Think You're Ready for Social Security? Not Until You Read This

Social Security isn't quite as simple as it may seem. It's not just a matter of waiting until you're 65 and then receiving checks from Uncle Sam. There are important things to know that can affect how much you receive from the program.

Here's a quick overview of what you need to know before you think about taking Social Security. If you know these things well before you retire, you can plan more effectively for retirement, too.

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Know how much money to expect from Social Security

Perhaps the most important thing to know is how much money you can expect to get from Social Security. For most people, it won't be enough to sustain you comfortable. The program was designed to replace about 40% of your pre-retirement income, if you earned an average income. (That percentage is higher for lower-income folks and lower for higher earners.) The average monthly retirement benefit was recently $1,375, which totals $16,500 per year. If your earnings have been above average, though, you'll collect more than that -- up to the maximum monthly Social Security benefit for those retiring at their full retirement age, which was recently $2,639. (That's about $32,000 for the whole year.) More specifically, you can find out how much you can expect to receive in retirement from Social Security at the Social Security website.

Once you have an idea of what to expect, factor it into your big picture. Figure out how much money you'll need in retirement and subtract what you expect from Social Security. Then figure out where the rest of your needed funds will come from. If you're still some years from retirement, you might save and invest aggressively. There's no guaranteed return from stocks, but the table below shows what you might accumulate over several periods if your investments generate 8% average annual growth:

Calculations by author.

Decide when to take Social Security benefits

Next, give some thought to when you'll start collecting your Social Security benefits. Don't assume that 65 is when you're supposed to start getting Social Security checks. The normal (or "full") retirement age has been increased for many of us. For those born in 1937 or earlier, it's 65, and for those born in 1960 or later, it's 67. For those born between 1937 and 1960, it's somewhere in between. Despite that, though, you can start receiving benefits as early as age 62 and as late as age 70.

For every year beyond your full retirement age that you delay starting to receive benefits, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter -- enough to turn a $2,000 check into a $2,480 one. Retire early and your benefits may be up to about 30% smaller. Note, though, that the system is designed so that total benefits received are about the same for those with average life spans no matter when they start collecting. Checks that start arriving at age 62 will be considerably smaller, but you'll receive many more of them.

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Know how to increase your Social Security benefits

Delaying starting to take Social Security benefits is not the only way to try to collect more money from the program. For example, it might be useful to get familiar with the formula that the Social Security Administration uses to compute your benefits. It's based on your earnings in the 35 years in which you earned the most, so if you only earned income in 26 years, the formula will be incorporating nine zeros, which will shrink your benefits considerably. Are you planning to retire after 32 years of work? It might be worth it to work three more years, if you want to get more benefits. Even if you've worked 35 years, if you're now earning much more than you have 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.

Consider spousal strategies, too, if you're married. One good strategy for many married people is to start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, the couple does get 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. Note, too, that even divorcees can collect benefits based on their ex's earnings history -- if they were married for at least 10 years and have not remarried. Also, spouses can collect "spousal benefits" based on the other's earnings history, getting up to 50% of that spouse's benefits, while widows and widowers can choose to start receiving 100% of their late spouse's benefit instead of their own.

Will your Social Security benefits be taxed?

Finally, know that some or all of your benefits might be taxed. If Social Security benefits make up all or a vast majority of your income, you likely won't be taxed on them at all. But if your income surpasses a certain level while you're receiving Social Security benefits, those benefits may end up taxed. No more than 85% of your benefits will ever be taxed, though.

To determine whether you'll have to pay taxes on Social Security benefits, you need to calculate your "combined" income, which is your Adjusted Gross Income ("AGI") plus nontaxable interest plus half of your Social Security benefits. The table below shows the taxation you can expect:

Data source: Social Security Administration. 

Your benefits may shrink some if you work during retirement, but it's not as bad as it sounds. The Social Security Administration explains: "If you're younger than full retirement age during all of 2017 [and collecting benefits], we must deduct $1 from your benefits for each $2 you earn above $16,920." The year you reach your full retirement age, the earning limit jumps to $44,880, and the penalty decreases to $1 withheld for every $3 earned above the limit. Fortunately, though, the money withheld isn't lost. Instead, it's factored into the benefit checks you receive later, which end up increased.

The more you know about Social Security, the more you can get out of the program. Be sure to take Social Security into account as you plan for and save for your retirement.