If you're coming up on retirement and you're planning on claiming Social Security, you'll want to have a good handle on how the program works beforehand. For example, did you know that up to 85% of your Social Security income could be taxable? Read on to learn more about how this valuable source of retirement income may impact you in your golden years.
No. 1: How to qualify for Social Security
To qualify for Social Security, you must accumulate 40 Social Security credits. Most Americans collect enough credits to qualify for Social Security over a 10-year career. However, there are certain workers who don't pay into the Social Security system and therefore won't qualify. For example, many teachers and other state and local employees don't pay into Social Security and therefore may not qualify for benefits.
No. 2: The ages to claim Social Security
If you've accumulated the necessary credits, you can claim Social Security at any point after you turn 62; however, there's no economic benefit associated with claiming benefits after you turn age 70.
Social Security pays out 100% of the benefit you will receive at your full retirement age. That age varies depending on the year in which you are born, but currently, the full retirement age is 66. The full retirement age for people born after 1960 is 67.
If your full retirement age is 66 and you claim benefits prior to reaching your full retirement age, then the amount you receive in Social Security will be reduced. For example, if your full monthly benefit at age 66 is $1,000 and you claim at age 62, then you would receive $750 per month.
Alternatively, if you wait to claim your benefits until after your full retirement age, you'll collect a bigger monthly payout. If your full retirement age is 66, your benefit will increase by 8% for each year you delay. For example, if your benefit at full retirement age is $1,000 and you wait until age 70 to claim, then your monthly benefit would be $1,320 per month.
No. 3: How much in Social Security benefits can you receive
Social Security is designed to replace roughly 40% of your pre-retirement income. The exact amount that you receive in Social Security benefits is calculated using a complex formula that adjusts your 35 highest income-earning years into current dollars. In 2016, the average retired worker is receiving $1,341 in monthly Social Security income. However, as you can see in the following chart, many people receive more or less than this amount.
No. 4: Working and Social Security
You can continue to work and collect Social Security. However, working can impact the size of your monthly Social Security check and the amount of your Social Security that's subject to income tax.
In 2016, if you are under full retirement age and earn more than $15,720 per year, then your Social Security benefit will be reduced by $1 for every $2 earned over that amount. This money is added back to your Social Security calculation and will increase your benefit once you reach full retirement age. There is no reduction in benefits associated with working once you reach your full retirement age
The amount of Social Security that is taxed is based on your provisional income, or adjusted gross income, plus nontaxable interest, plus one half of your Social Security benefit.
If you're single and your provisional income is between $25,000 and $34,000, you may have to pay taxes on up to half of your Social Security benefit. If you earn over $34,000 in provisional income, then you can be taxed on 85% of your Social Security income. If you're married and your provisional income is between $32,000 and $44,000, then you could pay taxes on up to half your benefit. If the two of you earn more than $44,000, then you may be taxed on up to 85% of your Social Security income.
No. 5: Social Security changes may be coming
The Social Security Board of Trustees releases an annual report every year on Social Security's finances. Unfortunately, the Trustees this year suggest that big changes may be necessary to strengthen the program for the long haul.
While payroll taxes finance the majority of Social Security outlays, the amount paid out to recipients has eclipsed the amount collected in payroll taxes since 2010.
The difference is being made up for from the Social Security Trust Fund, but the Trustees estimate that the Trust Fund will run out of money in 2034. If no changes are made to increase tax revenue or reduce benefits, then an across-the-board 21% cut to benefits will be necessary at that point.
Because Social Security is considered to be a valuable safety net for tens of millions of Americans, it's likely that Congress will act at some point to protect the program. For this reason, everyone who currently benefits from Social Security, or will in the future, ought to pay close attention to Washington over the coming years.