Financial Perspectives: Social Security planning for pre-retirees

With the impact of the economic downturn, many folks who are thinking about retiring are wondering how they are going to make ends meet.  As a result, I have been receiving many questions around how much retirees can earn in retirement and without affecting their Social Security benefits.  Many folks also do not understand that Social Security benefits can be taxable if you have other income that exceeds certain levels.

The following guidelines are taken directly from the Social Security website (www.ssa.gov):

• If you are younger than full retirement age, $1 in benefits will be deducted for each $2 in earnings you have above the annual limit ($14,160 in 2011).
• In the year you reach your full retirement age, your benefits will be reduced $1 for every $3 you earn over a different limit ($37,680 in 2011) until the month you reach full retirement age. Then you get your full Social Security benefit payments, no matter how much you earn.

If you are younger than full retirement age and some of your benefits are withheld because your earnings are more than $14,160, there is some good news. When you reach full retirement age, your benefits will be increased to take into account those months in which you received no benefit or reduced benefits.

The definition of full retirement age is based on the year of your birth.  For people born between 1943 and 1954, it is 66, and then it rises to 67 for those born in 1960 and after.

The taxation of Social Security benefits is a bit complicated.  For those with incomes less than $25,000 ($32,000 for married joint taxpayers), Social Security benefits are not taxed.  For those with incomes between $25,000 and $34,000 ($32,000 and $44,000 for married joint taxpayers) benefits are taxed at 50 percent.  Those with incomes above these thresholds have their benefits taxed at 85 percent.

The long and short of planning is to understand where you fit in.  Thankfully, the Social Security Administration has made a number of improvements in helping the public answer benefit related questions.  You may, however, need to consult a tax professional to address tax concerns.

Jim Heisler is a Certified Financial Planner with Family Wealth Services in Holmesburg. You can read all his Financial Perspective columns here.

Registered Representative, Securities offered through Cambridge Investment Research, Inc., A Broker/Dealer, Member FINRA/SIPC and Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Family Wealth Services, LLC and Cambridge are not affiliated.

Jim Heisler, CFP®, CDFA™, CASL™ Family Wealth Services, LLC is located at 8275 Frankford Ave. (215-332-4968)

The views expressed are not necessarily those of Cambridge and should not be construed as an offer to buy or sell any security. These situations are hypothetical in nature and do not represent a specific client.