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What You Need to Know About the Social Security Changes

As we enter 2021, there are seven significant changes coming to Social Security benefits that will impact both taxpayers and beneficiaries. We break down those changes below:

Recipients will receive more money

Beneficiaries will see a small raise hit their bank statements in January as payments increase by 1.3%. Retired workers can expect to see around $20 more, bringing their total for the month to $1,543. These increases are designed to keep up with the rising cost of living.

Retirement age increases

In order to receive full benefits, you have to be slightly older in 2021. The full retirement age will increase to 66 and 10 months for those born in 1959. The full retirement age will peak in 2022 at 67-years-old for anyone born in 1960 or later. If you choose to claim your Social Security before you reach the full retirement age, you will receive reduced payments.

Higher earners can expect to pay more taxes

Before you reap the benefits of Social Security, you first have to contribute to the fund. If you make more money, you will pay more taxes as next year’s payroll tax earnings cap will increase by $5,100 to $142,800 from $137,700. Next year, workers will pay 6.2% of their earnings toward Social Security until the taxable maximum of $632.40 is reached.

Higher earners can also expect bigger payouts

If you earn more, you can expect to receive more as well. In 2020, the Social Security Administration capped monthly retirement benefits at $3,011. In 2021, the maximum will increase to $3,148 a month. However, to get the full payment, you will need to wait until you’re at full retirement age to claim benefits, have worked at least 35 years and hit or surpassed the maximum taxable earnings cap in each of the past 35 years.

Slight rise in disability benefits

Next year, non-blind disabled beneficiaries will be able to earn an extra $600 annually, or up to $1,260 a month without having their payments stop. This increase is more for blind disabled beneficiaries who will earn up to $2,190 a month in 2021.

Early filers will see their earnings limit increase

People 65-years-old and younger can now earn an extra $720 more, up to $18,960 before their benefits are reduced. After $18,960, $1 is withheld for every $2 earned above the limit. However, if you are full retirement age, then the limit goes up to $50,520, an increase from $1,920 from 2020. Additionally, the penalty will increase to $1 withheld for every $3 earned over the limit.

Earn more to cash in on retirement benefits

You’ll have to earn more to cash in on retirement benefits. Although it may seem that everyone gets Social Security benefits, it isn’t something given away and you will have had to earn 40 lifetime work credits to receive retirement benefits. You earn a credit for every $1,470 you make in earned income; this is up $60 from 2020 and you can earn up to four credits a year. Many people will earn more than the minimum number of credits you need to be eligible for benefits.

The closer you get to retirement age, the closer attention you will want to pay to these changes to ensure you are making the best financial decisions for yourself. However, these changes are important to know about at every age so that you can see where your hard-earned dollars are going. A financial professional can help you sort through and understand your options.

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