As you approach retirement, understanding your Social Security benefits becomes crucial for financial planning. Your benefit amount hinges on factors like earnings history and age at sign-up. With careful planning and strategic decision-making, you can maximize your Social Security benefits to ensure financial stability in your golden years. Here are proven strategies to help you make the most out of your Social Security benefits.
Delay Your Claim
One of the most effective ways to increase your Social Security payments is by delaying your claim beyond your full retirement age (FRA). For each year you delay claiming benefits, your payments could increase by up to 8%, until you reach the age of 70. After age 70, there is no additional benefit for waiting to claim benefits.
Stay in the Workforce Until FRA
You can begin collecting Social Security payments at age 62. However, opting for this early withdrawal results in reduced monthly payments, while waiting until FRA provides higher monthly payments.
FRA is age 66 for those born between 1943 and 1954, gradually increasing in two-month increments thereafter. Individuals born in 1960 or later reach FRA at age 67. Claiming benefits before you reach FRA results in a permanent deduction.
Maximize Earnings
Be strategic about when you earn your highest income. Since Social Security benefits are based on your highest 35 years of earnings, consider working overtime, asking for a raise, taking on side jobs, or seeking higher-paying jobs in the years leading up to retirement.
There is a maximum earnings threshold – adjusted each year for inflation – which is used to calculate Social Security benefits. In 2024, earnings up to $168,600 are used to calculate retirement benefits. However, any income beyond this threshold isn’t subject to Social Security tax and won’t influence future benefit payments in retirement.
Claim Spousal Benefits
Married individuals have the option to claim spousal benefits based on their spouse’s work record, which can be up to 50% of their spouse’s benefit amount. This can be particularly advantageous if one spouse has significantly higher earnings. The lower-earning or nonworking spouse needs to sign up for spousal payments at his or her FRA to get the 50% spousal payment. The percentage is reduced if this spouse starts benefits before their FRA.
Coordinate Spousal Benefits
Spouses can strategize to maximize their combined Social Security benefits by coordinating when each spouse claims their benefits. This may involve one spouse delaying their claim while the other claims benefits, allowing the delayed benefits to grow.
Know Retirement Earning Limits
If you claim Social Security before reaching FRA and continue to work, a portion of your benefit might be temporarily withheld.
In 2024, Social Security recipients under FRA earning over $22,320 will see $1 withheld for every $2 earned beyond this threshold. At full retirement age, the earnings limit rises to $59,520, with a penalty reduction to $1 withheld for every $3 earned above this limit.
Upon reaching full retirement age, you can work while receiving Social Security without penalty. Your benefit will be recalculated, accounting for any previously withheld payments and your ongoing earnings.
Minimize Social Security Taxes
Be aware of the tax implications of your Social Security benefits. Depending on your adjusted gross income, a portion of your benefits may be subject to federal income tax. Careful strategizing, like minimizing other sources of taxable income, can help reduce the taxation of your Social Security benefits.
Maximize Survivor’s Benefits
Surviving spouses are entitled to receive the higher of their own benefit or their deceased spouse’s benefit. If your spouse received the higher benefit, you might qualify to claim your spouse’s survivor benefit initially, letting your own benefit accrue, and then transitioning to your benefit later in life. By understanding the rules surrounding widow/widower benefits, you can ensure you receive the maximum amount possible.
Retirement should be a time to finally relax, but concerns about depleting savings can cast a shadow over your golden years. In this article, we’ll delve into smart money moves that can help ensure a more secure and comfortable retirement.
Set Up a Safe Withdrawal Rate
A safe withdrawal rate is the percentage of your retirement savings that you can tap into annually without risking running out of money during your lifetime. A common strategy is the 4% rule, which suggests withdrawing 4% of your retirement savings each year, creating a sustainable income stream while preserving your principal. This approach takes into account market fluctuations and adjusts your withdrawals accordingly. For example, in thriving market conditions, you might withdraw a bit more, while in downturns, you might cut back.
Diversifying your investments is another key factor in managing the safe withdrawal rate. A well-balanced portfolio can help mitigate risks and generate returns, ensuring that your retirement savings remain resilient over time.
Delay Social Security
You are eligible to receive your full Social Security benefit, determined by your individual earnings history, upon reaching full retirement age (FRA), which varies depending on your birth year. However, opting to postpone your application beyond FRA offers the advantage of increasing your monthly benefits by 8% annually, up to the age of 70.
While an increased Social Security benefit doesn’t necessarily ensure your savings won’t deplete, the extra funds each month would contribute to preserving your savings and maximizing your overall retirement income.
Annuities
Annuities are financial products designed to provide a steady income stream during retirement. They can be an excellent option for those worried about outliving their savings. Annuities come in various forms, such as immediate annuities and deferred annuities, each offering distinct advantages.
Immediate annuities involve a lump-sum payment in exchange for guaranteed monthly payments for life. This can be a reliable way to secure a fixed income stream, regardless of market fluctuations. Deferred annuities, on the other hand, allow you to invest a sum of money that grows over time and is converted into periodic payments later in retirement.
Annuities provide a predictable cash flow, but be sure to carefully evaluate the terms and conditions, fees, and potential risks associated with them before making a decision. Also keep in mind that, unlike Social Security, annuities work on a fixed amount and don’t adjust with inflation. Consulting with a financial advisor can help you navigate the complexities and choose an annuity that aligns with your financial goals.
Securing a worry-free retirement requires thoughtful planning and smart financial strategies that are tailored to your unique circumstances. Consult with a financial professional to ensure that your retirement plan aligns with your long-term goals.
At some point in your employment journey, you’re going to find yourself at a crossroads – whether you voluntarily quit a job for a new position or face an unexpected layoff. Amidst the emotional and logistical challenges of these changes, one crucial aspect that requires attention is your 401(k) plan with your former employer. Here’s how to manage your 401(k) plan when employment changes.
Assess Your Options
When you leave your current job, you need to evaluate your available options for your 401(k). Typically, these are your main options:
Leave it be: In some cases, leaving your 401(k) with your former employer may be a viable option, especially if you’re content with the plan’s performance and fees. This option is often convenient and allows you to maintain the tax-advantaged status of your retirement savings. However, you won’t be able to make additional contributions, and you’ll need to manage the account independently.
Roll it over into your new employer’s plan: If your new employer offers a 401(k) plan and allows rollovers, transferring your 401(k) to your new employer’s plan would allow you to consolidate your retirement savings, making it easier to manage. Be sure to research the fees and investment options of the new plan before making a decision.
Roll it over into an Individual Retirement Account (IRA): Transferring your 401(k) funds to an IRA provides more control over your investments and may offer a broader range of investment options compared to employer-sponsored plans. IRAs are not tied to your employer, offering flexibility and portability. Be mindful of fees and investment choices when selecting an IRA provider.
Cash Out: While it’s possible to cash out your 401(k) when you leave a job, it’s generally not advisable. Cashing out comes with tax consequences, including penalties for early withdrawal if you’re under 59 ½. Additionally, you’ll miss out on the potential long-term growth of your investments.
Convert it to a Roth IRA: If you’re willing to pay taxes upfront, you can convert your traditional 401(k) into a Roth IRA. You will pay income taxes on the amount converted, but qualified withdrawals in retirement are tax-free. This option may be beneficial if you expect to be in a higher tax bracket in the future.
Understand Tax Implications
When contemplating what to do with your 401(k), it’s important to understand the tax implications that could be triggered. Cashing out, as mentioned, may trigger taxes and penalties. On the other hand, transferring your funds without a direct rollover may result in mandatory withholding. To avoid unexpected tax bills, consider consulting with a financial advisor who can offer guidance based on your personal situation.
Stay Informed About Deadlines
The different options available for your 401(k) are all subject to different deadlines. Missing these key deadlines could limit your choices. Some plans may require you to take action within a certain timeframe, so it’s imperative to stay informed about these deadlines to make the most informed decision possible.
Seek Financial Advice
Navigating the management of a 401(k) plan on top of a job transition can be stressful. A financial advisor will be able to offer valuable insights tailored to your specific circumstances. They can help you weigh the pros and cons of each option and guide you toward a move that aligns with your long-term financial goals.
Health Savings Accounts (HSAs) are well-regarded tools for managing healthcare expenses, but the advantages of HSAs extend beyond the scope of medical bills. In this article, we’ll explore how these tax-advantaged accounts can offer a range of benefits and opportunities outside of qualified medical expenses.
Triple Tax Benefits
Contributions to an HSA are tax-deductible, which effectively reduces your taxable income. Furthermore, the funds in an HSA grow tax-free, and when money is withdrawn for qualified medical expenses, it remains tax-free. This triple tax benefit creates a powerful savings engine.
Retirement Savings
The main objective of an HSA is to save for medical expenses, but it can also be used to save and invest for retirement income. At age 65 you are able to withdraw money from your HSA for any reason and avoid the typical 20% early withdrawal penalty for non-medical expenses. While you will owe income tax on these withdrawals, having the option of using those funds penalty-free gives you some flexibility and financial cushion in retirement.
Investment Opportunities
When you contribute to your HSA, those funds remain tax-advantaged and can be invested in various assets such as stocks, bonds, mutual funds, or ETFs. Overtime, your HSA can grow into a substantial financial asset, earning a solid return on investment and enhancing your financial security in retirement. Furthermore, unlike other retirement accounts such as 401(k)s and IRAs, HSAs do not require Required Minimum Distributions (RMDs) once you hit a certain age (currently age 73). This flexibility makes HSAs an appealing option for individuals who wants to continue to let their money grow and compound.
Portability
An HSA is portable, meaning it remains with you even if you change employers or retire. This flexibility allows you to continue growing your account balance over the years to use for future healthcare expenses, even if your employment situation changes.
Education Expenses
HSAs can be used to cover qualified education expenses without penalty, including tuition, fees, books, supplies, and required equipment. This extends to the account holder’s spouse and dependents at eligible educational institutions. Note that certain expenses, such as room and board, don’t apply, and individual HSA providers may have differing rules and requirements. If you use funds from an HSA account to pay for eligible education expenses, be sure to keep receipts and records in case of an audit.
Wealth Transfer
If you’re a high-net-worth individual or you simply make enough income elsewhere to not need to use your HSA, you can let it grow and compound, and leave it to a beneficiary. If the beneficiary is your spouse, they can continue using the HSA as if it were their own account. If the beneficiary is someone other than your spouse, like a child, they will need to take a taxable distribution from the account.
Every October, retirees and individuals planning for their retirement expect the Social Security Administration to announce the cost-of-living adjustment (COLA) for the following year. The COLA aims to counteract the eroding effects of inflation on retirees’ purchasing power. In this article, we go over how the anticipated COLA for 2024 could affect American retirees.
Understanding the COLA
The COLA for Social Security benefits is determined each year by using a specific formula that takes into account changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W is a measure of inflation that reflects the average change in prices paid by urban consumers for a predetermined “market basket” of goods and services. The goal of COLA is to ensure that Social Security benefits keep up with the rising cost of living, so that the purchasing power of beneficiaries is maintained over time.
Anticipated COLA for 2024
The exact COLA for 2024 will not be officially announced until October, but early predictions suggest a raise of 3% for 2024. That would boost the average Social Security retirement benefit by about $55 a month in 2024.
COLA Fluctuation
A 3% raise would be a significant shift from the previous two years, which saw COLA adjustments at 5.9% and 8.7%. These adjustments raised the average retirement benefit by $92 in 2022 and $146 this year. Compared to these percentages, some might consider a 3% raise a disappointment, but it’s important to remember that annual COLA calculations are meant to offset the price increases consumers have faced since the previous year’s COLA was determined. Therefore, a 3% raise would be a sign that inflation is cooling.
It’s also important to point out that a 3% raise is still above average. Looking at the last two decades, the average inflation adjustment for Social Security benefits was 2.6%, and three of those years – 2010, 2011, and 2016 – saw no adjustment at all. Even so, when comparing this year’s 8.7% hike to the projected 3% for next year, retirees on a tight budget will feel the difference.
How Social Security Beneficiaries Can Still Benefit
Retirees may be temporarily profiting from the COLA raises in these latter years, and those who are able to increase savings for the remainder of 2023 are in a position to benefit. With 15-year highs in interest rates on certificates of deposit and money market savings accounts, retirees may want to think about transferring available assets to these safe saving vehicles as they offer a better rate of return than traditional savings accounts.
The passage of the Secure Act 2.0 in December of 2022 pushed back Required Minimum Distribution (RMDs) from age 72 to age 73 in 2023 (and age 75 in 2033). While proponents of this move argue that it provides advantages, such as allowing individuals more time to accumulate wealth in their retirement accounts, others warn that it could be a tax trap. Below we explore the potential pitfalls and drawbacks of this delay.
More Income Tax and Higher Medicare Premiums
While proponents argue that individuals will have more time to accumulate wealth in their retirement accounts without being required to withdraw a specific amount each year, it’s important to remember that RMDs are subject to income tax. By delaying the distributions, you risk ending up with significantly larger distributions in the future, resulting in higher tax liabilities when you eventually begin taking withdrawals. This could potentially push you into a higher tax bracket, increasing your overall tax burden and possibly negatively impacting what you pay for your Medicare premium as this is always based on your taxable income from two years prior.
Higher Tax on Social Security Benefits
If you have taxable income as well as Social Security benefits, such as your RMD, that can affect how much your Social Security benefit is taxed. If your adjusted gross income is more than $25,000 for single filers ($32,000 for joint filers), your Social Security payments can be taxable. If an eventual RMD will trigger that tax, an earlier withdrawal from your account may be the better move.
Consequences for Beneficiaries
Delaying RMDs could have unintended consequences for beneficiaries of inherited retirement accounts. Under current rules, non-spouse beneficiaries must withdraw the funds within ten years of the account owner’s death. This means that heirs who inherit the deceased owner’s account must distribute the entire account in 10 years. If those heirs are in their prime working years, they could likely pay a federal tax rate of 24% to 37%, plus another 3% to 12% in state income taxes. And the distributions could push their “other income” above the income thresholds ($200,000 for single filers and $250,000 for joint filers). By delaying RMDs, you could be dumping a hefty tax bill on your heirs.