As retirement approaches, many people look to Social Security as a reliable source of income for their golden years. But navigating the ins and outs of when and how to claim can be confusing. To make this process easier, here are five crucial things you should know about starting Social Security benefits.
1. Your Claiming Age Impacts Your Monthly Benefit
The age at which you start claiming Social Security benefits plays a critical role in determining how much you will receive each month.
You can begin claiming benefits as early as age 62, but if you choose to claim before your full retirement age (FRA), which typically falls between 66 and 67 depending on your birth year, your monthly payment will be permanently reduced. On the flip side, delaying your claim past your FRA will increase your monthly benefit by a certain percentage for each year you wait, all the way up until age 70. The later you start, the higher your benefit.
2. Your Work History Counts
The amount of Social Security benefits you’re entitled to depends on your earnings history.
Social Security calculates your average indexed monthly earnings (AIME) based on your top 35 years of income, adjusted for inflation. The more you earn during your working years, the larger your benefits are likely to be. It’s important to keep track of your work history to ensure you’re getting the full benefits you deserve.
3. Spousal and Survivor Benefits Are Available
For married couples, Social Security offers spousal and survivor benefits, which can be a significant part of retirement income.
Spousal benefits allow the lower-earning spouse to receive up to 50% of the higher-earning spouse’s benefits. Survivor benefits offer financial support to a surviving spouse after the death of their partner. Understanding how these benefits work can help couples maximize their Social Security income.
4. Working While Claiming Can Affect Your Benefits
If you start claiming Social Security before reaching your FRA and continue to work, your benefits could be reduced due to the earnings test.
This test takes away $1 for every $2 you earn over a certain annual limit (which is updated each year). However, once you hit your FRA, you can earn any amount without affecting your Social Security benefits. It’s important to consider how continued work might influence your benefits before making a claim.
5. Social Security May Be Taxable
Many retirees don’t realize that Social Security benefits are subject to federal income taxes, depending on your total income.
The taxability of your benefits is determined by your provisional income, which includes half of your Social Security benefits plus all other sources of income. If your provisional income exceeds specific thresholds, a portion of your Social Security benefits may be taxed. Understanding the potential tax implications can help you plan for a smoother financial future in retirement.
