With countless rules enforced by the Social Security Administration (SSA) and many potential strategies for collecting Social Security benefits, it’s no wonder pre-retirees and retirees alike often feel overwhelmed and confused when it comes time to claim benefits. What it comes down to, however, is that there are no one-size-fits-all solutions for collecting Social Security, and those of us without a basic understanding of how Social Security works are more likely to make uninformed decisions—which can lead to poor claiming strategies and overall reduced benefits. And the first step to making financially-responsible decisions regarding Social Security and in turn, the best plan of action for your individual situation, is to know your options.
What four things can affect your Social Security benefits?
Before you can determine when the best time is for you to begin collecting Social Security benefits, you need to know what factors impact the overall size of your benefit. Your monthly Social Security benefit is determined by four main factors: your work history, your earnings history, your birth year, and your claiming age. Let’s break down each factor.
Work history
When calculating your monthly Social Security benefit, the SSA will take your 35 highest-earning, inflation-adjusted years into consideration. But don’t worry if you took a few years off to care for the kids or were unemployed briefly; accumulating less than 35 years in the workforce doesn’t mean you’re destined to work forever. Each year fewer than 35 that you worked will simply result in a $0 salary averaged into your earnings history.
Earnings history
As mentioned under the previous bullet, your earnings over your highest-paid 35 years in the workforce will influence your benefit. Higher lifetime earnings often equate to a higher Social Security benefit, in terms of dollar amounts, but the actual percentage of pre-retirement income that’s replaced may be lower for higher income workers. According to the SSA, when retirees begin claiming benefits at full retirement age, as much as 75 percent of pre-retirement income may be replaced for very low earners, 40 percent for medium earners, and 27 percent for high earners.1
Related: How Much Should You Save for Retirement?
Birth year
Full retirement age is defined as the age that grants you 100 percent of your monthly Social Security benefit, which sounds simple upfront, but things get more complicated from there. For starters, your full retirement age varies based on the year you were born. Currently, the full retirement age for those born between 1943 and 1959 is 66 and some change, but if you were born after 1960, you’ll have to wait until age 67 to receive full retirement benefits. Use this resource from the SSA to help you determine your own full retirement age based on your birthdate.
Claiming age
To make things even more confusing, you don’t necessarily need to wait until your full retirement age to begin claiming Social Security, but there are certain benefits for doing so. While retired employees can begin claiming benefits at age 62, your monthly benefit will be permanently reduced by approximately one-half of one percent for each month you receive benefits before reaching full retirement age. While this may not necessarily seem like a big deal at first glance, the permanent reduction can add up to a large dollar amount over the course of a retirement.
Additionally, workers aren’t required to begin collecting Social Security benefits once they reach their full retirement age. In fact, you can wait until age 70 before being required to take distributions—and in return, the SSA will increase your benefit for each month you delay collecting benefits after full retirement age. And with a yearly benefit increase of about 8 percent for each year past full retirement age, a retiree waiting to claim until age 70 can receive anywhere from 54 to 88 percent more per month than a retiree who claimed benefits at 62.
Learn more: Social Security Benefit Planning
Why is it important to have a Social Security claiming strategy?
There are a variety of reasons it’s vitally important to have a Social Security claiming strategy when approaching retirement age. Average life expectancy continues to climb, which means people are responsible for funding more years in retirement than in the past. And since Social Security benefits account for about 30 percent of income of the elderly, with nearly nine in ten people who are 65 or older receiving a Social Security benefit2, it becomes clear that Social Security can have a big impact on financial security in retirement.
For additional tools to help you get there, check out our Retirement Saving Resources or contact us at 888-652-8086.
Sources:
1"Understanding the Benefits" Social Security Administration, 2023. https://www.ssa.gov/pubs/EN-05-10024.pdf
2"Social Security Fact Sheet" Social Security Administration, 2023. https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
FAQs
Your monthly Social Security benefit is determined by four main factors: your work history, your earnings history, your birth year, and your claiming age.
What are the 4 parts of Social Security? ›
Types of Social Security Benefits. There are four basic types of benefits based on the person receiving them. The types are retirement, disability, survivors and supplemental benefits.
What are the four ways you can lose your Social Security? ›
Social Security: 4 Ways You Can Lose Your Benefits
- You Forfeit Up To 30% of Your Benefits by Claiming Early. ...
- You'll Get Less If You Claim Early and Earn Too Much Money. ...
- The SSA Suspends Payments If You Go To Jail or Prison. ...
- You Can Lose Some of Your Benefits to Taxes. ...
- You Can Lose SSDI in a Few Different Ways.
For general Social Security inquiries, call us toll-free at 1-800-772-1213 or 1-800-325-0778 (TTY) between 7 a.m. and 7 p.m., Monday through Friday.
What income reduces Social Security benefits? ›
If you're younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits. If you're younger than full retirement age during all of 2024, we must deduct $1 from your benefits for each $2 you earn above $22,320.
What are 4 credits for Social Security? ›
You can work all year to earn four credits ($6,920), or you can earn enough for all four in a much shorter length of time. If you earn four credits a year, then you will earn 40 credits after 10 years of work. Each year the amount of earnings needed to earn one credit goes up slightly as average wages increase.
What is Step 4 of Social Security disability? ›
Step 4: Can severely impaired applicants work in their past jobs? At this step, the DDS considers whether an applicant's residual functional capacity ( RFC ) meets the skill and task requirements of his or her past relevant work.
Do I get my ex husband's Social Security if he died? ›
A surviving spouse, surviving divorced spouse, unmarried child, or dependent parent may be eligible for monthly survivor benefits based on the deceased worker's earnings. In addition, a one-time lump sum death payment of $255 can be made to a qualifying spouse or child if they meet certain requirements.
Can my wife get Social Security if she never worked? ›
Even if they have never worked under Social Security, your spouse may be eligible for benefits if they are at least 62 years of age and you are receiving retirement or disability benefits. Your spouse can also qualify for Medicare at age 65.
Can I collect my deceased husband's Social Security and still work? ›
What if I work? If you work while getting Social Security survivors benefits and are younger than full retirement age, we may reduce your benefits if your earnings exceed certain limits. The full retirement age for survivors is 66 for people born between 1945 and 1956.
Social Security tax FAQs
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
Is there really a $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
How to answer Social Security questionnaire? ›
9 tips for filling out the function report
- Keep your answers consistent. ...
- Start with question 20. ...
- Answer questions directly. ...
- Talk about your average or worst days. ...
- Be honest and don't exaggerate. ...
- Send additional information as quickly as possible. ...
- Talk about all conditions that keep you from working.
Some American workers do not qualify for Social Security retirement benefits. Workers who don't accrue the requisite 40 credits (roughly 10 years of employment) are not eligible for Social Security. Some government and railroad employees are not eligible for Social Security.
What is the Social Security 5 year rule? ›
The Social Security 5-year rule refers specifically to disability benefits. It requires that you must have worked five out of the last ten years immediately before your disability onset to qualify for Social Security Disability Insurance (SSDI).
What kind of income does not count against Social Security? ›
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes.
What is Section 4 of the Social Security Act? ›
the Secretary shall notify such State agency that further payments will not be made to the State (or, in his discretion, that payments will be limited to categories under or parts of the State plan not affected by such failure) until the Secretary is satisfied that such prohibited requirement is no longer so imposed, ...
What is the $16728 Social Security bonus? ›
Have you heard about the Social Security $16,728 yearly bonus? There's really no “bonus” that retirees can collect. The Social Security Administration (SSA) uses a specific formula based on your lifetime earnings to determine your benefit amount.
What are the parts of the SSN? ›
The Social Security number is a nine-digit number in the format "AAA-GG-SSSS". The number has three parts: the first three digits, called the area number because they were formerly assigned by geographical region; the middle two digits, the group number; and the last four digits, the serial number.
What is Part A and Part B of Social Security? ›
Medicare Part A (hospital insurance) is free for almost everyone. You have to pay a monthly premium for Medicare Part B (medical insurance). If you already have other health insurance when you become eligible for Medicare, you may wonder if it's worth the monthly premium costs to sign up for Part B.
