Social Security plays a huge role in many people's retirement finances. Regardless if Social Security will be all, most, or just a portion of your retirement income, it's important to make sure you know what you're getting into so you can be as prepared as possible.
If you're planning to claim Social Security benefits in 2023, here are four questions you should answer first.
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1. Am I claiming benefits early, on time, or late?
In Social Security, your full retirement age (FRA) is the age you're eligible to receive your full Social Security monthly benefit. It's based on your birth year and is essentially your baseline.
| BIRTH YEAR | FULL RETIREMENT AGE |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration.
Although your FRA is the magic number, you can begin taking benefits as early as 62 or as late as 70. If you take benefits before your FRA, they'll be reduced: five-ninths of 1% if you're within 36 months of your FRA and five-twelfths of 1% monthly for each month over month 36.
Your benefits will increase by two-thirds of 1% for each month you delay them past your FRA. You can delay them past age 70, but it won't increase them any further, so there's no real need.
2. How much will you need in retirement?
You don't want to go into retirement oblivious to how much your expenses will be, especially if your retirement lifestyle will differ from your current lifestyle. If you're unsure where to start, you can use the 80% rule of thumb, which says you should aim to have 80% of your final working year's income. For example, if you earn $100,000 in the year before you retire, you'll aim for $80,000 annually in retirement.
The 80% rule is just a starting point that you can adjust to your personal situation. If you know you'll be adding expenses (such as traveling more), you may want to increase it. If you're downsizing your lifestyle, you can subtract from it.
3. How much will you be receiving?
To get an idea of how much your monthly benefits will be, you should access your earnings record on the Social Security website (SSA.gov). First, create an account. Once your account is created, it should show your annual wages and projected Social Security monthly benefit.
Your earnings over your career (and how much Social Security taxes you've paid) is a large part of what determines your benefit, so not only do you want to check this to get an idea of your benefit, but you also want to make sure there are no errors in your earnings record. It's not common, but it happens.
You don't want your earnings to be underreported and have your benefits unexpectedly lowered. If you find an error, fill out a Request for Correction of Earnings Record form and submit it to Social Security along with documentation proving the error.
4. Will you be working while receiving benefits?
Even if they don't need the money, many people decide to work while receiving Social Security benefits. You don't have to stop earning money just because you begin taking Social Security benefits; you just need to monitor how much you make because it could lower your monthly benefit.
Social Security has a retirement earnings test (RET) that it uses if you begin taking benefits before your FRA and earn over a certain amount. If you haven't hit your FRA and take benefits in 2023, your annual earnings limit is $21,240. If you'll reach your FRA in 2023, the most you can earn in the months leading up to your FRA is $56,520.
Although the RET reduces your monthly benefit, the reduced amount is added to your benefits once you reach your FRA.
For example, let's assume your FRA age was 67, and you decided to take benefits at 64 while earning over the allowed limit. If the RET lowered your yearly benefits by $5,000, Social Security would've withheld $15,000 over the three years until you reach age 67. Once you turn 67, Social Security will recalculate your monthly payments, increasing them in a way that could gradually give you your entire $15,000 back if you live long enough.
There's nothing wrong with working in retirement; just be aware of how it could affect your benefits.
