Are you thinking about retirement? Will you have a pension? If so, stick around as we dive into an essential topic for anyone planning to retire with a pension: Will your pension reduce your Social Security benefits?
First, let's talk about the basics. If you have a pension, you'll probably receive regular taxable income throughout your retirement. But did you know that this can also impact your Social Security benefits? Understanding the interplay between these two income sources is crucial for effective retirement planning.
Social Security benefits are calculated based on your average earnings during your highest 35 'covered' years of work. However, your pension income could lead to adjustments through provisions like the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO).
The Windfall Elimination Provision
The Windfall Elimination Provision can reduce your Social Security benefits if you have a pension from a job that didn't withhold Social Security taxes. If this applies to you, your Social Security could be significantly reduced.
There are some exceptions to the Windfall Elimination Provision, such as certain federal employees, if your only pension is from the railroad, or if you have at least 30 years of substantial earnings at a job where you did pay into Social Security.
The Government Pension Offset
The Government Pension Offset affects widows and widowers receiving a 'non-covered' pension. It reduces their Social Security survivor benefits by two-thirds of their pension amount. This can have a major impact on your financial planning if you’re a surviving spouse.
Once again, there are some exceptions such as certain federal employees. The Government Pension Offset does not apply to any Social Security benefits you earned from your own “covered” work, but the Windfall Elimination Provision may still apply.
It’s also important to note that in general neither the Government Pension Offset or the Windfall Elimination Provision apply to military retired pay.
Taxation of Your Social Security Benefits
Did you know your pension income could also cause your Social Security benefits to be taxed? Depending on your income, up to 85% of your Social Security benefits might be taxable. This is important to consider when planning your retirement income.
If your combined income exceeds certain limits, a portion of your Social Security benefits will be taxed. There are two income thresholds to be aware of: the 50% threshold and the 85% threshold.
When your income exceeds $25,000 (filing single) or $32,000 (filing jointly), up to 50% of your Social Security benefits would be taxed.
Once your income rises above $34,000 (filing single) or $44,000 (filing jointly), up to 85% of your Social Security would be taxed as income.
There are strategies to lower your taxes, like Roth conversions, but it really depends on your personal situation. Planning ahead can help reduce your tax burden and ensure you make the most of your retirement income.
At NextGen Wealth, we examine all of your income sources to uncover the best strategies for your retirement. Our COLLAB Financial Planning Process™ goes beyond investment management to help you transition smoothly into retirement.
Ready to take control of your retirement? Contact us today to see if we’re a good fit and schedule your free financial assessment. Don't leave your retirement to chance. Let's make sure you're on the right track.
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