Around 90% of seniors in the U.S. receive Social Security benefits, with 50% of married couples and 71% of singles relying on these benefits to provide at least half their retirement income .
If you're nearing retirement and about to become one of the 62 million Americans receiving Social Security benefits, it's important you understand exactly how Social Security works. This is especially true since some of the decisions you'll make when applying for benefits have big implications in terms of your monthly income.
If you're like most people and not quite sure what to expect, the good news is we've got the answers to your top Social Security questions right here.
1. How much will my Social Security benefit be?
The amount of Social Security benefits you'll receive is determined based on a formula that takes into account your 35 highest years of earnings. The formula determines the Social Security benefits you'd receive at Full Retirement Age (FRA) which is determined based on your birth year. For people born in 1960 or later, FRA is 67.
You can, however, claim benefits as early as 62, although benefits are reduced by an amount equal to five-ninths of 1% per month for the first 36 months before FRA and by an additional five-twelfths of 1% for each prior month. This benefit reduction is permanent; if you reduce benefits by claiming early, you'll receive reduced benefits for the rest of retirement.
The few options you have for raising your benefits again once you've claimed early are impractical for most. You could work while receiving benefits before reaching FRA to reduce benefits you receive each month and Social Security would then recalculate your benefits at FRA to take this into account. You could also rescind your application if you change your mind within 12 months of claiming benefits, but you'd have to repay all the benefits you'd already been paid.
You can also claim benefits late, resulting in Social Security benefits increasing by an amount equal to two-thirds of 1% until age 70, at which time there are no further increases.
To determine how much your Social Security benefits will be, sign into my Social Security. You'll see benefits estimates if you retire at 62, FRA, and 70. If you want to retire at a different age, you'll need to multiply your benefit at FRA by the reduction or increase determined by how many months early or late you'll be retiring.
If FRA is 67 and you'll be retiring at 65, that's 24 months early. Multiply 24 by five-ninths of 1% to get a 13.3% reduction in benefits. If your benefit would have been $1,500 at FRA, it would now be 13.3% lower, or around $1300.
Claiming Social Security early, or claiming late, sometimes make sense, but you'll need to calculate your break-even number to decide when the best time to claim Social Security benefits is. This involves determining the value of benefits you miss out on by claiming late and calculating how many months of higher benefits you'll need to break even.
2. How do I apply for Social Security benefits?
When you've decided you're ready to apply for Social Security benefits, you'll need to submit your application. You can apply:
- Online by submitting a Social Security Retirement/Medicare Benefit Application
- Via phone at 800-772-1213
- In person after making an appointment with your local Social Security office
To apply for Social Security benefits, you will need your Social Security number; proof of U.S. citizenship or lawful alien status; and a copy of your W-2 forms. If you are missing documents, you can submit an incomplete application and the Social Security Administration will assist you in obtaining the necessary documentation to obtain benefits.
Completing your online application for Social Security benefits will take around 10 to 15 minutes. You can use the same application to apply for both Social Security and Medicare benefits if you are eligible for Medicare coverage.
3. When do I apply for Social Security benefits?
You become eligible to apply for Social Security retirement benefits when you are at least 61 years and nine months old. However, you should wait until you are actually nearing retirement before applying. If you're 61 and nine months and don't want to retire until 70, you can wait years before applying.
When you're ready to apply for Social Security benefits, submit your application three months prior to the time you want your benefits to begin. This would mean submitting your application at age 66 and nine months if you hoped to begin receiving retirement benefits at a full retirement age of 67.
Social Security benefits are paid only for months in which you qualify for the full month of payments, and benefits are paid one month behind, with the Social Security payment date based on your birthday.
If you were born Sept. 15 and wanted to begin receiving benefits as soon as possible after turning 62, you would not qualify for benefits until the October after your birthday and would not receive the October benefit in your bank account until November.
If you're not yet ready to retire but are nearing your 65th birthday, you should submit your application for Medicare three months prior to turning 65.
3. Is my Social Security benefit taxed?
Once you begin receiving Social Security, you may have to pay taxes on your retirement benefit.
- If you file an individual return with income between $25,000 to $34,000 or a joint return with income of $32,000 to $44,000, you may owe federal tax on up to 50% of your Social Security benefits.
- If your income on an individual return is $34,000 or higher, or combined income on a joint return exceeds $44,000, up to 85% of your Social Security benefits could be taxed by the federal government.
It's important to realize "income" for determining whether Social Security benefits are taxed isn't necessarily your total income. Instead, "income" used to determine if Social Security benefits are taxable is equal to the sum of half your Social Security benefits plus taxable non-Social Security income and some -- but not all -- tax-free income, such as interest from muni bonds. You can use the calculator in this article to determine if you'll pay a Social Security benefits tax.
Thirteen states also potentially tax your Social Security income. These include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
Those with lower incomes in these states may be exempt from tax. However, if you are concerned about how a big tax bill will affect your Social Security benefits, you may want to consider moving to a state that is friendlier to retirees.
Deciding how to claim your Social Security benefits
There's a lot to think about when it comes to claiming Social Security benefits, including whether you can claim benefits on your spouse's work record.
It's worth doing your research and making sure you understand the fundamentals of the program -- especially if Social Security is going to account for a big portion of the income that keeps you going during your senior years.