What About Taxes On Social Security
Social Security benefits may be taxable, depending on your “combined income.” Your combined income is equal to your adjusted gross income , plus non-taxable interest payments , plus half of your Social Security benefit.
As your combined income increases above a certain threshold , more of your benefit is subject to income taxâup to a maximum of 85%. For help, talk with a CPA or tax professional.
In any case, if you’re still working, you may want to postpone Social Security either until you reach your full retirement age or until your earned income is less than the annual limit. In no situation should you postpone benefits past age 70.
Apply The Social Security Benefits Formula To Aime
Once you know your AIME, put it into the Social Security benefits formula using the bend points in effect in the year that you turn 62. The table below shows the bend points that have applied in recent years:
| Year |
|---|
If you turn 62 in 2019, the bend points to use in your Social Security benefits formula are $926 and $5,583. So, if your AIME was $6,190.48 as calculated above, here’s how your benefits would be calculated:
- 90% of $926 = $833.40
- 15% of $6,190.48-$5,583 = $91.12
Your primary insurance amount would be $833.40 + $1,490.24 + $91.12 = $2,414.76.
If you turned 62 in 2018, different bend points apply: $895 and $5,397. So, if your AIME was $6,190.48, your primary insurance amount in 2018 would be $2,365.16:
- 90% of the first $895 = $805.50
- 32% of $5,397-$895 = $1,440.64
$805.50 + $1,440.64 + $119.02 = $2,365.16.
There Are Social Security Survivor Benefits For Spouses And Children
If your spouse dies before you, you can take a Social Security survivor benefit. However, that wont be in addition to your own benefit. You must choose one or the other. If you are at full retirement age, that benefit is worth 100% of what your spouse was receiving at the time of his or her death .
A widow or widower can start taking a survivor benefit at age 60. However, the payment will be reduced because its taken before full retirement age. Theres a twist available assuming the survivor has benefits of their own available and hasnt already filed for them: Take the survivor benefits as early as possible, which is age 60, and switch to your own retirement benefits at age 70. Your survivor benefits will be reduced because you will have filed for them before your full retirement age, but your own benefits will grow, garnering delayed-retirement increases, until age 70. Online programs such as the one offered by Social Security Solutions can help you compare the cumulative benefits for each strategy to determine which one provides the highest payout.
Remarriage has implications here. If you remarry before age 60, you are not eligible for a survivor benefit. If you remarry after age 60, you may be eligible for a survivor benefit based on your former spouses earnings.
Eligible children who are under age 18 or were disabled before age 22 can also receive a Social Security survivor benefit. It would be worth up to 75% of the deceased’s benefit.
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When Does The Change Take Effect
For those seniors receiving Social Security benefits, the Administration will pay the new amount starting January 2023. For those who receive SSI, those increases will start with the Dec. 30, 2022, payment. Those receiving benefits payments should receive a letter in December providing the exact amount of their increase. It is also possible to log into your My Social Security account to see how much your payment will be.
Retiring Early From Declining Income Below The Highest 35 Years
After all, the reality is that if the worker already has 35 years of work history, all of which are at least as high as current earnings , then the prospective retiree isnt actually earning any further increase in benefits by continuing to work! Because the AIME formula only counts the highest 35 years and drops the rest. So if the prospective retiree isnt adding new years that are higher than the existing ones, the additional years of work have no impact. Which means stopping work early has no adverse impact, either.
For instance, the chart below shows an individuals historical earnings over a career, including a substantial ramp-up in the early years, followed by a career transition , then a steady series of raises, with a few wind-down years of consulting work at the end. The top 35 years are shown in blue, and the low years are shown in orange.
As the chart above shows, additional years of work at the current consulting levels will have no impact on benefits because there are already 35 years of historical earnings at even higher levels. As a result, quitting work after age 64 wont have any impact on the benefits that were originally projected to begin at full retirement age of 66.
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How Does The 2023 Increase Compare To Prior Years
The 2023 COLA is markedly higher than most other years. For 2022, the Administration raised the COLA by 5.9%. The increase was just 1.3% for 2021 and 1.6% for 2020.
The last big increase was in 1981 when the Administration set the COLA at 11.2%. In 1980, it was adjusted by 14.3%, the highest since 1975.
Social Security Calculation Step : Adjust All Earnings For Inflation
So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.
Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.
The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.
This may seem a little redundant to put the year and your age, but itll make another step a little easier.
Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.
Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.
Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.
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The Impact Of Medicare Changes
Medicare costs are decreasing, which is good news for seniors. Medicare announced in September that it would be reducing premiums by about 3% for most people with a Medicare Part B plan. The typical plan will drop by $5.20 per month, lowering the standard payment most pay to $164.90 per month. Health care costs are a big portion of many seniors monthly budgets, and any reduction here is a good thing.
One key concern, though, comes from some higher earners who may get bumped up to the next tax bracket with the COLA increase. Specifically, those who earned over $97,000 as an individual or $194,000 as a couple in 2021 will pay more than the standard Part B premium as well as pay more for Part D drug plans. For some, that could be a concern going forward.
Since Social Security Is Adjusted For Inflation Why Do People Say Retirees Live On Fixed Incomes
Its really not an accurate description.
People who receive Social Security simply dont live on fixed incomes, said Alicia Munnell, director of the Center for Retirement Research at Boston College. They have this wonderful benefit that increases over time when consumer prices rise.
That doesnt mean Social Security is adequate to meet the needs of retirees. For example, the Elder Index, which measures the cost of living for older Americans, shows that for a single person who rents a home, the average benefit covered just 68 percent of basic living expenses in 2021 housing, food, transportation and health care. For a married older couple, the comparable figure was 81 percent.
Social Security does not and will not cover necessary expenses as long as benefit increases are tagged to the cost of living and nothing more, said Jan Mutchler, a professor of gerontology at the University of Massachusetts Boston, which created the index.
Census Bureau data released last month showed that the rate of poverty increased among older Americans, despite improvement among all other age groups. The poverty rate among Americans 65 and older rose to 10.3 percent in 2021 from 8.9 percent in 2020. Looked at another way, 5.8 million older Americans were below the federal poverty level in 2021 a figure that increased by 950,000 last year.
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How To Estimate Your Social Security Income
Two facts are knownSocial Security benefits are not guaranteed, and some changes will be necessary to keep the system solvent in the future as millions of baby boomers retire and begin to receive their Social Security benefits. Though these facts create uncertainty, its also true that the quality of your retirement depends on your planningand you must start planning somewhere.
A good starting point is to figure out the dollar amount of the retirement benefits to which all of your years of Social Security contributions entitle you under current law. There are four ways to do this:
Is Social Security All You Need To Retire
Generally not. Social Security is not intended to be your only source of retirement income. On average, beneficiaries receive about 40% of their pre-retirement income through Social Security benefits. According to the Social Security Administration, most financial advisers say youll need at least 70% of your pre-retirement income to comfortably meet your expenses in retirement.
Here are few other ways to save for retirement:
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Average The Highest 35 Years
The Social Security benefits calculation uses your highest 35 years of earnings to calculate your average monthly earnings. If you do not have 35 years of earnings, a zero will be used in the calculation, which will lower the average. In the table below, the highest 35 years are listed in Column G.
Total the highest 35 years of indexed earnings, and divide that amount by 420, which is the number of months in a 35-year work history, to find the Average Indexed Monthly Earnings.
For our example worker, who was born in 1953 and turned 60 in 2013, the highest 35 years of wages total $1,919,040. Divide by 420 to get an AIME of $4,569.
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What Is The Social Security Benefits Formula For 2019
The Social Security benefits formula that applies to determine your primary insurance amount is the formula in effect when you turn 62. The percentage of AIME you receive never changes, but the bend points do. In 2019, the bend points are $926 and $5,583. So, if you turn 62 in 2019, the Social Security benefits formula that would apply to determine your benefits is:
- 90% of the first $926 in AIME
- 32% of the amount of AIME between $926 and $5,583
- 15% of the amount equal to or greater than $5,583 in AIME
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Cola 202: How Much Did Social Security Benefits Increase For 2023
Social Security’s COLA is increasing to combat the rising CPI
- A new Cost-of-Living Adjustment is going into effect in 2023.
- This will see Social Security checks increase by 8.7%.
- This comes as inflation continues to push prices higher.
Social Security benefits are increasing for 2023 as the Social Security Administration announces an update to the Cost-of-Living Adjustment .
The COLA 2023 update will see receivers of Social Security get an 8.7% increase. The Social Security Administration came to this decision after evaluating the increases in the Consumer Price Index over the last 12 months.
To put that increase in perspective, the average monthly retiree benefit is increasing by $144. Also, those receiving benefits will note that the 8.7% increase comes after an 8.2% increase in the CPI over the prior year.
Dan Adcock, the director of government relations and policy at the National Committee to Preserve Social Security and Medicare, told CNBC the following about the COLA 2023 update:
The COLAs really are about people treading water theyre not increases in benefits. Theyre more trying to provide inflation protection so that people can maintain their standard of living.
Social Security Calculation Step : Primary Insurance Amount Calculation
Now youre ready to determine the heart of your benefit your primary insurance amount . The PIA is simply the result of your benefit calculation and is generally your full retirement age benefit amount.
This is calculation is accomplished by using the bend point formula thats in effect for the year you attain age 62. If you arent 62 yet, youll need to forecast what the bend point formula amounts will be in the year you turn 62. These change annually based on the change in annual wages and generally increase at 3-4%.
There are two numbers that make up this formula which are separated into three separate bands: The amount up to the first number, the amount between the first and second number, and the amount above the second number.
The sum of these three bands is your benefit amount at full retirement age: your PIA, or Full Retirement Age benefit amount.
In the example image below we illustrate an individual with an AIME of $6,000 being applied to the bend point formula.
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What Month Will I Get The Cola Increase
Even though the Social Security Administration announced the adjustment this week, seniors and others on the program will have to wait until January to receive their higher payments.
While the COLA will actually go into effect with the December 2022 benefits, those payments will be made in January 2023.
Your January 2023 check will be sent based on your birth date:
- If your birthday falls on the 1st to 10th of the month, your payments arrive on the second Wednesday of the month. That means the first check with the 2023 COLA will land on January 11.
- If your birthday falls on the 11th to 20th, your payments come on the third Wednesday of each month. Your first 2023 COLA will arrive with your January 18 benefit.
- If your birthday falls on the 21st to 31st, your payments are scheduled for the fourth Wednesday of each month. Your first 2023 COLA will arrive with your January 25 check.
How Much Will The Average Monthly Payment Increase
The average Social Security benefit sent in September 2022 was 1,673.88. Given the 2023 COLA increase of 8.7 percent, the average benefit could reach $1,819 in January.
For those who receive Social Security Disability Insurance, the average monthly payment was $1,232.11, which will be bumped up to $1,339.30.
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How Are Spousal Benefits Calculated For Social Security For Married People
If someone is married to a worker eligible for Social Security benefits, they may be able to claim spousal benefits based on their worker spouses earnings. Social Security spousal benefits are based on the worker spouses earnings and the age of the claiming spouse. Note that spousal benefits do not in any way decrease your spouses retirement benefit.
To qualify for Social Security spousal benefits:
- Both the higher-earning worker and the claiming spouse must be at least 62
- The couple must have been married for at least one year
- The higher-earning worker spouse must already be receiving their earned benefit
Depending on the age that the spouse claims, the benefits can range between 32.5%-50% of the worker spouses primary insurance amount . As with earned benefits, youll receive less than the full spousal benefit if you decide to claim before your full retirement age. But unlike earned benefits, you dont receive more if you wait to claim spousal past full retirement age. In fact youll actually be forfeiting some money by waiting longer.
If only one spouse worked, then the Social Security Administration calculates half of the worker spouses PIA and adjusts it based on the age of the claiming spouse.