Social Security benefits play an important role in supporting you as a retiree. But, before you leave your job, there are a few things to know about how these benefits will work and how much you'll receive.
Here are three key facts about Social Security you must understand before you give up a paycheck for good.
Image source: Getty Images.
1. Social Security is only designed to provide part of your retirement income
The most important thing to know about Social Security is that it is only going to replace about 40% of the salary you were earning before retiring. It's not going to give you enough money to replace the 80% to 90% of pre-retirement earnings you'll likely need if you want to maintain a similar standard of living after you stop working.
It's not a glitch or mistake that your Social Security benefits won't provide enough income to live on. The retirement benefits program was never supposed to be your only source of support. Instead, it was meant to work in conjunction with money you saved, as well as with a pension from the company you worked for.
If you don't have a pension, you'll be left with just two of the three sources of income you were intended to have: Social Security and savings. You can't make your benefits fill the gap since you have limited control over how much those are worth, so you'll have to save more to provide the supplementary funds you need.
2. You could shrink your benefits if you claim early
You do have some control over how much you receive from Social Security.
See, you're entitled to a standard benefit based on a percentage of average wages over your career. But you only get that standard benefit amount if you claim your first Social Security check at your full retirement age (FRA).
Your FRA is based on birth year, but is between 66 and 6 months and 67 for anyone born in 1957 or after. You don't have to claim benefits right at FRA, though. You're allowed to get your first retirement check when you turn 62, or you have the option to keep waiting.
If you don't wait until at least FRA, you will shrink your benefit for each month you get a check ahead of that designated age. The benefits reduction is equal to 5/9 of 1% for the first 36 months and 5/12 of 1% for each month prior. Here's what this looks like in terms of an annual reduction in Social Security income if you claim benefits a full year or more early.
| If you claim benefits this many years early | You'll shrink your benefits by this much |
|---|---|
| 1 | 6.7% |
| 2 | 13.3% |
| 3 | 20% |
| 4 | 25% |
| 5 | 30% |
Table calculations: Author.
In contrast, delaying your benefits claim beyond FRA raises it by 2/3 of 1% per month, or 8% annually until age 70.
Make sure you understand that if you get your checks any time before your 70th birthday, you're going to get a smaller monthly income than you could have if you'd delayed. Of course, you'll also get money coming in earlier and get more checks over your lifetime, so you may be OK with this trade-off.
3. There's a chance you could owe taxes on your Social Security checks
Finally, you should know that you could be taxed by the IRS on Social Security checks once countable income exceeds $25,000 for single tax filers or $32,000 for married joint filers.
Up to 85% of benefits could become subject to federal tax, depending on how high your countable income is. Countable income is half of all Social Security benefits, all taxable income, and some non-taxable income. If you live in one of the minority of states that tax benefits, you could also be hit with tax on the state level.
It's important to understand all three of these Social Security facts before retirement, because they affect the amount of money you'll have. Make sure the Social Security benefit you'll end up with, along with your savings, will provide you with enough money to have a comfortable life in your later years.
