15 Social Security Rules That May Surprise You

As a retiree, you will probably find that Social Security is one of your most important income sources. Unfortunately, it's complicated to understand the rules of this retirement benefits program.

In particular, there are 15 rules that may surprise you that you need to know about to make informed choices about your retirement benefits. Here's what they are.

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Although you can start your Social Security checks at 62, you're penalized for doing so -- and many people don't realize this basic fact. The reality is, if you start your checks any time before full retirement age (FRA), early filing penalties will reduce your monthly benefit.

You could take a significant hit to your monthly Social Security by starting checks at a younger age. In fact, if your full retirement age is 67, you could lose 30% of your monthly Social Security income by claiming benefits starting at 62.

It's a common misconception that if you start checks early, you'll get a reduced benefit -- but will see your monthly income go up once you hit full retirement age.

The reality is that if you reduce your benefits with an early claim, that reduction permanently affects monthly income for the rest of your life. It's important to understand this reality when you make your claiming choice.

While penalties apply for early claims, late filers end up with bonus income. That's because anyone who waits beyond full retirement age to start their checks will find themselves earning delayed retirement credits.

Retirees with a full retirement age of 67 could score up to a 24% bump up in their monthly Social Security checks by waiting until 70 to start them. This would mean forgoing years of income, though, so it's important to carefully assess whether this is the right move for you.

There's also no advantage to waiting beyond 70 to start your checks, as no further delayed retirement credits are applied.

ALSO READ: 3 Reasons You're Better Off Claiming Social Security at 70

Average wages earned over your career are a key part of the Social Security benefits formula. But many people don't know their average is calculated over 35 years. Specifically, the Social Security Administration adjusts wages for inflation and then considers your 35 highest-earning years.

Since 35 years of work are always included in your average -- even if you didn't work that long -- having $0 earning years factored in when your average wage is calculated could significantly reduce your benefits.

Some retirees are better off not getting their own benefits but instead claiming spousal benefits on their husband or wife's work history. This can make sense when their partner earned more money.

Spousal benefits could be worth up to 50% of your partner's full benefit. There's a catch, though. The person claiming spousal benefits can get them only after their husband or wife has started receiving retirement benefits. For example, if a wife wants spousal benefits, she'd have to wait until her husband started his checks.

This is an important consideration when assessing the best time to claim benefits.

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Retirees claiming spousal benefits sometimes assume they're safe to start their checks as soon as their partner has reached full retirement age.

That's why it's so important to understand that early filing penalties apply to spousal benefits as well -- even if the primary earner has already hit FRA.

For example, say a younger husband is claiming benefits on his wife's work history. If his wife reaches a full retirement age of 67 but the husband is just 62, he'd have to wait a while to claim spousal benefits to avoid a significant reduction in monthly Social Security income due to early filing penalties.

While recipients of spousal benefits can lose monthly income due to early filing penalties, they can't boost their benefit by waiting beyond full retirement age to claim it.

Because of this weird rule, it makes no sense for anyone claiming spousal benefits to put off their claim past full retirement age as there's no financial incentive to do so.

While it's natural to assume you'd have to actually be married to get spousal or survivors benefits based on a partner's work record, that's not necessarily the case.

If you divorced after at least 10 years of marriage, you can still receive either spousal or survivors benefits based on your ex's work history. This is true as long as you don't remarry too soon if you're claiming survivors benefits, or don't remarry at all if you're claiming spousal benefits.

ALSO READ: Divorced? You May Be Able to Claim Social Security on Your Ex's Work History

If you work while on Social Security, your benefits could be affected if you haven't reached full retirement age yet. In 2022, you'll end up forfeiting some of your benefits once your income exceeds:

• $19,560 if you won't reach FRA at any time during the year
• $51,960 if you will reach FRA

You'll lose $1 in benefits for every $2 earned above the $19,560 limit or $1 in benefits for every $3 earned above the $51,960 limit. Eventually, at full retirement age, your checks will be recalculated to account for the income you missed due to exceeding these earnings thresholds.

Some retirees are taxed on part of their Social Security checks. This becomes an issue once provisional income exceeds $25,000 for single filers or $32,000 for married joint filers. Ultimately, retirees could face tax on up to 85% of benefits, depending on earnings.

Provisional income is half your Social Security checks, all taxable income, and some nontaxable income. A growing number of retirees have a provisional income above these thresholds, so more people are subject to tax on Social Security each year because the income limits aren't adjusted to account for wage growth.

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It's not just federal taxes retirees have to worry about.

States have different Social Security tax rules. If you live in one of the 13 states that impose tax on some benefits, you need to understand how much this could cost you.

ALSO READ: 37 States That Don't Tax Social Security Benefits

One of the biggest shocks many retirees face comes when they see just how low their Social Security benefits are.

See, Social Security was designed as one of three primary retirement income sources along with a pension and savings. Because of this, the program's rules ensure benefits replace about 40% of pre-retirement income.

Since this isn't enough for most people to live on, it's crucial to have a plan to supplement your benefits.

Another rule that could come as a surprise relates to the fact that the Social Security benefits formula is progressive. The formula entitles seniors to a standard benefit equaling:

• 90% of average wages up to a first earnings limit
• 32% of the income between a first and second earnings limit
• 15% of the amount equal to or greater than the second limit

This means that while higher earners get a larger benefit, it actually replaces less than 40% of pre-retirement earnings -- so it will be even harder for these wealthier workers to live on Social Security without added savings.

Retirees who make an early Social Security claim and end up regretting it will be pleased to learn there is a rule allowing them to undo their decision. However, only a limited number of people can take advantage of it.

If you first started getting benefit checks less than a year ago, it's possible to rescind your claim so it will be as if it never happened. The big catch, though, is that you'll have to repay any Social Security income earned to date -- so not everyone can do that.

Finally, Medicare premiums are typically taken out of Social Security checks -- so it's important retirees understand that raising those premiums will result in a reduced benefit.

Retirees could end up increasing their Medicare costs if they sign up late for benefits. Since the penalty for late Medicare sign-ups can be substantial, seniors need to make sure they don't delay in getting covered after reaching the eligibility age of 65.

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If you want to enjoy your later years with the maximum financial security, making informed choices about Social Security is crucial.

While these benefits can't be your only income source, they're still going to make up a big part of your retirement income -- and you don't want to inadvertently reduce the funds they provide.

Now that you know these 15 surprising rules, hopefully you can make the choice that's right for you.

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