There's a lot you need to know about your income benefits at retirement. Find out here about the financial affects of retirement pension and social security.
In an ideal world, the money you have after retirement would come from a mix of social security, pension plan, and personal savings. That being said, your pension and social security benefits aren't mutually exclusive. The kind of pension you have can affect how much social security you actually end up receiving.
Your social security benefits can be lessened or even disappear completely depending on your pension and when you decide to claim your benefits. Read on, and we'll walk you through everything you need to know so you can be prepared for when retirement comes.
What is Social Security?
Social Security is a government program designed to alleviate the financial burden retirees may otherwise experience. Roughly 61 million Americans receive benefits every month.
The program works by taking a combined 12.4% tax from workers and their employers and then distributing money from that pool to retirees and disabled persons.
Eligible candidates can start claiming their benefits when they reach the age of 62. But Social Security is only meant to replace 40% of your pre-retirement income. Most people need more to live off of, so be sure to put money away and don't end up like the 34% of Americans who have nothing saved.
What is a Pension?
A pension is a type of retirement plan in which an employee receives a monthly income after they have stopped working. As an active employee with a pension plan, your employer will put money into your pension while you are working. After retirement, you can typically expect monthly pension payments for the rest of your life.
Most government agencies offer pension plans to their employees. Some private-sector corporations also offer them. Let's take a look at these two types of pension plans and see how they can affect your social security benefits.
Private-Sector Pension Plan
If your pension plan is exclusively from private-sector work, your social security benefits will not be affected. Because it is a private entity paying taxes toward the social security pool, you can receive the full amount you are eligible for.
You can fully receive both your social security and pension. Maybe you'll use that extra cash to pay off debt, buy a new house, or fund a trip to Paris.
Public-Sector Pension Plan
Having a pension plan from a public-sector job can affect how much of your social security benefits you actually receive. This all has to do with how social security gets funded. For many people who work in the public sector, they don't actually pay taxes to social security. Instead, money comes out of their paycheck and goes to public pensions.
Some people would consider it unfair for public workers to receive both the full benefits of their pension and also social security when they are not fully contributing.
Public Pensions and Social Security
Social Security calculates how much you will receive in benefits by looking at your 35 highest-earning years. If you didn't work for 35 years, that missing work time is filled in with zeros. However, because of the way social security is designed, people with fewer working years can still walk away with more money than expected.
Because of this, the Windfall Elimination Provision was put in place. This provision is aimed at people who worked in both the private and public-sector. Since earnings from a public job are not taxed for social security, this provision prevents retirees from earning the full benefits of social security and pension.
It states that the only working years that are counted for social security are the ones in which you actually contributed to the program. If you worked at least 30 years in a contributing job, then your social security benefits will not be affected.
If you worked less than 30 years in such a job, your social security benefits will be reduced.
However, there are protections in place. There is a maximum amount of benefits that can be reduced in the Windfall Elimination Provision.
Also, your social security will not be cut by more than 50% of what you get from your public pension. For example, if you receive a monthly public-sector pension of $1,000, your social security can not be cut by more than $500 per month.
There is also the Government Pension Offset. This applies to people receiving their deceased spouse's social security. If you are receiving spousal benefits plus your own public pension, the Offset stipulates that your social security payments are reduced by two-thirds of your pension.
With a big enough pension, your social security benefits can be totally wiped out.
How Timing Affects Pension and Social Security
Your public pension and social security payments only affect each other when you are receiving both simultaneously.
If your pension kicks in at age 65, then the best age to collect social security might be at 62 (the earliest age you can receive social security) because your monthly benefits will not be affected by the pension for another 3 years.
If you receive a private pension then you do not need to be worried about the best time to start collecting. Your pension will not affect your social security.
Retire with a Plan
When it comes to retirement, you need to be prepared. Understand what your options are and always try to save when you can. And be sure to take a look at your finances and see what your pension and social security will look like when the time finally comes.
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