Unless you have an exceptionally healthy nest egg, Social Security benefits will likely be an integral part of your retirement income. In fact, roughly half of baby boomers say they expect their monthly checks to be their primary source of income in their senior years, according to a survey from American Advisors Group.
If you're going to be depending on your benefits to make ends meet in your golden years, it's crucial to do your best to maximize those checks. And there are a few Social Security rules you need to understand to truly make the most of your benefits.
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1. Your benefit amount is affected by the age at which you claim
The amount you receive each month varies significantly based on the age you begin claiming benefits. The earliest you can file for benefits is age 62. However, by doing so, you'll receive much smaller checks than if you claim at your full retirement age (FRA), which is either age 66, 67, or somewhere in between. And if you wait to file for benefits until after your FRA (up until age 70), you'll receive a bonus amount on top of the full amount you're entitled to.
Depending on when, exactly, you claim, you may receive hundreds of dollars more or less per month. Say, for instance, your FRA is 67 and by claiming at that age, you'd receive $1,700 per month. If you were to claim at age 62, your checks would be reduced by 30%, leaving you with $1,190 per month. Or if you waited until age 70 to file for benefits, you'd receive a 24% bonus in addition to your full amount, or $2,108 per month. In other words, claiming at age 70 rather than 62 could nearly double your benefit amount.
Choosing the right age to claim largely depends on your unique situation. If your savings are slim and you expect to live a long life, delaying benefits might be the best choice. On the other hand, if you don't expect to live into your 80s or beyond, you may be better off claiming benefits as early as possible. No matter when you choose to claim, make sure you take the decision seriously.
2. Your benefits may be subject to state and federal taxes
Unfortunately, just because you've been paying Social Security taxes throughout your entire career doesn't mean you get to escape them in retirement. Depending on where you live and how much you're earning in retirement, you may be subject to both state and federal taxes on your Social Security benefits. If you're relying on your checks for a significant portion of your income, taxes can put a real damper on your retirement.
The good news is that there are 37 states that don't tax benefits, so there's a good chance you may be off the hook for state taxes. But many retirees do owe federal taxes on their benefits.
Whether your benefits are taxed at the federal level and exactly how much of your benefits are taxed depends on your "combined income," which is half your annual benefit amount plus any other retirement income you have. So if you're receiving $20,000 per year in benefits and receiving $30,000 per year in outside retirement income, your combined income is $40,000.
Here's what your tax situation would look like depending on your combined income:
| Percentage of Your Benefits Subject to Federal Taxes | Annual Combined Income for Individuals | Annual Combined Income for Married Couples Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Source: Social Security Administration
No matter how much you're earning per year, you won't pay federal taxes on more than 85% of your benefits. And if you're earning less than $25,000 per year (or $32,000 per year for married couples), you won't pay any federal taxes on your benefits.
3. You can potentially increase your benefits by working longer or increasing your income
You may think that your benefit amount is set in stone, but in reality, you have control over how much you receive.
Your basic benefit amount (or the amount you'll collect if you claim at your FRA) is based on an average of the 35 highest-earning years of your career. So that means if you increase your average, you'll also be increasing your benefit amount.
One way to increase your average is to work more than 35 years. By doing so, the SSA replaces some of your lower-earning years (likely from early in your career) with higher-earning years in its benefits calculation. Another way to increase your benefits is to pick up a side hustle and jump-start your income. That will also bump up your average earnings, thus boosting your benefit amount. If you're going to be depending on your benefits for a good chunk of income in retirement, it's wise to do whatever you can to increase those monthly checks while you still can.
Social Security benefits are an important part of retirement. Although they can be confusing and complex at times, the more you understand about how they're calculated, the better your choices will be to maximize them.
