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This week’s question is from Jackie:
I am thinking about starting to collect Social Security in a one year and four months, when I turn 66. I am still working and have no retirement to speak of. Would it be wise to take Social Security while I am still working and invest it, or would the tax consequences be too high? My salary will be about $32,000 a year. I am also a widow and my husband did not qualify for Social Security.
3 things to consider before taking Social Security
Jackie, there are many aspects to your question, which is why it is often difficult to decide when to start taking Social Security benefits. Here are some things to consider.
First, if you begin taking Social Security before your full retirement age, 66, Social Security will reduce your benefit if you earn more than $17,040 this year. If you wait until the calendar year in which you reach your full retirement age, then you can earn $45,360 before your benefits will be reduced.
After reaching full retirement age, you can earn as much as you want without any reduction. So, given your present salary, if you wait until that age before taking benefits, your benefits will not be reduced even if you continue working.
Second, your Social Security benefits increase each month that you delay taking them. For single people, full retirement age is not a magic number. Each year you delay them after full retirement age, benefits increase by 8 percent a year until you reach 70. If you have limited savings and you do not need your benefits immediately, this may be your last opportunity to really increase your income in retirement.
Third, you asked a question about taxes. The table below shows how much of your Social Security benefits are taxable for different levels of combined income where combined income is defined to be:
|Single||Married filing jointly|
|Benefits not taxed:||< $25,000||< $32,000|
|50% of benefits taxed:||$25,000 – $34,000||$32,000 – $44,000|
|85% of benefits taxed:||> $34,000||> $44,000|
You said your earnings are about $32,000 and you have little in savings. Let’s suppose that your interest income is $400 a year. Then, your adjusted gross income would be $32,400.
If your Social Security benefits are $700 per month, then your annual benefit would be $8,400. Your combined income would then be $32,400 + ½ ($8,400) = $36,600. This is greater than $34,000, so 85 percent ($7,140) of your Social Security benefits would be taxed.
Note: A married couple with this combined income of $36,600 would pay taxes on only 50 percent ($4,200) of their benefits, since this is less than $44,000
If you stopped working — or work only part-time so that your salary drops below $20,000 — none of your Social Security benefits would be taxed because your combined income would drop below $25,000.
As you can see, there are many factors that can influence your retirement income. But perhaps the most important thing is to recognize that delayed claiming can increase your future benefits.
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The questions I’m likeliest to answer are those that will interest other readers. So, it’s better not to ask for super-specific advice that applies only to you.
I hold a doctorate in economics from the University of Pennsylvania and taught economics at the University of Delaware for many years. I now do the same at Gallaudet University.
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Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the Social Security Administration alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.
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