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An Overview of Social Security Benefits
An Overview of Social Security Benefits
While you might be able to start receiving Social Security payments at age 62, most people find that waiting until age 70 results in larger payouts. Here's how to make a choice.
The timing of your Social Security benefits is largely dependent on your situation. As early as age 62 (or 60 if you are a survivor of another Social Security claimant, or at any age if you are claiming a disability), you can begin taking it; alternatively, you can defer taking it until full retirement age, or, depending on your work history, age 70. Although everyone has a different "correct" age to claim benefits, generally speaking, if you can afford to wait, deferring Social Security can pay off over the course of a long retirement. Here are some pointers to think about.
What age is complete retirement?
What age is complete retirement?
The age at which you are qualified to receive your full Social Security payments is called your full retirement age (or "normal retirement age"). Your birth year determines your complete retirement age: The complete retirement age for individuals born in 1960 or later is 67. The complete retirement age for individuals born in 1955 and up until the end of 1959 (officially, January 1, 19601) is 66.2 and 66.1 months. You've already attained full retirement age of 66 if you were born before 1955.
Full Social Security benefit retirement ages
If you were born in the state of...The age at which you can fully retire is 1954 or before.1955 is your official retirement year.66 + 2 months in 1956, 66 + 4 months in 1957, 66 + 6 months in 195866.8 months in 1959–66.10 months in 1960
1960 or later 67
How can I receive benefits early?
How can I receive benefits early?
Be advised that taking your individual Social Security benefit (rather than your spouse's) before reaching full retirement age will result in a permanent reduction of the benefit of five-ninths of 1% every month. The worker benefit is further decreased for the remainder of retirement by five-twelfths of 1% each month if you begin more than 36 months before your full retirement age.
Let's say, for illustration, that you retire at age 62. The lower benefit calculation is based on 60 months if your full retirement age is 67 and you choose to begin receiving benefits at age 62. As a result, the reduction is 20% for the first 36 months (five-ninths of 1% times 36) and 10% for the next 24 months (five-twelfths of 1% times 24). Your benefits would be permanently decreased by thirty percent overall.
Impact of early retirement benefit take-up (born January 2, 1960)
At age 62, if you start taking Social Security benefits, your primary insurance amount would be 70%;
at age 63, 75%;
at age 64, 80%;
at age 65, 86.67%;
at age 66, 93.33%;
and at age 67, 100%.
The SSA.gov website
And if I wait to claim my benefits?
And if I wait to claim my benefits?
For your individual benefits (but not for spousal benefits), you normally receive a "delayed retirement" credit (DRC) if you retire between your full retirement age and age 70. Let's take an example where you are 67 years old and were born in 1960. You would get a credit of 8% each year multiplied by two (the number of years you delayed) if you begin receiving benefits at age 69. This indicates that the benefit you would have gotten at age 67 would have been 16% higher. (This is exclusive of any possible cost-of-living adjustments for inflation from the age of 67 to 69.)
Benefits of postponing retirement (born January 2, 1960)
Benefits of postponing retirement (born January 2, 1960)
Starting at age 67, your primary insurance amount would be 100%;
starting at age 68, it would be 108%;
at age 69, it would be 116%;
and at age 70, it would be 124%.
The SSA.gov website
For the duration of your retirement, the higher baseline would apply, and it would act as the foundation for any subsequent increases based on inflation. Although it's crucial to take into account your unique situation—delaying isn't always an option, especially if you're sick or don't have the money to wait—waiting can have a lot of advantages.
Remember that you might still need to enroll in Medicare if you want to wait until after you turn 65. If you don't enroll in Medicare by the time you are 65, in certain cases, your coverage may be delayed and cost extra. When you turn 65, Medicare Parts A and B will be automatically registered in your account if you began receiving Social Security benefits early.
If you continue to work and make roughly the same amount of money through those years, your expected benefits between ages 62 and 70 will be listed on your yearly Social Security statement. You can request a copy of your yearly statement or access it online via the Social Security Administration (SSA) portal if you require one.
When should I start receiving benefits?
When should I start receiving benefits?
Think about the following when determining when to start receiving Social Security benefits.
Your financial requirements
Your financial requirements
You can be flexible about when to accept Social Security payments if you're thinking about retiring early and you have enough money (an investment portfolio, a traditional pension, and other sources of income).
You could have fewer options if you depend on your Social Security income to make ends meet. To optimize your benefits, you might want to think about delaying retirement or working part-time until you reach your full retirement age, or perhaps longer.
How long will you live?
How long will you live?
Although you will receive monthly payments for a longer period of time if you take Social Security early, your benefits will be reduced. However, if you wait to start receiving Social Security benefits, you will receive fewer checks overall, but each one will be greater.
It may be wise to hold off on accepting a greater monthly payment if you believe your life expectancy will exceed the average. On the other side, you may choose to seize what little remains of your life if you're in poor health or have cause to think that you won't outlive the normal lifespan.
A little comment regarding life expectancy
A little comment regarding life expectancy
The SSA estimates that a 65-year-old's average life expectancy is around 84 years for men and 87 years for women. People who are married often live longer than single people do, with a higher than normal chance that at least one spouse will live to be 90 years old. Use the life expectancy calculator provided by the SSA to determine your individual life expectancy.
But always keep in mind that an average is just that—an average. Reducing your life expectancy by a significant amount could justify early withdrawals. It can be especially advantageous to start Social Security later if you live longer than typical.
Your status as a married person
Your status as a married person
If you are married, start by considering your partner's benefits, age, and health, especially if they are the one making more money. For instance, you are eligible to receive 50% of your spouse's retirement benefits or 100% of your own, depending on which is higher, at full retirement age.
Based on your ex-spouse's Social Security record, you may be eligible for benefits (up to 50% of their total retirement benefits) if you were married for ten years or longer and are now divorced. Note that your benefits or those of your current spouse will not be affected if your ex-spouse utilizes your record.
In the event of your widowhood, you will be entitled to collect 100% of your spouse's retirement benefits or your own benefits. Utilizing the worker, spousal, and survivor benefit combinations to their fullest potential is crucial; if at all possible, a financial advisor should be consulted.
What is your job status?
What is your job status?
If you start taking Social Security early, earning a wage—or even income from self-employment—can temporarily lower your benefit. For every $2 you make above the annual cap ($21,240 in 2023) and you are still working, $1 in benefits will be withheld if you have not reached full retirement age.
The reduction in benefits drops to $1 for every $3 you earn over a higher ceiling ($56,520 in 2023) in the year you reach full retirement age. But regardless of your income level, your benefits stop being lowered the month you reach full retirement age.
Once more, any benefit reduction brought on by the earnings test is just momentary. Don't use the reduction as the only reason to reduce your working hours or worry about earning too much because you will receive the money back in the form of a recalculated higher benefit starting at full retirement ages.
Is it better to wait or not?
Is it better to wait or not?
If... think about receiving rewards early.
If... think about receiving rewards early.
Since you're no longer employed, your benefits are essential to your ability to survive.
The remaining member of the household is not expected to live to average because of your poor health.
Your higher-earning spouse might wait to apply for a larger benefit because you are the one with lower income.
If..., think about delaying benefit receipt.
If..., think about delaying benefit receipt.
You continue to earn enough money to have an effect on whether your benefits are taxable. (Or at least wait until your typical retirement age to prevent future wage reductions from affecting benefits.)
You or your partner anticipate living longer than the normal lifespan because you are both in excellent health.
Since you make more money than your husband does, you want to make sure the survivor gets the maximum advantage.
And what about Social Security taxes?
And what about Social Security taxes?
Your Social Security benefits can be subject to taxation based on your total income. Your adjusted gross income (AGI) plus non-taxable interest payments (such as interest on tax-exempt municipal bonds) plus half of your Social Security benefit make up your combined income.
More of your benefit is taxable as your total income rises above a specific threshold (due to receiving a paycheck, for example), up to a maximum of 85%. Speak with a tax expert or CPA for assistance.
Either way, if you're still working, you might wish to wait to start receiving Social Security benefits until you reach full retirement age or until your yearly income is below the cap. Benefits should never be delayed past the age of 70.
How come I decide differently?
How come I decide differently?
Within the first 12 months of receiving reduced-rate Social Security benefits, you have the option to withdraw your application and repay the government for the amount you have already received (including Medicare payments and taxes withheld) if you decide to change your mind. After that, you could resume receiving benefits at a later time to benefit from a larger payout. Remember that you can only take one withdrawal throughout your lifetime.
Let's take a scenario where you choose to begin receiving early benefits at age 62 and then opt to return to work at age 63. You might stop applying for Social Security, repay the years' worth of benefits you received, return to work, and then wait to resume receiving higher-level benefits until you reach full retirement age.
Another option after reaching full retirement age is to choose to discontinue benefits voluntarily at any time before turning 70 in order to gain credits for delayed retirement (spousal benefits will also be stopped). Benefits will automatically resume at a higher rate when you reach 70, unless you decide to begin receiving benefits earlier. Keep in mind that you have to indicate if your Medicare coverage, if any, should be included in the withdrawal when you withdraw your application or cease receiving benefits after reaching full retirement age.
What does Social Security's future hold?
What does Social Security's future hold?
The Social Security Trust Fund is expected to be sufficiently funded as of March 2023 to pay all promised benefits until 2034, at which point, unless Congress acts, payouts for all current and future claimants would have to be reduced to around 80% of planned benefits.2. Longer-term options include means testing and adjustments to the full retirement age, which may diminish or eliminate benefits depending on your other sources of income.
You could be inclined to begin receiving benefits early if you have doubts about Social Security's future or are afraid of possible changes, reasoning that it's better to have something than nothing. Whatever your circumstances, you should start saving more for retirement earlier if you have concerns about the future of Social Security.
In summary
In summary
If you are in good health and have the option, consider delaying the start of your benefits as long as possible (but no later than age 70). The main dangers are a protracted retirement combined with inflation and market unpredictability. If you can, delaying Social Security is essentially a safeguard against such difficulties.
But your circumstance can be different, and there are a lot of things to think about. Seek advice from a financial planner if necessary.
When You Should or Should Not Max Out Your 401(k)
Maxing out a 401(k) isn’t the best choice for everyone, even if you can afford it.
By the end of this article, we’ll cover when you should or should not max out your 401(k), what it takes to max out your 401(k) (you may not be actually fully maxing out your 401(k), and other financial goals you may want to consider if you do not max out your 401(k).
Before you can decide if maxing out your 401(k) makes sense for you, you will need to look at all of your financial goals and priorities.
What matters most to you – retiring early, paying for your kids’ education, traveling more while you’re young?
There’s no one right answer, only what is best for your unique situation.
As financial advisors, we often see people who think they are maxing out their 401(k) account but are not.
Do not confuse “maxing out” with just contributing enough to get your full employer match. We’ll cover more on that below.
Let’s get started!
Ground Rules: What You Need To Know Before You Max Out Your 401(k)
Many companies offer a 401(k) retirement plan to help you save and invest for the future.
With a regular 401(k), your contributions come out of your paycheck before taxes are taken out. One upside of contributing to your 401(k) is it can help lower your tax bill for that year.
Many plans also offer a Roth 401(k), where you contribute after-tax dollars.
The big benefit of both 401(k) contribution options is that your employer will match part of what you contribute. For example, 50% of the first 6% you put in. It’s usually smart to contribute enough to get the full company match – that’s free money!
What Does Fully Maxing Out Your 401(k) Mean?
When we talk about “maxing out” a 401(k), this means contributing up to the annual IRS limit, not just maximizing your employer match.
For people who are focused on retirement savings, it’s recommended to strive to hit the IRS maximum each year.
For those who can’t hit the full IRS maximum, try to steadily increase your contribution rate a small percentage each year or when your income increases. If you get a raise, bump up your 401(k) contributions by 1-2% of your new pay. This allows your savings to grow without feeling the impact as you start to earn more money.
With a little planning, maxing out your 401(k) contributions is a more achievable goal than you may think. And that small and steady bump adds up over time.
How Much Can I Contribute To My 401(k) In 2024?
When deciding how much to contribute to your 401(k), there’s no single right amount for everyone. But a few key factors to consider are:
Contribute as much as your budget comfortably allows. The power of 401(k) plans is the automatic deductions from your paycheck. This makes saving effortless.
If you’re on the fence between two contribution amounts, go with the higher option. Most people quickly adjust to the new take-home pay.
Try increasing your contribution percentage every time you get a raise. Bump it up 1-2% each year to grow your savings over time.
Work towards maxing out the annual IRS limits if possible. For 2024, that’s $23,000 per year for those under 50 or $30,500 for those over 50.
The more you can consistently contribute through automated deductions, the better off your future finances and retirement will likely be.
How Much Should I Contribute?
Contributing enough to get your full employer 401(k) match should always be your first priority. That’s free money!
Beyond the match, deciding how much to contribute can be tricky. If you’re in a high tax bracket, maxing out the $23,000 annual IRS limit ($30,500 if over 50) is often smart to get tax savings.
On average, aim for contribution benchmarks like: 10% of your salary, increasing 1-2% each year as you get raises, and ultimately working up to maxing out the IRS limits.
In terms of total savings needed for retirement, shoot for 25-30 times your desired annual spending. For example, if you want $50,000 annual retirement income, aim for $1.25-$1.5 million total saved up by retirement. Use these goalposts to help decide your 401(k) contribution amount at each stage of your career.
When to Max Out A 401(k)
There are many situations where maxing out your 401(k) contributions could be the right move.
If you have:
Steady positive cash flow after paying your bills
Built up your emergency savings
Paid off all high-interest debt
Considered other tax-advantaged accounts
When all of the above factors are true, we often recommend maxing out your 401(k) retirement account.
Additionally, if you want to reduce your taxes, contributing the maximum to a pre-tax 401(k) can be helpful.
This usually applies if you’re in a high-income tax bracket and have already funded other personal finance goals. Look at your own situation to determine whether maxing out your 401(k) aligns with your top priorities and goals.
You can also speak to a financial Advisor to get a total review of your finances, help you decide if maxing out your 401(k) makes sense for your scenario, and how maxing out your retirement accounts will impact your financial future.
When Not to Max Out a 401(k)
Maxing out your 401(k) contributions might not make financial sense if you don’t earn a high salary.
For example, if you make $50,000 per year, contributing over 40% of your pay to retirement savings could leave you cash-strapped to pay current bills and expenses. Make sure you have enough income remaining after 401(k) deferrals to cover your necessities.
You also need to look at the costs and investment options in your specific 401(k) plan.
Some plans charge high fees or only offer expensive, actively-managed mutual funds. In that case, you may be better off contributing enough to get the full match, than investing any extra savings into an IRA with better funds and lower expenses. Don’t overfund a suboptimal 401(k).
Finally, if you are still working on building up emergency savings or expect major expenses soon, it’s perfectly fine to keep your 401(k) deferrals lower.
For example, if you want to buy a house in a couple of years, divert more cash to your down payment fund rather than maxing out retirement savings. It’s important to know your priorities.
In general, while it is a noble goal to max out your 401(k) plan each year, if you are struggling to maintain a decent cash buffer (such as an emergency or rainy day fund) or might soon face a cash need, then absolutely do not feel bad about keeping your 401(k)-contribution percentage low.
401(k) Contributions And Competing Goals
The most common reason our clients ask us if it makes sense to lower their contribution rate for a period of time is because they have competing financial goals.
From a cash flow perspective, you may be trying to fund many things that compete with your 401(k):
Paying down debt
Saving for a dream travel trip
Purchasing a new home
Saving for college
Supporting a loved one
Medical bills
Working with a financial Advisor, you can get a more detailed view of how reducing your contributions–even for a short period of time–will impact your long-term finances.
For example, if you drop your contributions for six months or a year, how big of a hit your retirement accounts experience?
Ultimately, you will have to decide if the impact is too great.
If the impact is reasonable and will not impact your retirement lifestyle or income each month in retirement, you may be fine to step back for a short period of time.
However, it can be challenging to restart your contributions once you get used to having the extra cash flow, so we often encourage clients to stay consistent with their savings rates and goals.
Financial Priorities to Face First
Determining if you’re ready to max out your 401(k) can seem daunting, but here are some key goals to tackle before you do:
Ensure you have a fully funded emergency fund to cover three to six months of living expenses
Focus on paying off any high-interest credit card debt to avoid hefty interest charges
Fund your immediate financial goals before allocating extra money to your retirement account
Review your insurance coverage to make sure you’re adequately protected
When balancing saving for retirement with current financial goals, it’s essential to plan collaboratively with your partner if you have one.
Consider all household accounts, sources of income, and financial objectives together. Avoid making isolated decisions and instead look at the big picture to make informed choices about your 401(k) contributions and other financial matters.
By prioritizing these steps, you can set yourself on a solid financial path while working towards a comfortable and stress-free retirement.
Saving More Is Usually Still The Right Decision
When thinking about retirement, saving more is usually a good idea.
For people who earn a lot of money, just putting all their savings into a 401(k) might not be enough when they retire. Even if they max out their 401(k) every year, they could still end up with less money to live on after they stop working.
Imagine someone who made a lot of money each year but only saved in their 401(k). When they retired, they found they had to live on much less money than they were used to. This shows why it’s important to look at other ways to save, especially for those who earn a lot.
So, it’s smart to be flexible with your retirement savings. While this article talks about whether to max out your 401(k), it’s also important to think about your overall savings plan.
Many people don’t have enough saved for retirement, so it’s a good idea to save as much as you can, be ready for unexpected expenses, and pay as little tax as possible in the long run.
The main goal is to make sure you have enough money to enjoy your retirement years comfortably while also enjoying today.
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