As tax season unfolds and Americans engage in the yearly ritual of filing taxes, it presents a unique opportunity to not only reflect on past financial activities but also to strategically plan for the future, particularly regarding Social Security. According to Jared Friedman, a certified financial planner and partner at Redwood Financial Planning in New Jersey, tax season is “the perfect time” to get deeper into understanding and optimizing your Social Security benefits.
The expert advises incorporating a thorough financial review into the tax-filing routine. This involves scrutinizing not only current income and tax withholding but also evaluating retirement accounts, bank balances, credit limits, and, notably, your Social Security statement. Accessible through the Social Security Administration’s website, obtaining your statement is a straightforward process that requires submitting some identifying documents.
Know Your Retirement: How Much Will You Get?
Even if retirement is several years away, examining your Social Security Statement now provides valuable insights into the potential benefits awaiting you. Social Security benefits aim to replace around 40% of your pre-retirement income, calculated based on the average of your 35 highest-earning working years.
The statement offers an estimated monthly payout in retirement, taking into account the age you choose to claim benefits. Understanding the impact of early or delayed claims is crucial; claiming benefits at age 62 might result in a reduction of up to 30%, while delaying until age 70 could increase your payout by 8% per year.
The timing of when to claim Social Security involves complex considerations, but Friedman emphasizes the importance of knowing this baseline figure early on, allowing you to assess your estimated retirement income holistically alongside other financial assets like a 401(k) and Roth IRA.
Furthermore, the Social Security Statement outlines potential benefits for family members in case of death or disability, providing an added layer of financial security. For Jared Friedman, the peace of mind gained from having a clear understanding of Social Security benefits outweighs any uncertainty, even for younger individuals. He advocates for financial organization at every stage of life, highlighting the role of knowledge in mitigating stress around money matters.
Now, as tax season aligns with Social Security calculations, Crystal McKeon, a certified financial planner and chief compliance officer at TSA Wealth Management, recommends seizing this moment to review your Social Security Statement. The statement lists pre-tax income from each working year, which forms the basis for benefit calculations. McKeon emphasizes that errors in Social Security income calculations can be rectified during tax season when you have easy access to W-2s and 1099s. Correcting inaccuracies becomes more challenging as you approach retirement age, making it imperative to address any discrepancies now.
The SSA Offers Two Free Tools to Calculate Your Retirement
This is the most accurate and personalized way to estimate your benefits. You can create an account at https://www.ssa.gov/myaccount/ and access the following features. This statement includes your earnings history, which is used to calculate your benefits. You can also view a personalized bar graph displaying your retirement benefit estimates at different ages.
Use the Retirement Benefits Planner: This online tool allows you to estimate your future benefits based on different retirement ages and scenarios. You can also factor in expected future income for a more precise estimate. For a swift and simplified estimation of your Social Security benefits, you can utilize the quick calculator available at https://www.ssa.gov/OACT/quickcalc/. However, bear in mind that this tool provides a general approximation.
To use the calculator effectively, input three key pieces of information: your date of birth, which determines your Full Retirement Age (FRA) and influences your benefit amount; your estimated annual earnings, based on your current income or future projections; and your anticipated retirement date, as the age at which you choose to start receiving benefits can impact the calculated amount
A Social Security Strategy for an Extra $182,000 in Retirement
While you can begin receiving Social Security as early as age 62, waiting until your Full Retirement Age (FRA), which ranges from 66 to 67 for current workers, ensures you receive the full benefit you’ve earned. This full benefit is called your Primary Insurance Amount (PIA). However, many opt to claim benefits sooner, often due to financial needs.
Early claiming comes with a reduction in benefits: the Social Security Administration deducts a portion for each month claimed before your FRA. This reduction can range from 25% to 30% compared to your full benefit if you claim at 62.
The good news? Delaying your claim increases your monthly benefit. This increase continues even after reaching your FRA, with a 2/3 of 1% monthly bump until you turn 70. This age marks your eligibility for the maximum benefit: 124% or 132% of your PIA, depending on your specific FRA.