Social Security benefits can make up a substantial source of income in retirement, but there's a chance you may not receive as much as you think.
Your benefit amount is based primarily on your income and the number of years you've worked. There are a few factors, however, that could potentially reduce the size of your monthly checks.
As you're preparing for retirement, it's wise to start planning for these factors so they don't catch you by surprise later down the road.
1. Taxes could take a bite out of your benefits
Even in retirement, your Social Security benefits could still be subject to both state and federal income taxes. There are 13 states that tax benefits, and your federal taxes will depend on a figure called your “combined income.”
Your combined income is your adjusted gross income (such as 401(k) withdrawals) plus half of your annual Social Security benefit amount. If your combined income is higher than $25,000 per year (or $32,000 per year for married couples filing taxes jointly), at least a portion of your benefits will be subject to federal taxes.
2. Your benefits may be withheld if you continue working
It's possible to continue working even after you've filed for Social Security, but depending on how much you're earning at your job, you could have a portion of your benefits withheld.
The first number you'll need to know is your full retirement age (FRA). Anyone born in 1960 or later has an FRA of 67 years old, and if you were born before 1960, your FRA is either 66 or 66 and a certain number of months, depending on your exact birth year.
If you won't reach your FRA in 2022, your benefits will be reduced by $1 for every $2 you earn over the limit of $19,560 per year. So, for example, if you're earning $25,000 per year at your job, that's $5,440 over the limit. Your benefits would be reduced by $2,720 per year, or around $227 per month.
If you will reach your FRA in 2022, your earnings are subject to a different limit of $51,960 per year. In this scenario, your benefits will be reduced by $1 for every $3 you earn over this limit.
The good news is that these reductions aren't permanent. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for the money that was withheld. However, it's a good idea to be prepared for these temporary reductions if you plan to continue working after filing for benefits.
3. Your checks could be reduced depending on when you claim
One of the biggest factors that could influence your benefit amount is the age you file for Social Security. You can begin claiming as early as age 62, but your benefits will be reduced by up to 30%.
This reduction is permanent, so if you claim early, you'll receive smaller checks for the rest of your life.
Keep in mind that, in theory, you should collect roughly the same amount over a lifetime no matter what age you claim. If you claim early, you'll receive smaller checks but more of them over a lifetime. If you delay benefits, you won't get as many checks, but each one will be larger.
That said, your filing age will have a substantial effect on your monthly income. If you claim early, be sure you're aware of the fact that you'll receive lower payments each month.
Social Security benefits can go a long way in retirement, but it's important to be aware of the factors that could potentially reduce your monthly checks. With a little preparation, you can ensure you're as ready as possible when heading into retirement.
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