Deciding when to collect Social Security benefits is a big decision that can have a lasting impact on your standard of living in retirement, especially if you didn’t save enough on your own. According to the Social Security Administration, Social Security benefits represent 30% of retirement income for the elderly. Making this decision is a complicated task — you’ll have to consider factors like your spouse, your other sources of retirement income, your health status and the cost of Medicare deductions.
“Because SSA maintains a neutral stance on the claiming decision, many other government, academic, nonprofit, and private groups have developed Social Security benefit calculators and tools for analyzing retirement finances to provide clarity on individuals’ retirement decisions,” states a 2016 report by the Social Security Administration. “The calculators may be very informative for older workers who have an established earnings record, but less so for younger workers whose future earnings may be unpredictable.”
While these tools vary in how much information they collect and how accurate the earnings estimates are, online calculators and tools can still provide individuals with an estimate of how much they’ll earn in benefits. The choice of when to collect could mean earning thousands or hundreds of thousands of dollars more.
To help you in the quest… here are a handful of online tools that make the process a little easier.
This one is a no-brainer, but the Social Security Administration website provides a number of different benefit calculators — there’s a tool to help you figure out when your full retirement age is and another that calculates how your earnings (before full retirement age) could impact your benefit amount.
However, most of the calculators on the Social Security Administration website don’t account for many factors in the calculation of your monthly benefit. If you have a spouse or other sources of retirement income that could affect the percentage of your benefits that are taxable, you may have to use multiple tools.
Open Social Security is a free calculator developed by Mike Piper, a CPA. This calculator, unlike the Social Security Administration calculators, is more complex, accounting for multiple factors like whether an individual has a spouse, the average lifespan of men versus women and the potential for benefits to be cut in the future.
The tool also provides individuals with a rundown of their yearly Social Security benefits and their cumulative earnings with a spouse over the course of retirement.
The AARP Social Security calculator is a basic calculator that provides a graphical depiction of how much your monthly benefit is depending on when you choose to collect. The calculator also provides information on how much of your living expenses (based on an average retiree’s monthly living expenses) your Social Security benefits will cover.
The drawback of this calculator is that it determines your monthly benefit based on your average annual salary, so it might not be entirely accurate if your estimate of your average annual salary is not correct. The calculator also determines cumulative benefits based on if an individual collected at age 70, a goal that may not be realistic for many.
MaxiFi Planner is a fee-based Social Security tool developed by economist Laurence Kotlikoff. The software focuses on helping retirees smooth consumption over time. In other words, it creates a plan for retirees that allows them to have a standard of living that stays constant once they’re done working.
The software allows for users to input information that many free calculators don’t allow such as withdrawals from retirement accounts, mortgage costs and pensions. The software provides users with information on when to withdraw from other retirement accounts and when you and your spouse should file for benefits.
This complex software comes at a cost though. The standard plan costs $109 for the first year of service, and then $89 each year after that.
Since Social Security is only meant to supplement people’s retirement income, it’s critical to take the initiative to save for retirement on your own, the sooner the better. Pensions, 401(k)s, traditional IRAs and Roth IRAs are excellent sources to create the retirement income you want. If your employer offers matching 401(k) contributions, your first priority should be maxing out the match.
If your employer doesn’t offer matching contributions or you have extra money leftover to save for retirement, you might consider opening a Roth IRA or a traditional IRA.
A Roth IRA has an income limit so not everyone is eligible. Individuals who make less than $144,000 and married couples filing jointly who make less than $204,000 are eligible to contribute to a Roth IRA. These accounts offer a unique tax advantage: You pay taxes on your upfront contributions so your investments grow tax-free over time. And when you do withdraw, you won’t pay taxes on any of your distributions (as long as you withdraw after age 59 and a half).
For those who don’t qualify for a Roth IRA, a traditional IRA is a good option. A traditional IRA offers a different type of tax advantage. With a traditional IRA individuals pay taxes on their investments when they withdraw that money in retirement. However, depending on your income and whether your employer offers a retirement plan, your traditional IRA contributions may be tax deductible. This means your contributions reduce your taxable income now and therefore how much you owe in taxes.
– Steven DiGregorio, President Compass Asset Management Group
Compass Asset Management Group, LLC is a private wealth management and fiduciary working with select clients. The firm that leverages research from the largest names on Wall Street with fifty plus years of market experience to provide strategic, tactical and dynamic investment management. The personalized financial planning, estate planning and investment management advice is available in the private setting of our local offices or virtually via Zoom. As a fiduciary, we do only what is in the best interest of our clients and maintain a high degree of sensitivity to your personal perspectives and concerns. We pride ourselves on exceeding the expectations of our clients by listening purposefully, understanding completely and communicating frequently through personal consultations entirely focused on you.
Please note that the content of this blog does not constitute tax advice and is only intended for the educational purpose of the reader. Please consult your tax advisor for specifics regarding your circumstances.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
COMPASS ASSET MANAGEMENT GROUP
100 STONY BROOK COURT
NEWBURGH, NY. 12550