Your Cheat Sheet for Understanding Social Security Benefits

Social Security is a key component to many boomers’ retirement plans, but many of us don’t fully understand the system and how to make the most of it.

Knowing when to start taking benefits can be overwhelming. Case in point: only 24% of those 55 and older felt “very confident” on knowing when they should start claiming their benefits, according to a survey released by Financial Engines earlier this week. Fifty-four percent described themselves as "somewhat confident" when making that decision. What’s more, when respondents took an eight-question quiz about crucial Social Security rules, 5% got a perfect score.

When it comes to creating retirement security, being confident in your financial decisions is key. Understanding the rules about Social Security can be difficult as they can change (in fact, the president’s 2015 budget proposes a major change), but staying up to date will help create a secure nest egg.

I spoke with Joe Lucey, president of Secured Retirement Advisors, about some of the changes coming to Social Security this year, and here is what he had to say:

Boomer: Let’s talk about the rules surrounding "file and suspend" and how this move impacts Social Security recipients:

Lucey: File and suspend is not necessarily a new rule, but retirees often overlook how using this strategy can increase their lifetime benefits. Furthermore, this strategy has traditionally been used as part of a couple’s SSA planning strategy, but single retirees who plan to defer their benefits may want to look at this strategy as well.

One benefit of file and suspend is that it establishes a "go back to date" for a retiree who is looking to defer taking benefits. This allows a retiree who does this move to continue to make 8% increased earned credits from age 66 to 70. But should retirement plans change due to health or financial concerns while still in deferral, the retiree could collect all deferred benefits back to the age the file and suspend was submitted (age 66, in this example). At $2,000 per month, this can amount to quite a bit of money. Without electing the file and suspend, the SSA would only be backdated up to six months.

Boomer: Will people who receive Social Security benefits get a cost-of-living increase in 2014? If so, how much, and who will get it?

Lucey: The 2014 COLA adjustment is 1.5%. Often times people do not realize this, but they will receive the COLA increase even if they continue to defer benefits.

Boomer: What will be the maximum amount of my pay that can be taxed for Social Security in 2014?

Lucey: Maximum earnings for 2014 is $117,000. Medicare taxes are uncapped for income and there is the new 0.9% increase for Medicare for high earners $200,000 or $250,000 depending on tax status.

Boomer: Will the annual earnings limit for Social Security change in 2014 and who will be affected?

Lucey: Only beneficiaries between the ages of 62 and 66 are affected by the earnings tests (potentially a beneficiary back to age 60 if on survivor benefits). New limits are $1,290 per month for most retirees collecting Social Security checks.

For more information about Social Security rules, click here