15 Critical Social Security Rules to Understand Before You Retire

There's no denying it: Social Security is complicated. There are rules upon rules that affect your benefit amount and the benefits available to your family members.

The upside is that some of these rules give you options. You can choose when to collect Social Security. You can also choose to receive your benefits while you're still working. You can even change your mind on timing after you've filed your Social Security application.

With choice comes complexity. But as long as you know the rules, you can make smart decisions that contribute to the best retirement possible -- for you and your family.

Read on for a look at 15 Social Security rules you should know before you retire.

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You pay for your Social Security retirement benefit indirectly via payroll taxes. Specifically, the FICA line item on your paycheck includes a 6.2% Social Security tax. The rest of your FICA taxes fund Medicare.

Social Security uses payroll taxes collected this year to pay out benefits for current-year recipients. In other words, the money you pay in isn't earmarked for you. When you retire, taxes on those who are working should cover your benefits.

This is useful to know because it's one reason why Social Security has a projected funding shortfall in the 2030s. While lawmakers can resolve the issue with legislation, there is the chance your benefit outlook will change. Saving and investing more now is the best way to protect against a lower-than-expected Social Security benefit.

ALSO READ: Is Social Security Doomed to Benefit Cuts?

You don't need a full-time job to qualify for Social Security retirement benefits.

Social Security's work credit system determines your benefits eligibility. You earn credits by working at a job that withholds FICA taxes. Credits are tied to your income, and the income associated with one credit changes annually. In 2022, you earn one credit for every $1,510 you make -- up to a maximum of four credits per year.

To be eligible for Social Security, you need 40 total credits. You can reach that benchmark with 10 years or more of part-time or full-time work.

Unfortunately, earning more than 40 credits doesn't increase your benefit. But earning a higher average income will.

Social Security calculates your benefit by averaging your inflation-adjusted income from your highest-paid 35 years of working.

If you have less than 35 years on your work record, the missing years go into the calculation with zero income. Those zero-income years reduce your average, which in turn lowers your benefit.

The takeaway? Work at least 35 years if you can. That way, your benefit should replace a higher percentage of your working income average.

ALSO READ: 3 Ways to Score a Richer Social Security Payout

Social Security calculates your benefit from your work records. If those records are incomplete, your retirement benefit will be too low.

The good news is, Social Security has a process for correcting work record mistakes and omissions.

You can find your official work history by logging into my Social Security. If any income is missing, look in your own files for W-2s, tax returns, or pay stubs that document the missing amounts. If you don't have paper documentation, write down the details of the income, including the employer's name, dates, and amounts.

Then call Social Security and explain the issue. They'll work with you to update their records.

Your full retirement age (FRA) is the age you qualify for your primary insurance amount. This is your benefit without any early retirement reductions or delayed retirement credits.

If you were born after 1959, your FRA is 67. If you were born between 1955 and 1959, your FRA is 66 years and a few months. Specifically, it's 66 years and two months for those born in 1955, 66 years and four months for those born in 1956 -- and so on, up to 66 years and 10 months for 1959 babies.

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You can claim Social Security at age 62, which could be up to five years before your FRA. Claiming early has a drawback, though. Social Security will reduce your benefit.

The reduction formula has two parts. For each of the first 36 months you claim early, your benefit is reduced by 5/9 of 1%. If you take your benefits more than 36 months early, the monthly reduction for the remaining months is 5/12 of 1%. That works out to a maximum reduction of 30%.

Note that your lifetime benefit should be about the same no matter when you claim. The timing only dictates whether you get a longer stream of lower payments or a shorter stream of higher payments.

ALSO READ: 3 Great Reasons to Take Social Security Benefits at 62

If you claim Social Security before your FRA, there are limits to how much you can make from working. Exceed those limits and Social Security will trim your benefits.

The income limits change annually. In 2022, you can earn up to $19,560 in the years before you reach FRA. For every $2 you earn above that amount, your benefit gets reduced by $1. In the year you reach FRA, you can earn up to $51,960. For every $3 you earn above that higher limit, your benefits dip by $1.

Note that once you reach FRA, the income caps drop away. You can work as much as you want and collect Social Security simultaneously without it affecting your benefit.

If you claim Social Security after FRA, you'll earn delayed retirement credits. These increase your Social Security income. The increase is 8% per year or 2/3 of 1% per month.

Delayed retirement credits flow through to your benefit each January. So, if you claim two years after your FRA, you may not see the credits earned in the second year immediately. This happens when you claim before year-end -- say, in August or September. You'll see the credits applied the following January.

ALSO READ: The No. 1 Reason to Claim Social Security at Age 70

There are three tiers of taxability on Social Security income. Some beneficiaries pay no taxes. Others are taxed on 50% or 85% of their retirement benefit. How much you make outside of Social Security largely determines which tier applies to you.

Single filers with combined income of $25,000 or less and married filers with combined income of $32,000 or less aren't taxed on their Social Security. Combined income is half of Social Security plus other income such as pensions, wages, and investment income.

Single filers earning $25,000 to $34,000 in combined income are taxed on 50% of their Social Security income. The same goes for married filers whose combined income is between $32,000 and $44,000.

If your combined income exceeds $34,000 as a single filer or $44,000 as a married filer, you pay taxes on 85% of your Social Security retirement benefit.

Spousal benefits are available to those who haven't met Social Security eligibility requirements with their own work history. Spouses aged 62 or older can earn 32.5% to 50% of the breadwinning spouse's retirement benefit -- but only if the breadwinning spouse is already collecting Social Security.

Spousal benefits are subject to reductions when they're claimed early. Also, the normal income limits apply to spouses who work and receive spousal benefits before their FRA. Note that spousal benefits do not earn delayed retirement credits.

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Spouses who have earned the minimum 40 work credits will receive either their own benefit or a spousal benefit, whichever is higher. If you qualify for both, Social Security may require you to file for both -- though you'll only receive the higher amount.

If you and your spouse collect your own Social Security benefits, there is no marriage penalty or household benefit limit. You'll each receive your retirement benefit as individuals.

Your ex-spouse may be eligible for a spousal benefit off your work record if the marriage lasted 10 years or more. There are other requirements, though. Your ex must be at least 62 years old and unmarried. And, as with current spouses, the ex's own benefit must be less than the available spousal benefit. If it's not, the ex will receive benefits off his or her work record instead.

You can remarry without affecting your ex-spouse's eligibility for a spousal benefit.

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Cost-of-living adjustments (COLAs) are annual inflation-based increases to your Social Security benefits. Social Security calculates COLAs by averaging the inflation rate from July, August, and September in the current year and comparing that to the same average for the prior year. If the current year's average is higher, the COLA will be the percentage increase. That amount is added to benefits in the following January.

COLAs help you manage inflation, but they're not an exact science. COLA critics say the calculation doesn't adequately reflect real cost-of-living increases for seniors. In other words, it's smart to implement other inflation strategies to protect your income in retirement.

If you have a pension from a job that did not withhold FICA taxes, Social Security may reduce your benefit under the Windfall Elimination Provision, or WEP. The reduction applies to these pension earners who have not paid Social Security taxes on "substantial earnings" for at least 30 years. The threshold for substantial earnings changes every year, but it is $27,300 in 2022.

The benefit reductions under WEP are scaled, based on the length of your substantial earnings record. You'll see the largest reduction if you paid Social Security taxes on substantial earnings for 20 years or less. This reduction is applied before any timing-related adjustments to your benefits.

If WEP applies to you and you're near the 20-year threshold, you might consider postponing retirement temporarily for higher Social Security income.

ALSO READ: 2 Ways Government Pensions Can Reduce Your Social Security

Deciding when to file for Social Security is a challenge. Usually, the right timing balances your income requirements with your life-quality needs. And even after careful deliberation, you may realize later that you made the wrong decision. Fortunately, you can change your mind under certain circumstances.

Your two options in this scenario are withdrawing your application or suspending your benefits. You can withdraw your application within 12 months of filing, one time only. You'll have to repay all benefits received on your record, including spousal benefits.

Or, if you're between FRA and age 70, you can suspend your benefits. You will earn delayed retirement credits for the months your benefits are suspended. You can restart benefits upon request. Or, wait until your 70th birthday and they'll start up again automatically.

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