It's worth celebrating just about any time our leaders on both sides of the political aisle can meet in the middle. But seniors in Kansas City, MO should all be smiling now that, starting in 2024, they’ll get to enjoy a little bit more of their Social Security benefits. Thanks to a broadly bipartisan vote, Missouri is set to become the 39th state to make Social Security payments exempt from state taxes.
Of course, that also means many folks in our audience will have to factor in a new variable when they're deciding when to take Social Security. Luckily, Matt Wilson, Keen Wealth's Chief Investment Officer and President, recently hosted a comprehensive webinar on Maximizing Social Security Benefits that you can rewatch on our website. Today, we're going to discuss some follow-up questions Matt received from attendees.
1. "There's a 13-year age gap between my husband and me. Does that affect how we should think about maximizing survivor and spousal benefits?"
Assuming that the higher-earning spouse is also the older spouse in this example, when the primary earner passes, the total Social Security benefit they are currently receiving will be payable to their surviving spouse. So, in a vacuum, it's usually best for the high-earner to delay taking Social Security until they reach full retirement age, which maximizes the benefit they receive for the rest of their life and a potential survivor's benefit.
But, of course, life doesn't happen in a vacuum. At Keen Wealth, we typically run planning simulations that weigh both spouses taking Social Security at various ages, as well as life expectancy calculations and the general health of a couple, to try to pinpoint the most advantageous use of their benefits. And if life happens and a couple needs those benefits earlier to pay for a home remodel or in-home nursing, we'll recalibrate the plan again.
2. "If you delay taking Social Security until your full retirement age, is there a limit on income that you can earn from other work?"
There is no earnings limitation if you keep working and don't take Social Security until your full retirement age.
If you do take Social Security early, the rule for 2023 is that you will lose $1 in benefits for every $2 you earn over $21,240. Essentially, that means you have to pay that portion of your benefits back for that year. That ceiling is on W-2 income, so things like pensions and retirement distributions don't count towards the $21,240.
3. "After I reach full retirement age, are my Social Security benefits taxed as ordinary income?"
No matter where you live or at what age you take Social Security, your benefits can be subject to some federal taxation, depending on the size of your provisional income.
Take your adjusted gross income for the year, add in tax-free earned interest (such as from municipal bonds), and then finally add 50% of your Social Security benefits. Single filers earning between $25,000 and $34,000 and joint filers earning between $32,000 and $44,000 have to pay tax on 50% of their Social Security benefits. Above those thresholds, the rate jumps to 85%.
4. "Nearly all financial advisors favor the idea of waiting as long as possible to take your Social Security benefits to increase the eventual payout. But almost no one speaks about enjoying the money you do get if you take your benefits early. How should we be thinking about taking smaller benefits, but potentially having more years to enjoy this smaller amount?"
This is a constant conversation that we have with folks at Keen Wealth, and it's a conversation that evolves as a person's retirement evolves.
Yes, between Social Security's own scale and the annual cost of living adjustments, your benefits could rise over 8% every year that you delay taking them. That's why we often start the Social Security conversation by asking folks, "How much money do you need to live and thrive in retirement?"
If taking Social Security benefits before full retirement age is going to help someone hit an early retirement goal, take bucket list vacations, join a country club, or manage a health scare without incurring massive debt, then the "maximum benefit" will be the benefit that person gets from having access to that money sooner rather than later.
On the other hand, if you're able to live your best life in retirement using your other resources, then we'll probably advise you to let that benefit keep growing.
Don't forget that Matt Wilson's Q4 Market Update webinar is just around the corner. Click here to join our mailing list and we'll let you know once we have that event scheduled. You can also email me at email@example.com if you have a question or topic you'd like us to cover on a future episode of Keen on Retirement.
Bill Keen is a financial advisor with nearly 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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