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Social Security is the backbone of the average retirement income. Social Security is available to anyone who has paid taxes for 10 years, and when you reach the minimum retirement agent of 62, you may file to receive these benefits. Also, you can receive Social Security Disability payments early if you have a medical issue that Social Security deems worthy of activating (this form of income is referred to as an SSDI.) There is definitely a conundrum with deciding when to draw upon your Social Security funds and when to delay. It can be tempting to draw as soon as eligible, but some nuances can change the decision when factored in.
When considering when to retire, remember: The longer you work, the better. Your benefits are based on the average income of your 35 highest paid working years. Since most people’s income goes up as they get older, working longer can really increase this average. If there is one trick to boost this portion of your income, this is it. Unfortunately, it also requires working when many people are sick and tired of doing just that.
Full Retirement Age (FRA) is based on your birthday. There is a chart that can easily help you decide what your FRA is here. When someone starts Social Security early at age 62, your reduction of total benefit can reach as much as 30%. This can be a huge loss for someone. In addition, 8% a year past FRA can be added to your Social Security income by postponing further all the way until age 70.
Income taxes in retirement is something many people do not consider. Since most retirement income is taxable, this is a massive consideration. There are types of income that are not taxable in retirement, such as payments from annuities or annuity-funded pensions. If earlier in retirement, someone should consider having a portion of their retirement plan dedicated to income sources that do not affect their marginal tax rate. Limiting your taxable income in retirement can also save you money by avoiding Income Related Monthly Adjustment Amounts (IRMAA) on your Medicare premiums.
Though the topic here is maximizing Social Security, don’t avoid total income potential just to save yourself some dollars on penalties or taxes later on. There are clever ways to change the overall makeup of your retirement income without just reducing the total amount of resources you have at your disposal. The rule of thumb is to amass funds and keep your income as high as possible for as long as possible, but take some of those resources and house them in assets that do not count against your taxable income and thus do not impact your marginal tax rate.
There are a multitude of factors that should be considered when looking at a retirement income, but the above lays out the primary considerations when it comes to Social Security and its place in a solid retirement portfolio.