Understanding the ins and outs of Social Security and how they affect you becomes increasingly important as you approach retirement. Although Social Security can be complex due to the constant changes and less-than-ideal jargon, it can help if you focus on the important pieces that mean the most.
Here are three questions you should be able to answer if you plan to receive Social Security anytime soon.
Image source: Getty Images
1. What's your full retirement age?
Your full retirement age (FRA) is the age at which you're eligible to receive your full Social Security monthly benefit. Your exact full retirement age is based on your birth year, as follows:
| Birth Year | Full Retirement Age |
|---|---|
| 1942 or earlier | 65 |
| 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 full retirement ages are later, you can begin receiving benefits as early as age 62. However, doing so will reduce them based on how far away from your full retirement age you are. Benefits are reduced by 5/9 of 1% for each month within 36 months of your FRA and 5/12 of 1% monthly for each month over month 36.
If your full retirement age is 67 and you claim benefits at 62, for example, your monthly benefit will be reduced by 30%.
You also have the option to delay your benefits past your full retirement age, increasing the monthly payout by 2/3 of 1% for each month until you reach 70. Delaying benefits past 70 won't increase them, so doing so is pointless.
2. What role will Social Security play in your retirement income?
For some people, Social Security serves as supplemental retirement income. For others, it serves as the only source of retirement income. Whatever the case, knowing what role Social Security will play in your retirement income is essential.
A good starting place is knowing how much you'll need monthly in retirement. This will depend on your individual circumstances, of course, but a good baseline is the 80% rule. The 80% rule states you should aim to have 80% of your final working year's income to maintain your current lifestyle. For example, if your income is $120,000, you'll aim for $96,000 annually ($8,000 monthly).
You can adjust the percentage depending on whether you plan to downsize or upsize your lifestyle, but 80% is a good starting point.
Once you have an idea of how much you'll need monthly, you should get an estimate of what your monthly Social Security will be. The best way to do this is by checking your earnings record on the Social Security website (SSA.gov). Once you access your Social Security account, you'll be able to see how your monthly benefit will look depending on when you decide to claim benefits (early, at full retirement age, or late).
Knowing your expected benefits versus the retirement income you'll need can help you plan your finances in retirement. You may determine you need to actively work toward having other sources of income, like a retirement account. It can also help you determine when you claim benefits. If claiming early leaves you with too big a gap, you may want to consider delaying if you can.
3. Will you be working while receiving benefits early?
If you decide to take Social Security benefits early, you'll need to monitor how much you earn because it could affect your monthly benefit. Social Security uses a retirement earnings test (RET) once you earn over a certain threshold that's set each year.
For 2023, the most you can earn in the months leading up to full retirement age is $56,520. If you won't reach your full retirement age in 2023 and you take benefits early, the most you can earn is $21,240. Earning over the limit will reduce your monthly benefit, but the reduced amount will be gradually added back once you reach your full retirement age.
As an example, let's assume your full retirement age is 67, and you decide to take benefits at 65 while earning over the allowed limit. If the RET lowers your yearly benefits by $2,000, Social Security will withhold $4,000 over the two years until you turn age 67. Once you turn 67, Social Security will recalculate your monthly payments, increasing them to incrementally give you your $4,000 back.
