When you retire, Social Security benefits will become an important source of monthly income for you. But many people don't really understand much about how this federal program works, beyond the fact that you get monthly checks.
Learning a little bit more about the Social Security system can help to ensure you understand its role in your retirement. To get you started, here are four key Social Security facts you may not be aware of but are important to determining the income you receive.
1. Social Security is only designed to replace 40% of your income
When you retire, most financial experts advise that you'll need to replace at least 70% or more of pre-retirement income -- and Social Security alone cannot do that for you.
In fact, your monthly benefit from Social Security is designed to replace only about 40% of pre-retirement funds. This would leave you with a substantial shortfall if you don't have funding from other sources. Saving for retirement at as young an age as possible ensures you'll have additional financial resources and won't have to struggle to try to live on Social Security alone.
2. The age you claim Social security benefits affects your monthly check but not necessarily your total benefits
Social Security designates a specific age when you can retire with full benefits. This is called your full retirement age (FRA) and it's between 65 and 67, depending on your year of birth (you can find your FRA in this guide to full retirement age).
If you claim benefits before your FRA, your monthly benefit is reduced by a small percentage. It equates to around a 6.7% reduction for each of the first three years you retire before FRA and an additional 5% annual reduction if you retire more than three years ahead of FRA. If you retire after FRA, you can earn delayed retirement credits that actually increase your benefits by a small amount each month, which is about an 8% annual increase in benefits. This increase occurs only until age 70, after which no further increases are possible.
The reduction in monthly checks could be as much as 30% if you retire at 62 when your FRA is 67, while your benefits could be as much as 24% higher if you wait to age 70 to retire. This suggests that you should wait as long as possible to claim benefits to get the maximum income from Social Security. However, that's not necessarily always the case.
Social Security is actually designed so that beneficiaries get the same lifetime benefits, regardless of when they first begin receiving them, if they live to the age projected by actuarial tables. In other words, it shouldn't matter if you claim at 62 or claim at 70. At the younger age, you'd get checks for more years but they'd each be smaller and, in the latter case, you'd get larger checks for fewer years.
The age when you claim benefits matters most if you outlive your projected lifespan or pass away early. While this can be hard to predict, many applicants consider their family health history when deciding when to start getting benefits. If you expect to live longer than around 80 or 81 years of age, you'll likely be better off waiting to claim benefits until 70. But if you think you'll pass away sooner, then claiming earlier could make the most sense.
3. You can still get Social Security survivors benefits if you're divorced
Social Security survivors benefits are calculated based on your deceased spouse's earnings, and can sometimes be higher than the benefits you would get using your own work record as a basis. You can also claim survivors benefits much earlier than Social Security benefits. For instance, these benefits are available to you at any age if you're caring for a child of the deceased who is under age 16, at age 50 if you're disabled, or at age 60 otherwise.
Unfortunately, recent studies have shown close to two-thirds of those surveyed don't know they can receive survivors benefits on their spouse's work record if they were married for at least 10 years -- even if they've since divorced.
If you're unaware that you're entitled to these survivors benefits, you may miss out. Don't count on the Social Security Administration to clue you into this aspect of the law. In fact, government auditors found the Social Security Administration actually underpaid widows and widowers by an estimated $131.8 million by not properly informing them about benefits claiming options.
4. Working while getting Social Security benefits might result in missed monthly checks
Once you begin receiving Social Security benefits, you may decide you want to work in order to boost your income or fill your time. If you retired prior to full retirement age, however, working while getting benefits could lead to some of your checks being withheld.
The Social Security Administration has limits on how much you can earn before your retirement benefits are affected. These limits depend on how old you are:
- If you're working before the year you'll hit FRA, you can only earn so much income before benefits are affected. For 2019, the limit is $17,640. For each $2 above this threshold, $1 of your benefits will be withheld. So, if you earned $18,640 -- or $1,000 over the limit -- you'd have $500 in Social Security benefits withheld.
- If you're working in the year you'll reach your FRA, you can earn a larger amount before taking a benefit hit. In 2019, you can earn up to $46,920. For each $3 earned above this limit, $1 of your benefits will be withheld. So, if you earned $47,920, you'd be $1,000 over the limit and would have about $333 withheld from benefits.
When you have money withheld from your benefits because you earn over the limit, the Social Security Administration doesn't send you a monthly check until you've had the appropriate amount withheld. So, for example, if you normally receive benefits of $1,000 per month and have $2,000 withheld because of your excess earnings above income limits, you would end up getting no benefit checks for two months. After that, you'd go back to getting your full $1,000.
The money withheld does come back to you -- eventually. When you reach FRA, the SSA recalculates your benefits. It does this by figuring out how many months you didn't get a check but had an early filing penalty applied. That penalty is taken away. So, say you retired one year early but worked enough that your benefit check was withheld for six months of that year. You would normally see a 6.7% reduction in Social Security income because you retired a year early -- but the early filing penalty wouldn't apply for six of the 12 months, so you'd actually only have a 3.35% reduction.
Your monthly benefit will be made slightly higher once the SSA recalculates benefits at FRA and eliminates the early filing penalty in months you didn't get a check. It will take you a long time to make up for withheld benefits, but eventually, you'll do so because of the higher monthly income you receive after FRA.
Preparation is key
Now that you know a little more about Social Security, you should see how important it is to plan ahead. Armed with these facts, you should be better equipped to decide when to retire, whether to work after receiving benefits, whether to claim survivors benefits, and how much money you'll need to supplement Social Security.