5 Factors That Can Reduce Your Social Security Benefits

School of Social Security & Medicare

A reduction in social security benefits symbolized by a dollar sign in front of a down arrow.

Social Security plays a pivotal role in the retirement plans of nearly 70 million Americans. These benefits can provide steady income and a sense of security during your golden years. However, the Social Security program is vast and can be confusing. It often requires you to make important decisions that can impact your income for the rest of your life.

As you craft your retirement plan, consider these 5 factors that can reduce your Social Security benefits. If you are prepared for these situations, you can make the right choices to maximize your Social Security income.

To learn more about maximizing your Social Security Benefits, attend our no-cost webinar Social Security: What You Need to Know to Maximize Your Retirement Income. This webinar will be hosted by our resident Social Security and Medicare specialist Pat Burris, CFP® on September 20 at 3:00pm central. Also, please register to attend our live event Navigating the Social Security & Medicare Maze on October 25 from 6:30 to 8:00 central at the Birmingham Botanical Gardens. This event will expound on previously covered topics and provide new information to help investors maximize their benefits from these government programs.

Factor #1: Taking Your Social Security Benefits Early Can Reduce Your Lifetime Income

If you claim your Social Security benefits before your Full Retirement Age [FRA], your benefits could be reduced permanently. For example, if your FRA is 67, and you begin taking benefits at the earliest possible age, 62, your benefits would be reduced by 30%. This reduction would occur for each monthly payment, even after you reach your FRA.

There are some instances where taking benefits before your FRA can be a good decision but in many cases it is not. Making the wrong choice early can impact your income for the rest of your life. For this reason, it is important to discuss your Social Security strategy with an experienced financial advisor and determine the optimal time for you to begin benefits.

Factor #2: Unexpected Taxes Could Reduce Your Social Security Benefits

Contrary to a common misconception, Social Security benefits can be subject to tax. In fact, about 50% of beneficiaries owe tax on their Social Security benefits. Whether you will owe tax on your benefits depends on your provisional income. If your provisional income is above a certain threshold, you could owe tax on up to 85% of your Social Security benefits.

If you underestimate the tax you could owe on your Social Security benefits, you could have a shortfall in your retirement income. To avoid this, work with an experienced financial advisor to estimate your retirement income and your future tax liability.

Factor #3: Windfall Elimination Provision and Government Pension Offset Rules Can Reduce Social Security Benefits

If you or your spouse receive a pension from employment not covered by Social Security, you could be subject to the Windfall Elimination Provision [WEP] or the Government Pension Offset [GPO] rules.

WEP applies to some teachers and government workers who did not contribute to Social Security during their working years and receive a pension from that noncovered employment. If you are subject to WEP, your Social Security benefits could be reduced by up to half of the amount of your pension.

GPO applies to spouses and widow(er)s of Social Security beneficiaries who receive a government pension. If you have a government pension, your spousal and survivor Social Security benefits could be reduced by up to two-thirds of the pension amount.

If either of these rules apply to you, they could have a significant impact on your retirement and estate plans. This is another good reason to work with an experienced financial advisor to estimate your Social Security benefits and how any pensions you’ve earned could affect them.

Factor #4: The Earnings Test Can Reduce Social Security Benefits for Beneficiaries Who Continue to Work

The earnings test is a Social Security provision that could apply if you continue to work after claiming Social Security but before reaching your FRA. If you are subject to the earnings test, you could have some of your Social Security benefits withheld for the months prior to reaching your FRA. This provision applies to all Social Security beneficiaries who receive Social Security benefits prior to their FRA – including widow(er)s and minor children.

The earnings test only applies after your income reaches certain thresholds and depends on whether you will achieve FRA in the given year. In 2022, those who will not reach their FRA will have $1 withheld for every $2 earned over $19,560. For those achieving FRA in 2022, $1 will be withheld for every $3 earned over $51,960.

If you are subject to the earnings test, the withheld benefits are not lost forever. Once you reach your FRA, your monthly benefit will be increased to account for the benefits withheld. However, the withheld benefits are not all returned at once. Instead, a portion of the withheld amount is added to your benefit each month according to your life expectancy. Because of this repayment structure, it could take decades to recover what was withheld.

If you do not consider the earnings test when deciding on a Social Security claiming strategy, you could have an income shortfall in the early years of your retirement. For this reason, it is important to work with a financial advisor to determine if the earnings test will apply to you and how it could impact your retirement plan.

Factor #5: Forgetting Spousal and Survivor Benefits Can Prevent You from Maximizing Your Social Security Income

You may be entitled to Social Security benefits up to 50% of your spouse’s benefit amount under the spousal benefit provision. These benefits are particularly important for spouses who did not work outside of the home but can also benefit those who earned significantly less than their spouse during their working years. Couples often struggle to coordinate retirement and spousal benefits to achieve maximum combined income, and that is one of the reasons why couples should discuss their Social Security claiming strategy with an experienced financial advisor.

Survivor benefits are another often overlooked benefit of Social Security. Widow(er)s, dependent children, and even ex-spouses can claim benefits in some cases. Survivor benefits can play an important role in maximizing your Social Security income as well as implementing a successful estate plan. For these reasons, survivor benefits should be discussed with an experienced financial advisor and incorporated into your retirement plan.

Your financial plan should work to maximize all sources of income, including Social Security. With the help of an experienced financial advisor, you can ensure that you are receiving all benefits you’ve earned and be prepared for unavoidable factors that could reduce your Social Security income.

Maximize Your Social Security Benefits with Financial Fingerprint™ By Meld Financial

To learn more about maximizing your Social Security Benefits, attend our no-cost webinar Social Security: What You Need to Know to Maximize Your Retirement Income. This webinar will be hosted by our resident Social Security and Medicare specialist Pat Burris, CFP® on September 20 at 3:00pm central. Also, please register to attend our live event Navigating the Social Security & Medicare Maze on October 25 from 6:30 to 8:00 central at the Birmingham Botanical Gardens. This event will expound on previously covered topics and provide new information to help investors maximize their benefits from these government programs.

To discuss your retirement plan or Social Security benefits, contact the team of financial, legal, and tax professionals at Meld Financial. We have spent nearly 40 years helping our clients achieve their retirement goals and maximize their government benefits, including Social Security and Medicare.

Our experience managing our clients’ wealth has allowed us to develop a unique financial planning process called Financial Fingerprint™. This is a comprehensive financial plan that is quick to assemble, easy to understand and simple to modify as your circumstances change. Financial Fingerprint™ can help you achieve your retirement goals and ensure you receive the most from your Social Security benefits.

To get started with Financial Fingerprint™, contact us today.

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