President Franklin D. Roosevelt signed Social Security into law in 1935. AP Photo

The decision about when to retire has become complex. The timing can have a significant impact on an individual’s income and security. It can affect the amount saved for retirement, the level of Social Security benefits received during retirement, and the investment returns expected to be earned on retirement savings after retiring.

When to Retire

Determine where retirement income may come from. Clients who may have saved “enough” but have lost any company retirement plan may need to continue working. Or two wage earners who retire at the same time may not be able to replace any lost funds due to the market downturn. So helping clients understand the risks associated with the timing of retirement can make a difference in the overall experience of retirement.

Social Security

Social Security Insurance was established in 1935 as a financial safety net for older Americans. Eight decades later, most Americans pay into the system, with Social Security as the largest source of income for individuals age 65 and older.

The program is based on contributions that workers make into the system. While your client is employed, they pay into Social Security; when it’s their turn to retire they receive benefits.

Your client can start their Social Security retirement benefits as early as age 62 or as late as age 70 (if they were born in 1960 or later, their full retirement age is 67). Their monthly benefit amount will be different depending on the age they start receiving it.

The amount of money your client receives from Social Security is based on a number of factors, including how much income they earned throughout their working years, the year they were born, and the age at which they file for benefits. If they claim Social Security early, their benefits will be reduced by a fraction of a percent for each month before their full retirement age.

The following best practices are recommended by the U.S. Social Security Administration website.

How Benefits Are Calculated

Benefits are based on your lifetime earnings. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.

Social Security recipients below their full retirement age (66 for those born between 1943 and 1954) can earn up to $14,640 in 2012 (not including tax withholdings).

Paying Income Tax on Benefits

Some states tax Social Security benefits, while others don’t. Check the laws in the state where you reside.

No matter where you live, you will have to pay federal taxes on your Social Security benefits if you file a federal tax return as an individual and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income of more than $32,000.

If You Wait to Claim, Benefits Increase

Monthly Social Security payments will be bigger if you wait until your full retirement age to sign up for benefits instead of claiming at age 62. Even if you delay your claiming decision by a year, you will get a boost in your benefit.

Claiming Benefits After Your Full Retirement Age (Older than 65)

If you wait as long as possible to collect, your payments could increase by 8 percent annually after your full retirement age. Additionally, you get two-thirds of 1 percent more for each month you delay.

Maximum Social Security Retirement Benefit

The maximum possible Social Security check grew to $2,513 per month in 2012. That is up from $2,366 in 2011. In order to get this amount, a worker would need to earn the maximum taxable amount ($110,100 in 2012) every year after age 21.

Receiving Social Security and Unemployment at the Same Time

Unemployment insurance benefits are not counted under the Social Security annual earnings test and therefore do not affect your receipt of Social Security benefits.

However, the unemployment benefit amount of an individual may be reduced by the receipt of a pension or other retirement income, including Social Security benefits.

Receiving Social Security Benefits When Living Overseas.

As long as you are a U.S. citizen, you may receive your Social Security benefits outside the United States. So you can retire abroad.

Receiving Credit for Military Service

Earnings for active duty military service or active duty training have been covered under Social Security since 1957. Under certain circumstances, special earnings can be credited to your military pay record for Social Security purposes.

The extra earnings are for periods of active duty or active duty for training. These extra earnings may help you qualify for Social Security or increase the amount of your Social Security benefit.

Couples Have Extra Options

Spouses are entitled to Social Security benefits of up to 50 percent of the higher earner’s check if that amount is higher than the payments based on his or her own working record.

Additionally, dual-earner couples who have reached their full retirement age can even claim twice by first signing up for a spousal payment, then claiming again later based on their own work record (which will then be higher due to delayed claiming).

Lacking a Plan

Only half (51 percent) of pre-retirees have actually completed a detailed retirement income plan according to some studies.

Some reports indicate 31 percent of those born between 1925 and 1945 still do not have a plan for retirement. Among those born between 1946 and 1955, 42 percent lack a retirement income plan. The number is even higher at 53 percent for those born between 1956 and 1964.

Pre-retirees are willing to make other sacrifices to have the type of retirement they want, including delaying retirement, saving more, and continuing to work while in-retirement.

Uncertainty creates unique opportunities for you to inform and educate you clients and prospects about tax-advantaged solutions for their retirement planning. Lifetime monthly income may be more desired by baby boomers than wealth accumulation. Just ask your best prospects how they feel about their future monthly income.

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