Social Security is a cornerstone of retirement planning and financial security in the United States. While most people approaching retirement are familiar with Social Security, many don’t fully understand the intricacies of this important retirement benefit.
As with any government program, there are many complexities to navigate. We’ve put together this comprehensive guide to help you understand the benefits offered and the many aspects of the program.
Social Security, more formally known as Old Age, Survivors and Disability Insurance (OASDI), encompasses programs that cover various areas. In this guide, we’ll focus primarily on the retirement and related aspects of the program, covering social security basics and facts you should be aware of.
What is Social Security?
Social Security was established in 1935 to provide financial support to retired and disabled individuals. The program has evolved over the years, but its core purpose remains the same: to offer a foundation of financial security for Americans in their retirement years.
Key Components of Social Security
Social Security offers different types of benefits:
- Retirement benefits
- Disability benefits
- Survivor benefits
- Family benefits
How Social Security is Funded
Social Security is funded through payroll taxes under the Federal Insurance Contributions Act (FICA). Both employees and employers contribute to the system, ensuring its continued operation.
Eligibility for Social Security
Generally, you are eligible for Social Security retirement benefits if you are aged 62 or older. You need to be a U.S. citizen or a legally eligible alien. Your eligibility and benefit amount are determined by your work history and the amount paid into Social Security over the course of your working career.
If you have questions about your eligibility, it’s best to contact Social Security prior to when you are considering claiming your benefit.
14 Facts About Social Security
Here’s an overview of 14 social security facts that we will cover in more detail throughout this guide.
- You generally need 40 credits (10 years of work) to be eligible for retirement benefits.
- The earliest age to claim retirement benefits is 62, but this results in a reduced benefit.
- Full Retirement Age (FRA) ranges from 66 to 67, depending on your birth year.
- Claiming benefits at age 62 can reduce your benefit by up to 30% compared to waiting until FRA.
- Delaying benefits past FRA increases your benefit by 8% per year up to age 70.
- Social Security benefits are calculated based on your 35 highest-earning years.
- Working while receiving benefits before FRA may reduce your benefit amount.
- Up to 85% of your Social Security benefits may be subject to federal income tax, depending on your total income.
- Spousal benefits can be up to 50% of the worker’s benefit at full retirement age.
- Survivor benefits may be available to widows/widowers as early as age 60.
- Divorced individuals may claim benefits on an ex-spouse’s record if the marriage lasted at least 10 years.
- You can withdraw your application for benefits within 12 months of starting to receive them, but you must repay all benefits received.
- After reaching FRA, there’s no limit on how much you can earn while receiving full benefits.
- Social Security is funded through payroll taxes under the Federal Insurance Contributions Act (FICA).
How Social Security Benefits are Calculated
Workers earn Social Security credits based on their earnings. You can earn up to four credits per year, and you generally need 40 credits (10 years of work) to be eligible for retirement benefits.
Average Indexed Monthly Earnings (AIME)
Social Security benefits are calculated based upon “average indexed monthly earnings,” which considers the top 35 years of earnings compiled by a worker over their career. If a person doesn’t have a full 35 years of earnings, the missing years are factored into the calculation as zero for those years.
Primary Insurance Amount (PIA)
These earnings are used to calculate a recipient’s primary insurance amount or PIA. This is used to determine the benefit they would receive at their full retirement age.
Additional years of working can serve to negate any missing years or can replace lower wage years if they are higher than other years in their work history. This can increase their benefit amount.
Full Retirement Age (FRA) and Its Impact
Full retirement age (FRA) is a crucial concept in Social Security. FRA is the age at which you earn 100% of your benefit. For those who have reached their FRA, there is no benefit reduction if they earn too much from working.
Here’s how to calculate your full retirement age:
| Birth Year | Full Retirement Age (FRA) |
| 1943-1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or later | 67 |
When to Start Taking Social Security Benefits
Early Retirement vs. Full Retirement
You are eligible to file for retirement benefits as early as age 62. However, this will result in a reduced benefit. Here are the reduced amounts for someone claiming a benefit at age 62 versus waiting until their FRA to claim:
| Birth Year | Full Retirement Age (FRA) | Percent Reduction in Initial Benefit Amount |
| 1943-1954 | 66 | 25.00% |
| 1955 | 66 and 2 months | 25.83% |
| 1956 | 66 and 4 months | 26.67% |
| 1957 | 66 and 6 months | 27.50% |
| 1958 | 66 and 8 months | 28.33% |
| 1959 | 66 and 10 months | 29.17% |
| 1960 or later | 67 | 30.00% |
It’s important to understand that these are permanent benefit reductions. Any cost of living increases will always be based on this lower benefit amount.
Delaying Benefits for Increased Payments
You can also wait to claim your benefits past reaching your full retirement age. Your benefit reaches its maximum level at age 70. Claiming your initial benefit past age 70 makes no sense in terms of any economic benefit to you.
Waiting past your FRA to claim your benefit can increase the amount you receive each month. Delayed retirement credits accrue past your full retirement age up until age 70. For those born after 1943, the annualized increase is 8% for waiting past your FRA, the amount is prorated based on when you actually apply, for example, age 68 and 4 months. This increase is over and above the full amount of your benefit that becomes available when you reach your FRA.
4 Factors to Consider
When deciding when to start taking benefits, consider factors such as:
- Your health and life expectancy
- Your financial needs
- Whether you plan to continue working
- Your other sources of retirement income
Social Security and Taxes
Taxation of Social Security Benefits
In some cases, your Social Security benefits may be subject to taxes. This is based on income levels with no age limitations. Up to 85% of your benefit could be subject to taxes, based on these rules:
For single filers:
- If your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefit could be subject to taxes.
- If your combined income is greater than $34,000, up to 85% of your Social Security benefit could be subject to taxes.
For those who are married and who file jointly:
- If your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefit could be subject to taxes.
- If your combined income is greater than $44,000, up to 85% of your Social Security benefit could be subject to taxes.
Combined income is defined as: Adjusted gross income + ½ of your Social Security Benefits + non-taxable interest (such as from muni bonds)
State Taxes on Social Security
Some, but not all states tax Social Security benefits. Currently, there are 13 states that will tax your benefit. Each state that does has different rules, so it’s wise to check with a tax professional familiar with your state’s rules.
Strategies for Potentially Minimizing Taxes
From a planning standpoint, if you know that your income will be high at various times during your 60s, it might pay to delay your benefits as long as possible.
Special Considerations for Married Couples
If you are married, you may be eligible for benefits based on your spouse’s work record. The spousal benefit can be up to 50% of the worker’s benefit at full retirement age.
As a widow or widower, you may be eligible for a survivor’s benefit based upon your deceased spouse’s earnings record. A few things to know:
- They can file for a reduced benefit as early as age 60. If their own benefit would be higher, they can switch as early as age 62. A full survivor’s benefit is available when they reach their full retirement age.
- Benefits can be collected as early as age 50 if the survivor is disabled and that disability started prior to the death of their spouse or within seven years of their death.
- If the survivor is caring for a child of the deceased spouse who is under 16 or who is disabled at any age, they can collect a survivor’s benefit.
- Remarriage after age 60, or after age 50 if the survivor is disabled, will not impact their ability to collect a survivor’s benefit.
Strategies to Potentially Maximize Benefits as a Couple
When planning as a couple, consider factors such as:
- The age difference between spouses
- Each spouse’s earning history
- Life expectancy of each spouse
- Potential survivor benefits
Social Security and Divorce
If you are divorced, you may be able to claim benefits based upon your ex-spouse’s earnings record. The rules to claim a benefit based upon their earnings record include:
- You must have been married to your ex-spouse for at least ten years.
- You are not remarried.
- You are at least age 62.
- The benefit that you would receive based on your ex-spouse’s record is greater than the benefit that you would be eligible for based on your own earnings record.
- Your ex-spouse is entitled to receive Social Security retirement or disability benefits.
- You must be divorced from your ex-spouse for at least two continuous years.
It doesn’t matter whether or not your ex-spouse has claimed their own benefit yet. Your claiming a benefit based upon their earnings record will not impact their benefit.
Working and Social Security
If you work prior to reaching your full retirement age, your Social Security benefits may be reduced based upon the level of your earned income if you claim benefits prior to reaching your FRA. Earned income includes income from employment and from self-employment.
The thresholds change most years, but for 2020 if your earned income exceeds $18,240 then your benefit is reduced by $1 for every $2 of earned income over that amount. In the year in which you reach your FRA, the reduction is $1 for every $3 of earned income over $48,600 for 2020. After reaching your FRA, you can earn an unlimited amount of income and it will have no impact upon your benefits.
Many people work into their 60s, and this should be a consideration in deciding when to claim your benefits.
Social Security Benefit Withdrawals
Everyone can have one “do over” on their Social Security retirement benefit in a process which is called a withdrawal of your benefit application. This can be done within the first 12 months after commencing your benefit and cannot be done once you have reached your full retirement age.
This might be a good solution for someone who had retired and claimed their benefits prior to their FRA, but then decided to return to work, or who started their own business, and who will be earning an amount well over the limits discussed in the prior section.
Social Security Basics: Key Takeaways for Your Retirement Plan
While Social Security shouldn’t be someone’s sole source of retirement income, it is still an important piece for most retirees. Understanding this benefit and managing it to your greatest advantage is key to retirement for most people.
At Riverbend Wealth Management, we specialize in helping retirees and pre-retirees navigate the complexities of Social Security and create comprehensive retirement plans. Our team of fiduciaries can help you analyze your situation and develop strategies designed to potentially maximize your Social Security benefits as part of your overall retirement plan.
Schedule a free 15-minute financial assessment with us. We can help you analyze your situation and put together a full retirement financial plan, including how to best manage your Social Security benefits.
This content is developed from sources believed to be providing accurate information, and provided by Riverbend Wealth Management. Riverbend Wealth Management and its advisors are not legal or tax advisors. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.
