You probably wouldn't quit your job or hand over your bank account information without knowing how these decisions could potentially affect your finances. But when it comes to Social Security, people often start benefits without understanding how their choices will affect their checks and their lifetime benefit. That's an easy way to cost yourself money.
Here are three Social Security questions you should know the answers to right away. If you don't, take the time to review the information below and consider altering your Social Security plan, if necessary, to maximize your benefits.
1. Am I eligible for Social Security?
You must earn 40 credits to be eligible for Social Security based on your work record, where a credit is defined as $1,410 in earnings in 2020. This definition changes slightly every year. You're only allowed to earn up to four credits per year, so you must work a minimum of 10 years to be eligible. But these years don't have to be consecutive.
You can also qualify if you're married to someone who earned 40 credits, or you were married to a qualifying worker for at least 10 years and have not remarried. However, in these situations, the benefit you'll receive will only be 50% of the worker's benefit.
2. What's my full retirement age?
Your full retirement age (FRA) is the age at which you qualify for your standard Social Security benefit based on your work record. It is 66 if you were born between 1943 and 1954. Then it rises by two months for every year thereafter until it reaches 67 for those born in 1960 or later.
You don't have to wait until this age to claim benefits. You may start as early as 62. But for every month you claim benefits under your FRA, the Social Security Administration reduces the size of your checks. If you begin benefits right away at 62, you only get 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66.
Every month you delay benefits increases your checks slightly until you reach your maximum benefit at 70. This is 124% of your scheduled benefit if your FRA is 67, and 132% if your FRA is 66.
3. What factors influence my benefits?
In addition to the age you begin benefits, your work record plays a major role in determining the size of your Social Security checks. When calculating your benefit, the government looks at your average monthly income over your 35 highest-earning years, adjusted for inflation. So the more you earn while working, the larger your Social Security checks, up to a certain point. Only the first $137,700 you earn in 2020 is subject to Social Security taxes. If you're lucky enough to earn more than this, that's great, but it won't raise your checks any further.
The number of years you work also matters because if you haven't worked for at least 35 years, you'll have zero-income years weighing down your benefit calculation. If you earned $50,000 on average, adjusted for inflation, over 35 years, you'd have a monthly benefit of nearly $1,900, based on the most recent Social Security benefit formula. But if you'd earned an average of $50,000 over only 30 years, your benefit would drop to $1,700 per month.
On the other hand, if you'd worked more than 35 years, your benefits would likely go up because people typically earn more later in their careers. These higher-earning years would replace your lower-earning years in your benefit calculation, earning you larger checks.
Working and claiming Social Security at the same time could also affect the size of your checks if you're under your FRA. In that case, your benefits become subject to the Social Security Earnings Test. If you're under your FRA for all of 2020, you lose $1 for every $2 you earn over $18,240. If you'll reach your FRA in 2020, you lose $1 for every $3 you earn over $48,600 if you hit this amount before your birthday. Fortunately, this money isn't gone forever. Once you reach your FRA, the government recalculates your benefit to include the money it withheld, and your future checks will be larger.
If any of the above information was news to you, consider rethinking your plan for Social Security. Delaying benefits until you've worked a few more years or until you've reached your FRA could make a big difference in the amount of money you receive per month and over your lifetime. It may not be the right move for everyone, but it's an option worth weighing so you can feel confident that you're making the best decision possible.