A lot of people can overlook these two things related to social security, and doing so can negatively impact your retirement and cause unwanted surprises. A lot of clients aren’t too worried about running out of money, but they do realize there are a few optimizations that they can make to their investment plan, their income plan, and their tax plan that can add up to make a big difference in dollar terms for them.

If it would be helpful to have a planning session on your retirement, reach out to us.

Planning Accordingly for Tax Expenses

The first surprise, which is everyone’s favorite thing to talk about: taxes. Most states don’t tax social security. When it comes to federal taxes, you’ll most likely be expected to pay on average about 85% of the social security benefit you receive. These are the 2020 numbers just to give you an idea if you have to pay tax where some people may be caught off guard if they’re assuming that social security won’t be taxed. If you have more than $44,000 of taxable income, you’ll most likely pay tax on 85% of your social security. If you’re filing as a single person, that amount is around $34,000. You’re most likely to hit those income thresholds because of taxable distributions from your IRAs or 401(k), but even executing strategies like Roth Conversions or having some part-time consulting income can bump that income number up.

As you’re planning out your retirement income, sometimes called your “withdrawal strategy”, make sure you take these income thresholds and the taxes assessed on social security income into account so you don’t end up surprised.

Taking Social Security Too Soon

The second surprise happens when people don’t think through the best age to take their benefit. The common thought is, “If I’m not working, let’s start social security.” That might be the best thing to do, it might not be. You can start as early as 62 and you can wait till as late as 70. Your full retirement age is likely either 66 or 67, or you might be one of those special ones in between 66 and 67 and you got 66 and four months is your full retirement age. It’s called the FRA.

If you start income before your FRA, you could be reducing your total benefit by up to 30%. If you do this, there’s a chance the government might withhold some of your social security income that you thought you would get..

If you start collecting benefits at age 62, your benefits will be reduced by about 30%. If you wait until age 63, your full retirement age benefits will be reduced by 25%. 64, it’s 20%. 65, it’s 13.3%. 66 is about 6.7%. At 67, your full retirement age, there’s no reduction of benefits compared to the full retirement age benefit. And when you wait till 68, 69, 70, it grows by 8% simple interest each year.

Withheld Social Security Benefits

Here’s another risk of starting your social security before full retirement age, and that’s getting some of your benefits withheld by social security because you earn a wage while taking it. If you make more than $21,240, they will take $1 for every $2 above that amount (these are the 2023 numbers). Everything above that will be cut in half.

If you make $31,000 – let’s call it $31,240 to stick really exactly to our example – that’ll be an extra 10,000 above the limit. Again, this is before full retirement age. That $10,000 is going to be cut in half and you will only receive 5,000 of that. So it’s very important to consider your timeline.

We made another video on the specifics of this rule so you can make sure that you don’t get penalized. Because of this, sometimes we recommend waiting until at least full retirement age, and we even look at other income sources before starting at full retirement age if that’s 67.

One of those sources could be your IRA. I recommend modeling out a scenario of delaying social security and using your IRAs in the meantime and comparing that with starting social security and delaying your IRAs. What you’ll most likely find right now is that your taxes at age 72 and beyond will be a lot higher the longer you delay taking from your IRA or other tax-deferred accounts. Talk to your advisor about the withdrawal strategy and possibly using IRAs in your 60s, or even doing Roth conversions to minimize how much you’ll need to take out of your IRA later on. If your advisor is only talking about investments and not talking about modeling retirement income planning and tax planning, reach out to us, we’d love to have a call with you. And don’t forget to check out the DIY retirement planner.

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Disclosures: Securities offered through LaSalle St. Securities LLC (LSS), member FINRA/SIPC. Advisory services offered through LaSalle St. Investment Advisors LLC (LSIA), a Registered Investment Advisor. Streamline Financial Services is not affiliated with LSS or LSIA. LSS is affiliated with LSIA.