When you are young, Social Security can seem quite simple: leave your job, file for benefits and receive a check for the rest of your life. However, getting the most out of your monthly Social Security check is complex. As you near retirement, the decisions you make can have an impact on how much money you receive.
Here are nine essential details that you need to know:
Calculate Your Social Security Full Retirement Age
You can claim your Social Security benefits a few years before or after your full retirement age. Depending on when you file will determine how much your monthly payments will be. For people born after 1960, your full retirement age is 67. Your monthly benefit will be reduced if you take your Social Security benefits before your full retirement age. For example, if you file at age 62, your benefits will be 30% lower.
Understand How the Government Calculates Social Security
Your Social Security Benefits are calculated based on your earnings from the highest 35 years of your career. If you have not worked for 35 years, every year you didn’t work will reduce the benefits that you can receive. If you want to avoid this, you can increase your social security benefit by working a couple of extra years. However, there is a maximum amount of Social Security you can receive. For 2022, someone at full retirement age cannot receive more than $3,345 per month.
How are Your Social Security Benefits Earned
To be eligible for Social Security benefits, you must at least earn 40 credits throughout your career. It is possible to earn four credits a year, meaning it takes at least ten years to qualify for social security. To get all four credits this year, you must make at least $6,040. And yes, if you don’t earn 40 credits, it is possible to pay into Social Security and never get any benefit from it.
There’s an Annual Cost of Living Adjustment
One of the most attractive features of Social Security benefits is that the government adjusts the amount your receive based on the inflation rate. COLA, also known as a cost-of-living adjustment, can help provide you with extra inflation protection during retirement. Since COLA is calculated based on the changes to the CPI, the adjustment is dependent on the inflation set by the government. In 2022, Social Security beneficiaries received an extra 5.9% COLA to their monthly benefits.
Your Monthly Social Security Will Increase the Longer You Delay Your Benefit
Beneficiaries can start collecting benefits as soon as they turn 62, but taking benefits before your full retirement age can result in a reduction of income, this could be 25-30% depending on your full retirement age. If you want 100% of your benefits, you will have to wait until your full retirement age. Waiting beyond full retirement age will help you earn an additional 8% in credit each year until you reach 70 years old. Plus, any cost-cost of living adjustments will be included for those who wait to redeem their benefits.
There’s a Social Security Spousal Benefit
One spouse can receive up to 50% of their spouse's Social Security benefit. For example, if your spouse's benefit is worth $1,000 per month, you will receive $500 per month. If your spouse claims their benefit early and gets a reduced benefit, so will you. For example, if your spouse decides to use their benefits early at age 62, this may reduce your amount to as little as 32.5%. If you choose to take your benefits early and switch to your spouse’s benefit, your benefit will still be reduced.
There are Social Security Benefits for Spouses and their Children
You may receive a Social Security survivor benefit if your spouse dies before you. However, you can only have your benefit or your spouse's benefit, not both. If you are at full retirement age, every penny your spouse received is now yours. A widow can start taking their benefits as early as age 60. However, the payments will be reduced based on their age.
There’s one twist, if you haven’t already filed for your benefits, take your spouse's benefits as soon as possible or age 60, and switch to your retirement benefits at age 70. Your survivor benefits will be reduced, but your benefits will grow as you delay your Social Security benefits. If you remarry after age 60, you cannot receive your survivor benefit, but if you remarry after 60, you may be eligible based on your deceased spouse’s income record.
Children under age 18 or disabled before age 22 can also receive a survivor’s benefit, worth up to 75% of the deceased benefit.
You Can Claim Your Ex-Spouse's Social Security Benefits
Even if your marriage doesn’t go well, you can still get Social Security benefits based on your ex-spouse’s earnings history as long as you were married for at least ten years, 62 or older, and unmarried. Similar to spousal benefits, you can get up to 50% of an ex-spouse’s benefit. Unlike a regular spousal benefit, if your ex-spouse has not applied yet, you can start collecting money based on their current earnings history, but you must be divorced for at least two years.
In addition, ex-spouses can also take survivor benefits even if their ex-spouse is deceased after the divorce.
You May Have Taxes on Your Social Security Benefits
Most Americans understand Social Security is funded by taxes but don’t realize that you may have to pay taxes on the Social Security benefits you receive. Unfortunately, it doesn’t take a lot of income to trigger taxation. If your income is over $25,000 if you are single or $32,000 if you are married, you may have to pay taxes on your benefits. Since tax thresholds are not adjusted for inflation, the benefit amount becomes larger, and so does the chance of being taxed.
For additional information, here are three resources to check your Social Security benefits:
- Sign up for my social security account: This will give you the most accurate representation of your future social security benefits. Your statement will fluctuate based on your projected income and age of starting benefits. The account will also give you an estimate of your disability benefits if you become disabled.
- Online benefits calculator: This tool doesn’t force you to create an account; however, it requires you to insert your date of birth and Social Security number to access your earnings records.
- Social Security quick calculator: This is the least accurate calculation because it doesn’t have access to your employment information; the calculator only relies on the information you provide.
Danielle Miura, CFP®, is the founder of Spark Financials, a life and financial planning firm specializing in helping Sandwich Generation families manage their money. As a CERTIFIED FINANCIAL PLANNER™ professional, Danielle specializes in comprehensive financial plan development, financial education, and financial research.
