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Commentary: 3 Things You Need to Know Before You Claim Your Social Security Benefits

When talking about retirement income, we often describe it as a "three-legged stool." One leg is any pensions you may be entitled to. Pensions have historically been a critical part of retirement for many workers, but they are becoming less and l...

Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.
Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings.

When talking about retirement income, we often describe it as a "three-legged stool."

One leg is any pensions you may be entitled to. Pensions have historically been a critical part of retirement for many workers, but they are becoming less and less common. This means the other two legs will become more important over time.

The second leg is your own personal investments that you've accumulated while working. This may include income from tax-advantaged retirement accounts, taxable accounts and other alternative investments you may hold.

The third leg is your Social Security benefits. Some people may dismiss Social Security as only playing a minor role in their overall retirement income plan. The reality is that the Social Security Administration (SSA) found Social Security benefits will provide 50 percent or more of retirement income for 65 percent of all beneficiaries and 90 percent or more of retirement income for 36 percent of all beneficiaries.

With Social Security playing a critical role for so many retirees, it's important to make the most of these benefits. Yet many retirees may be leaving money on the table. The SSA found a whopping 73 percent of current retirees are receiving reduced benefits. Over the course of their lifetimes, this could lead to hundreds of thousands of dollars in missed benefits.

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In order to make the most of your Social Security benefits, consider these key factors before you claim:

• When you claim affects your benefits: You can claim your benefits as early as age 62. While it might feel great to begin receiving those monthly checks, consider that you'll receive 25 percent less than if you waited until your full retirement age (FRA). Alternatively, if you delay claiming Social Security until age 70, you'll receive 32 percent more than your FRA benefits. Depending on your age, your FRA will range between ages 66-67.

• Working can reduce your benefits: If you claim Social Security and haven't yet reached your FRA, your benefits could be reduced dramatically based on your income. During the years prior to reaching FRA, your benefits will be reduced by $1 for every $2 you earn over $15,720.

The reduction becomes less severe the year you reach FRA; for every $3 you earn over $41,880, your benefits will be reduced by $1. The earnings limit of $41,880 only applies during the months prior to reaching FRA. For example, if you reach FRA in August, the limit of $41,880 only applies to income earned from January-July.

Once you reach FRA, none of your benefits will be reduced because you're working, regardless of how much you earn.

• Social Security benefits are taxable: It's often assumed after paying payroll taxes for decades that Social Security benefits are tax-exempt. For many retirees, it's an unfortunate surprise that Social Security benefits are taxable.

If your income is over $25,000 when filing single or $32,000 filing jointly, up to 50 percent of your Social Security benefits will be included in your taxable income. If you earn over $34,000 when filing single or $44,000 filing jointly, up to 85 percent of your benefits will be included in your taxable income. It's important to note that these income thresholds are not currently indexed to inflation. This means that, over time, more and more retirees will have their benefits taxed.

These factors, along with your health, desire to retire earlier than FRA and family circumstances, can make the decision of claiming Social Security incredibly complex. Working with a financial adviser can answer your questions and create a strategy that can help make the most of these powerful but often complicated benefits.

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By Bruce Helmer and Peg Webb, financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC.

Related Topics: FINANCE
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