This article was updated on December 15, 2016. It was originally published on July 16, 2016.
There's a day that will arrive for most of us -- when we tell ourselves it's time to apply for our Social Security benefits. We can begin collecting them as early as age 62, or as late as age 70, and each of us has a "full" retirement age, at which we can expect to receive our full benefits. (For most working folks these days, that's between 66 and 67.)
It may all sound pretty simple, but there are some important considerations you need to think about before before you start taking Social Security.
Do you know how much money you can expect?
First off, do you even know how much income you can expect to receive from Social Security? It's smart to find out before you set the collection wheels in motion.
You can find out how much money you can expect to receive from Social Security via a visit to its website at www.ssa.gov. To give you a rough idea, the average Social Security retirement benefit was recently $1,355 per month, or about $16,000 per year, while the maximum benefit for those retiring at their full retirement age was recently $2,639 per month -- or about $32,000 for the whole year.
Have you worked enough?
Next, figure out whether you've worked enough. It's relatively easy to qualify for benefits -- you generally need the equivalent of about 10 years of work. But know that the formula used to compute your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation).
If you only earned income in 28 years, the formula will be incorporating seven zeros, which will shrink your benefits. If you're planning to retire after, say, 33 years of work, it might be worth it to work at least two more years.
Even if you've worked 35 years, if you're currently earning much more than you did in the past (on an inflation-adjusted basis), you might consider working for another year or two, as each high-earning year will kick a low-earning year out of the calculation, boosting your benefits.
Do you want bigger checks?
A common mistake people make regarding Social Security is not realizing how much control they have over the size of the checks they receive. If you elect to start collecting early, such as at age 62, your checks will be smaller than they would be if you started at your "full" retirement age -- as much as about 30% smaller. That can be OK, though, because per the Social Security Administration, "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between."
In other words, for those who live average lifespans, it's pretty much a wash. After all, the checks you get if you start collecting early might be a lot smaller, but you'll get a lot more of them.
To make your checks bigger, delay starting to collect them -- until age 70, if you can hold out that long. For every year beyond your full retirement age that you delay, your benefits will grow by about 8%. Delay from age 67 to 70, and you'll get benefits 24% bigger. If your full benefits would have been $2,000 per month, they would grow to $2,480 -- a lot more. That's a difference of $5,760 over a year.
Are you still working?
If you're still working, you might not want to start collecting your Social Security benefits just yet. That's because, while Social Security benefit payments are generally not taxed, they can be taxed.
That happens if your income during a year features not only Social Security benefits, but also significant sums from sources such as wages, self-employment income, interest, or dividend income. You'll never be taxed on more than 85% of your Social Security benefits, and if the benefits make up all or a vast majority of your income, you likely won't be taxed on them at all.
Below are the rules, per the IRS and the Social Security Administration. Note that "combined income" here refers to your gross income, plus nontaxable interest, plus half of your Social Security benefits.
- If you file your federal tax return as an unmarried individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income tops $34,000, then up to 85% of your benefits may be taxable.
- If you file a joint federal tax return and your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your combined income tops $44,000, then up to 85% of your benefits may be taxable.
- If you're married and file separate federal tax returns, you probably will be taxed on your benefits.
Depending on how much income you're receiving, you might not want to start Social Security just yet. Remember -- delaying it will also let your benefits grow.
Have you coordinated with your spouse?
Finally, know that married folks have more options when it comes to collecting Social Security benefits, and it can be very worthwhile to look into what strategies you might employ to collectively receive the most money from Social Security. For example, a couple might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying the collection of the benefits of the higher-earning spouse. That way, the couple gets some income earlier, and when the higher earner hits 70, they can collect extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks.
Clearly, there are a lot of things to consider before you apply for your Social Security benefits. Spend a little time learning more, in order to make the most of your benefits.
Longtime Fool specialist Selena Maranjian, whom you can follow on Twitter, owns no shares of any company mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.