Social Security benefits can help make retirement far more comfortable, especially if your personal savings are lacking. But if you don't fully understand how the program works and how your benefits are calculated, you could end up receiving less than you're expecting.
Social Security is complicated, and you don't have to understand every detail about how it functions. But you should at least know the basics so you can maximize your monthly checks. And you can start by understanding these three facts.
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1. You'll likely be taxed on your benefits
Yes, it's unfortunate but true. Even though you've spent your entire career paying into Social Security, you'll likely still need to pay taxes on a portion of your monthly checks.
The most important figure to know when it comes to Social Security taxes in retirement is what's called your "combined income," which is half your total benefit amount for the year plus any other retirement income you may have. So if you're receiving $20,000 per year from Social Security and also have $30,000 per year in other income, your combined income is $10,000 plus $30,000.
Here's how much of your benefits you may owe taxes on depending on your combined income:
| Percentage of Your Benefits You'll Owe Taxes On | Combined Income for Those Filing Taxes as an Individual | Combined Income for Those Who Are Married Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 per year | Less than $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Source: Social Security Administration.
Keep in mind that this is just for federal taxes; you may also owe state taxes on your benefits (although if you live in one of these 37 states, you might be able to avoid paying state taxes). Knowing how much you can expect to pay in taxes in retirement can help you better plan your financial future.
2. Your benefit amount is based on your 35 highest-earning working years
When calculating your benefit amount, the Social Security Administration takes an average of the 35 highest-earning years of your career. There are a few other calculations involved to consider cost of living adjustments, but the higher your overall income, the more you'll receive in benefits.
This also means you can potentially increase your Social Security benefits if you're strategic. First, make sure you work at least 35 years. If you work fewer than 35, you'll have zeros added to your benefit calculation, which will bring down your average and result in a lower benefit amount. But if you work more than 35 years, you can replace some of your lower-earning years (likely from early in your career) with more recent higher-earning years -- increasing your average.
Also, if you don't want to work longer than you have to, you can boost your benefit amount by simply increasing your income. Whether you pick up an extra job or take on some overtime at work, increasing your income will also increase your average when it comes time to calculate your benefit amount.
Keep in mind that your benefit can still change depending on what age you decide to start claiming benefits. Your basic benefit amount is what you'll receive if you claim at your full retirement age, but if you claim before or after that age, you'll receive smaller or bigger checks.
3. You may be entitled to benefits based on an ex-spouse's work record
If you're married, you may be eligible to receive spousal benefits based on your partner's work record. But even if you're divorced, you may still be able to claim benefits based on an ex-spouse's record -- as long as you meet certain eligibility requirements.
First, the marriage has to have lasted for at least 10 years. Second, you must not be currently married -- although if your ex-spouse has remarried, that won't affect your ability to claim benefits on his or her record. Finally, you have to be at least 62 to begin claiming benefits. Your ex-spouse must also be eligible to receive benefits, although if he or she is eligible but has not filed for them yet, you can still begin claiming your benefits as long as the two of you have been divorced for at least two years.
Even if you're eligible for your own Social Security benefits, you may be able to receive additional checks based on your ex-spouse's record. The SSA will pay out your benefit amount first, then if you're entitled to receive more based on an ex's record, you'll receive extra cash each month. Also, no matter how much you collect in benefits, it won't affect your ex-spouse's benefit amount.
It's important to understand which types of benefits you're eligible to receive, because you may not be notified by the SSA. If you don't know what you're entitled to, you might be missing out on extra money.
Social Security benefits can make or break your retirement, so make the most of them. The more you understand about the types of benefits you're eligible to receive and how much you're entitled to, the better you can plan for retirement.
