At first glance, Social Security retirement seems uncomplicated. For years, you pay into the system, and once you hit retirement age, you begin receiving regular monthly payments based either on your own work record or spousal benefits. While that's a relatively accurate bird's-eye view of how Social Security works, it overlooks several important nuances -- particularly for married couples.
If you're married and planning for retirement, here are three lesser-known Social Security rules that all married (and divorced) retirees should know.
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1. Taxes may come into play
As you plan, it's tempting to quickly calculate a post-retirement budget by adding expected Social Security benefits to other sources of income. In other words, you may overlook the taxes that will be due on that income.
Depending on how much you bring in annually, you may owe federal taxes. In addition, if you live in one of these nine states, you may have to pay state taxes on all or some of your income:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Whether or not you'll owe federal taxes (and how much you'll owe) depends primarily on your income, how much of that income is taxable, and your filing status.
It's important to remember that taxes will impact how much you'll have to spend in retirement. Factoring those taxes into your budget before you retire can help you design a far more accurate budget.
2. Cost-of-living adjustments (COLAs) can help fill a gap
COLAs are another factor to consider when budgeting. While they don't always match the rate of inflation, COLAs are designed to help you maintain purchasing power by periodically increasing your Social Security benefits. The goal is to ensure your benefits don't lose value over time.
Typically, COLAs are evaluated once a year, usually in October, and adjustments are made to Social Security payments the following January. Adjustments are based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- an index measuring the average change in prices paid by consumers for goods and services over time.
If there is no increase in inflation over the evaluated period, there may be no increase in benefits.
3. Divorce doesn't necessarily mean you're ineligible for spousal benefits
Let's say you've historically earned less than your spouse and have counted on spousal benefits to help you navigate retirement finances. Even if you divorce, you may still have access to the Social Security benefits you've been counting on. Here are five key factors associated with spousal benefits following divorce:
- Eligibility: To be eligible for spousal benefits, you must have been married to your ex for a minimum of 10 years and be currently unmarried.
- Divorce: If your ex-spouse isn't claiming benefits yet, you must be divorced for at least two years.
- Benefit: The amount you can receive as a divorced spouse may be up to 50% of your ex's full retirement benefit, depending on the age at which you claim benefits.
- Age: You can begin receiving benefits as early as age 62. However, if you start before your full retirement age, the benefits will be permanently reduced.
- Remarriage: If you remarry, you generally cannot claim benefits based on your ex-spouse's work record unless your latest marriage ends through death or divorce.
If you expect Social Security to play an essential role in your financial future, it pays to keep an eye on the details, large and small. That way, you can make the most of every dollar due to come your way.
