plan that’s right for you one year may not be the best choice one year later. Therefore, you’ll need to weigh each Part D plan’s premium costs and deductibles, if applicable, against your out-of-pocket costs for your prescriptions under that plan.

Another option, however, is to get a Medicare Advantage plan, which will provide the same coverage that Parts A, B, and D are designated for. Medicare Advantage, also known as Part C, is a private alternative to Medicare that can often be more cost-effective. Medicare Advantage plans are required to offer the same level of coverage as original Medicare, but in addition, many offer coverage for services that regular Medicare doesn’t pay for, like dental care, vision, and hearing aids. Some Advantage plans offer overseas coverage, which original Medicare does not, so if you expect to travel a lot in retirement, you might consider going this route.

As is the case with Medicare Part D, there’s no standard premium for Medicare Advantage. Rather, your premium costs will reflect the level of coverage you get. One benefit of Medicare Advantage, however, is that it comes with a maximum annual out-of-pocket limit you’ll be required to spend.

Under traditional Medicare, you’re responsible for a certain portion of your healthcare tab once your deductibles are met. In 2018, under Part A, you’re liable for a $1,340 deductible per benefit period during which you land in a hospital or medical facility. A benefit period begins the day you enter said facility and ends once you haven’t received inpatient care for 60 consecutive days. Part B, meanwhile, has an annual deductible of $183 in 2018. After that deductible is met, you generally then pay 20% of the Medicare-approved amount for most of the medical services you receive. This means that the more you end up in the hospital or doctor’s office, the more you’ll spend in a given year, and there’s no limit to what your financial responsibility might amount to. But with Advantage, you’ll have an outer limit to work with, thereby buying yourself a degree of protection.

If you don’t get a Medicare Advantage plan and stick with original Medicare, it could make sense to pay for a Medigap plan. Also known as Medicare Supplement Insurance, Medigap is insurance offered by private companies that’s designed to pick up some of the costs you’d otherwise be responsible for under Parts A and B. There are plenty of services, however, that Medigap won’t pay for, like vision, dental, and hearing, so you’ll need to weigh the cost of your plan (which will vary depending on which one you choose) against its potential savings to see if it makes sense financially.

One thing to keep in mind about Medicare is that it generally won’t cover long-term care. While Medicare will pay for extended hospital stays up to 60 days per benefit period (after that, you start paying for a portion of those stays out of pocket), it won’t pay for things like nursing homes or assisted living facilities, since this type of care generally doesn’t involve the administration of medical services or treatments, but rather, involves helping with everyday living activities. The best way to protect yourself from long-term care costs is to apply for long-term care insurance in your 50s or 60s, because even Medigap plans won’t pay for extended long-term care (some will, however, pay long-term care costs for a limited time).

Employer pensions
Though pensions are becoming less and less popular in today’s workforce, many companies and public employers continue to offer them. And if you’re nearing the end of your career, you may have once worked for a company that provided one.

A pension is a retirement plan that’s funded by you, the employee, and your employer during your working years (though some pensions are funded solely by employers). Once you retire, you’ll be eligible to collect a certain amount of money based on factors such as how long you worked for the employer, how much you earned, and how the pension plan’s investments have performed. You’ll then generally have the option to collect a lump sum payment that you can roll into your own retirement account or collect monthly payments for the rest of your life. Keep in mind that most pensions are taxable, so account for that when you collect your money.

While a pension can be a wonderful benefit to have in retirement, it can also complicate matters when it comes to Social Security. If you worked for a private company that provides a pension, your Social Security benefits won’t be affected. But if you were employed in the public sector, such as a school or government office, then you could see your Social Security benefits reduced when your pension payments start coming in thanks to the Windfall Elimination Provision. Meanwhile, if you’re collecting spousal or survivor benefits and also collecting a pension from a public employer, you might face a reduction in benefits due to the Government Pension Offset.

Making the most of your retirement benefits
Retirement is a time to kick back and enjoy life, but that doesn’t mean you shouldn’t take steps to make the most of your benefits. Being strategic about Social Security can help you secure a higher income stream for life, so carefully consider when you should file. Similarly, read up on Medicare so you understand how to take full advantage of the health benefits available to you. Finally, if you have a pension, consider yourself lucky, but also make sure you understand its tax implications, as well as the impact it might have on your Social Security income.

No matter what set of retirement benefits you ultimately wind up with, they’ll hopefully serve the key purpose of helping you enjoy your golden years like you deserve.

— Maurie Backman

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