4 Things Retirees Need to Know Before Claiming Social Security

Are you thinking about claiming Social Security benefits? Before you do, there are four key things you need to know so you can fully understand how much income your benefits will provide -- and how much of it you get to keep.

1. What your full retirement age is

Your age when you first start your benefits is one of the key factors that determines the size of the checks you receive. That's because you'll get your standard benefit only if you first claim it at full retirement age (FRA).

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Although some pre-retirees incorrectly believe they'll get their full benefit at 65, that's no longer the case and hasn't been for a while. Instead, FRA is between 66 and 67. The table below shows your specific FRA for retirement benefits depending on your birth year.

Table source: Social Security Administration.

Remember, if you start your benefits before reaching FRA, you'll see a check that's smaller than your standard benefit due to early filing penalties, while waiting until after it means getting a larger monthly income due to delayed retirement credits. The penalties apply by month, but early filing penalties add up to a 6.7% benefits reduction for each of the first three years your checks start before FRA and an additional 5% penalty for any prior years, while delayed retirement credits add up to an 8% annual increase for each year you wait. 

2. How many years of work history you have

The other important factor determining the amount of your benefits is the average wage you earned over the course of your career. Not your whole career, though. The Social Security Administration's formula involves determining your average wage in the 35 years your earnings were highest, after doing an inflation adjustment on wages. 

There's no deviation from this 35-year formula even if you happen to work for a shorter time. You'll just have some $0s included instead of years of wages. Obviously, this could bring down your average and lower your monthly benefits. On the other hand, if you've got at least 35 years in but are earning a lot at your current job, you may decide to stay at work for an extra few years before retiring so you can replace a few low-income years with higher ones. 

3. How much tax you'll owe on your benefits

For many retirees, the tax rate on Social Security benefits is 0%. That's because you aren't taxed on your benefits unless your provisional income reaches at least $25,000 for single filers or $32,000 for married joint filers. Your provisional income is determined by adding up all taxable income, some non-taxable income such as MUNI bond interest, and half of your Social Security benefit.

Once your provisional income exceeds these thresholds, you'll owe tax on up to 50% of your benefits if your income is below $34,000 as a single filer or $44,000 as a joint filer. And with income above this second threshold, you'll end up taxed on up to 85% of benefits. If you owe tax on your Social Security, it's charged at your ordinary income tax rates on the taxable portion of your benefits. 

4. What the rules are for working

If you're considering working while collecting Social Security benefits, you need to understand the Retirement Earnings Test could mean you temporarily forfeit part of your benefits. 

For those who have reached full retirement age already, you can work and earn as much as you'd like without benefits being affected. But if you'll work and are under FRA for the full year, you'll only be able to earn up to $18,240 before the SSA will begin withholding some of your retirement money -- specifically, $1 for each $2 earned above this threshold. If you're planning to work but will hit FRA later in the year, you'll also see benefits withheld at a rate of $1 for each $3 earned above a higher threshold of $48,600.

You should eventually get back the money you forfeit by working while collecting benefits, as the Social Security Administration recalculates your benefits at full retirement age to give you credit for the money you missed. But you can't count on having both money from work and your full Social Security benefit available in the meantime. 

By understanding the rules for working, claiming benefits, and paying taxes on them, you'll be able to make wiser choices both when claiming Social Security benefits and when determining the role they'll play in providing support as a retiree.