Depending on your age or circumstances, retirement may be decades away or just around the corner. Social Security income is an important part of many Americans’ retirement plans. Though Social Security benefits can be difficult to calculate and understand.
Learning about Social Security now has many benefits. This includes making sure you don’t miss out on this important benefit no matter where you are in your career.
What is Social Security?
Social Security is a federal government program that provides monthly income for those who qualify. Monthly income benefits are based on lifetime earnings, retirement age, and other factors. For retirees, earnings over the year, retirement age, and other factors impact their income. The income provided by Social Security is inflation adjusted each year.
President Roosevelt signed The Social Security Act in 1935 to provide income for retirees and combat elder poverty. The Social Security Act amended over the years to provide support for the disabled, children, and spouses of deceased workers.
Why Social Security is important
Social Security is a steady and reliable source of income for many. In fact, it accounts for 50% or more of the income for 37% of elderly men and 42% of elderly women. And for 12% of elderly men and 15% of elderly women, Social Security provides 90% or more of their annual income. Without Social Security, many elderly men and women would live in poverty.
Social Security income is inflation adjusted each year. Hence, it provides a type of economic security different from other types of retirement benefits. While other types of retirement benefits, such as investments, may decrease in value over time or even run out, Social Security benefits are payable until death.
It’s also important because many Americans don’t have retirement plans outside of Social Security. Employer-funded pension plans are becoming less common, and only 16% of people who don’t have access to an employer-sponsored retirement plan have retirement savings.
Social Security isn’t designed to be a complete replacement for retirement savings, so it’s still important for individuals to save for retirement through some other method. But Social Security provides additional, reliable income for many people who are retired.
How does Social Security work?
Payroll taxes funded Social Security. You probably already know that your employer withholds 6.2% of your paycheck for Social Security taxes. What you may not know is that your employer also matches your contribution so that a total of 12.4% of your income, up to the annual income limit, is paid to Social Security taxes. You pay the entire 12.4% yourself if you’re self-employed.
The tax is only paid on a certain portion of your income. For 2023, the income limit is $160,200. You won’t pay Social Security taxes on any earnings over this limit.
The Social Security taxes you pay are distributed to a trust fund, and payments from this trust fund are made to current recipients.
Everyone who has contributed to Social Security is entitled to receive benefits from it, as long as they meet certain requirements. Benefits are paid out monthly, but calculating the amount you may receive when you retire can be complicated.
Employees qualify for Social Security retirement benefits by earning Social Security credits. You can earn up to 4 credits per year, and most people need 40 credits to qualify. For 2023, you earn 1 credit for earning $1,640. You’ll receive all four credits if you earn at least $6,560 for the year.
Benefit payment amounts are based on factors like how much you earned while you were working, your retirement age, and your income during retirement.
Photo by Greta Hoffman
Social Security benefits
You can begin drawing Social Security retirement benefits as early as age 62; however, you’ll receive less income than you would if you had waited until full retirement age to retire. The full retirement age is 67 years for those born in 1960 or later. If you retire at your full retirement age, you’ll receive 100% of the benefit payment you’re entitled to, based on your earnings. If you choose to wait until age 70 to begin drawing Social Security payments, your benefits may be even higher.
Your Social Security benefit amount is based on a variety of factors, including your age at retirement. Social Security payments typically take direct deposit each month and are adjusted annually for inflation. You may also receive Social Security benefits from your spouse’s or ex-spouse’s Social Security record.
Who can sign up for Social Security?
You can sign up for Social Security if you have enough work credits and are at least age 62. If you qualify as a spouse or ex-spouse you were married to for at least ten years, you can sign up for social security.
People can also sign up for Social Security if they are disabled, a widow, or dependent on someone who is deceased. You can also sign up for Social Security if you care for a disabled child.
How to become eligible for Social Security
To receive Social Security retirement benefits, you must have 40 work credits. Generally, if you’ve worked for ten years and have paid into Social Security you will have the credits. You also must be at least age 62. However, you can decide when you want to start drawing Social Security.
You may also become eligible if you become disabled or if you are a surviving spouse or ex-spouse of someone who is deceased.
How are Social Security Benefits calculated for different people?
Social Security benefits are calculated based on a variety of factors including your income over your working years, how old you were when you retired, and the income you earn while you’re retired. You can always check your Social Security benefits through your Social Security statement.
Here’s how Social Security benefits are calculated for different people.
Individuals
To calculate benefits for individuals, Social Security uses average indexed monthly earnings. Your earnings for your 35 highest-earning years are measured against the national average wage index for those years, comparing your earnings for those years to the general wage levels of those years.
That number is then used to calculate your average indexed monthly earnings over your top 35 years of earnings. A formula is then used to calculate your basic benefit. In case you have worked for less than 35 years of your life, zeros are used for the years with no earnings.
If you decide to retire at age 62, your Social Security earnings will be reduced by about 0.5% for each month you receive benefits before your full retirement age. If your full retirement age is 67 but you retire at 62, you will receive only 70% of the benefit to which you’re entitled.
However, if you wait past your full retirement age to begin drawing Social Security, you’ll receive an additional 8% per year, or ⅔ of a percent per month, up until age 70. Delaying retirement past age 70 will not increase your benefits.
Please note that only income on which Social Security taxes were paid counts toward these calculations. Some state and federal government employees may be covered by a pension plan and not pay Social Security taxes on their earnings. This is also true of some railroad employees. Some members of religious organizations may also have opted out of paying Social Security.
Even if you didn’t pay Social Security tax on some of your wages, you may still have earned enough during the years you worked in other positions or through different types of part-time work to qualify for Social Security.
Married couples
If both people in the marriage are eligible for Social Security, they will each receive their own Social Security income based on the calculation above and their individual earning history.
However, Social Security also provides spousal benefits if one spouse didn’t work or had a much lower income than the other. Spousal benefits provide Social Security payments to the spouse of the worker and can be up to 50% of the worker’s benefit.
The spouse will first receive their own Social Security benefits based on their own earning record. If this amount is lower than 50% of the worker’s record, the benefit the spouse receives will be increased to reach their spousal benefits. Spouses will not receive both benefits.
Spouses will also receive reduced benefits if they retire before their own full retirement age.
Divorced people
Spousal benefits may apply to spouses even if the worker is divorced from the spouse.
Ex-spouses can receive Social Security benefits based on their ex-spouse’s record as long as they are unmarried, the marriage lasted at least 10 years, they are at least 62 years old, and the benefit they would receive from their own record is less than what they receive as an ex-spouse. An ex-spouse receiving Social Security income doesn’t reduce the primary workers’ benefits.
Surviving ex-spouses may also be eligible to receive benefits even if the primary worker is deceased, as long as the marriage lasted for at least 10 years. In this case, the ex-spouse can still receive benefits even if they have remarried, as long as they remarried after age 60 (or age 50 if they have a disability).
Widows/widowers
Widows and widowers can also receive benefits from their deceased spouse’s records. If the deceased spouse qualified for Social Security, the widow(er) can receive reduced benefits as early as 60 years old. They may receive benefits as early as 50 years old if they have a disability that began within seven years of the deceased spouse’s death.
Widow(er)s can also receive benefits at any age if they are caring for the deceased worker’s child under age 16 or a child with a disability who receives disability benefits.
Remarrying after age 60 does not impact the survivor’s benefits. Widow(er)s who qualify for their own Social Security can receive benefits under their spouse’s record and switch to their own record when they reach their own retirement age.
Photo by MART PRODUCTION
Disabled individuals
In general, Social Security Disability Income benefits may be paid to workers whose disability causes them to be unable to work for over a year. The Social Security Administration has its own definition of what qualifies as a disability. If you meet this requirement and have at least 40 work credits (20 of which were earned in the last 10 years), you may qualify to receive payments. The requirements are less for younger workers.
The benefits you receive are based on your work credits, your earnings, and how old you were when you became disabled. These payments may be reduced if you have income from other sources such as worker’s compensation or a state disability benefit.
Social Security benefits for each age group
You can receive Social Security retirement benefits as early as 62, but if you can wait longer to retire your benefit will increase as you age. You’ll receive 100% of your Social Security benefits if you wait to retire until you’ve reached full retirement age.
The full retirement age varies based on the year you were born. While it was 65 years for many years, a law passed in 1983 gradually raised the full retirement age. The chart below explains how the retirement age is calculated for those born in 1943 or after.
| Year Born | Full Retirement Age |
| From 1943 to 1954 | 66 years |
| 1955 | 66 years, 2 months |
| 1956 | 66 years, 4 months |
| 1957 | 66 years, 6 months |
| 1958 | 66 years, 8 months |
| 1959 | 66 years, 10 months |
| 1960 and after | 67 years |
DecidingDecided, when to begin drawing Social Security, is an important decision, because it can impact the payments you receive for the rest of your life.
A. Retiring between the age of 62 and your full retirement age
If you decide to begin drawing benefits at exactly age 62, you’ll see reduced benefits from 25% to 30% each month, depending on the year you were born. But even though your monthly benefits may be smaller, you’ll receive them for a longer period of time since they will continue until your death.
Your monthly Social Security payment is reduced by 5/9 of a percent for each month before you reach full retirement age (up to 36 months) and by 5/12 of a percent per additional month.
In other words, after you turn 62 you may begin receiving reduced Social Security payments. However, for every month after age 62 that you wait to retire, your retirement payments will increase until you reach full retirement age. And once you reach full retirement age, you will receive 100% of your benefit.
B. Retiring at your full retirement age or later
If you wait to retire until your full retirement age, you’ll receive 100% of your Social Security benefits.
However, if you delay retirement even by one month after turning your full retirement age, you’ll begin to see an increase in your benefits.
For every month you wait to retire after your full retirement age, you’ll receive a delayed retirement credit. For those born in 1943 or later, this is ⅔ of 1% per month or 8% per year. If you were born between 1930 and 1942, you can see your delayed retirement credit increase on this chart.
C. Retiring after age 70
Once you have reached age 70, you will no longer receive any increased benefit from waiting to receive Social Security payments. Those born in 1960 or later can receive 124% of their Primary Insurance Amount by waiting until age 70 to take Social Security.
For those born prior to 1960, this chart can help you find your benefit based on the year you were born and your age when you begin to draw Social Security benefits.
How to sign up for Social Security
You can sign up for Social Security by visiting the Social Security website. Apply through this website whether you’re applying for retirement benefits, disability benefits, survivor benefits, or supplemental income if you’re disabled or over age 65.
Moreover, try calling the National 800 Number at 1-800-772-1213 or your local Social Security office for help.
If you’re not sure whether you qualify for Social Security benefits, you can check your eligibility by answering a few questions on the Social Security website.
If you’re signing up because of a disability, you can also apply online.
Strategy to maximize your benefits
Whether you’re already at retirement age or just planning ahead, you may be able to make changes that can maximize your Social Security retirement benefit. Here are 6 ways to maximize your benefits.
1. Waiting to retire
As we’ve already mentioned, waiting until age 70 to retire will give you the largest possible monthly Social Security benefit. However, this isn’t always the best choice for everyone. For example, for people with a family history of long lives, it may be a good choice to wait until age 70 to retire. But if you’re in poor health or don’t expect to live a long life, it may be best to begin taking your Social Security benefit sooner.
The Social Security Administration (SSA) suggests looking at several factors before deciding to retire, including if you’ll have access to health insurance, if you may be eligible for payments through someone else’s record, and if you have access to other income if you wait to draw Social Security benefits.
2. Pause your Social Security payments
If you’ve already begun taking your Social Security benefits before reaching 70, you can voluntarily suspend your payments.
Suspending your payments allows you to earn delayed retirement credits. This will ultimately increase the payment you receive beginning once you turn 70. You can suspend your payments by notifying the SSA either orally or in writing. Your payments will automatically resume once you turn 70.
3. Maximize your monthly payment
Many people earn more in their careers as they age since wisdom and experience often result in a better income. Since your Social Security benefit is calculated based on your 35 highest earning years, you may be able to increase your benefits by waiting to retire.
In other words, you can increase your monthly payment if you continue to work because you’re replacing a lower-earning year with a higher-earning year.
4. Be careful with your outside income
If you haven’t reached full retirement age, your Social Security income may be reduced if you have income from working. While you can still receive Social Security payments while working, it may impact your Social Security benefits.
Income from pensions, IRAs, retirement accounts, interest income, annuity payments, and others will not impact your Social Security payment.
If you do decide to work, you can maximize your Social Security benefits. Here’s how: by making sure you stay under the earnings threshold if you haven’t yet reached your full retirement age. For 2022, the annual earnings limit is $19,560. Your Social Security payments will be reduced by $1 for every $2 you earned above the limit.
Only wages, bonuses, commissions, and vacation pay are counted toward your earnings. If you’re self-employed, only your net profit is counted.
Your Social Security benefits are unaffected by your income once you reach full retirement age, though they could be taxed.
Still not sure how your earnings may impact your Social Security payment? You can use the SSA’s Retirement Earnings Test Calculator to help you estimate.
5. Don’t wait past age 70 to begin drawing Social Security
If you decide to wait until age 70 to retire, you’ll receive the maximum benefit amount. But there is no benefit to waiting until after age 70. As you age to 70, you don’t have to worry about how your earnings may impact your Social Security payments. You will not receive additional credits for waiting past age 70, so your monthly payment will not continue to grow.
Make sure you apply at least three months before you would like to begin receiving your payments. It can take the SSA up to three months to process applications. Hence, this will make sure there is plenty of time for them to process your application. This way, you won’t miss any payments.
6. Minimize your taxes
Your Social Security income may be taxable depending on how you file your tax return. It’s $25,00 if you file as an individual and $32,000 if you file a joint return.
You can minimize taxes on your Social Security income by choosing when to draw on other sources of income. For instance, while delaying receiving Social Security benefits, you can withdraw money from an annuity or pension early in retirement.
Another strategy is by saving for retirement in a Roth IRA. Contributions to Roth IRAs are made with after-tax earnings. So when you withdraw funds from your ROTH fund, those funds do not count as taxable earnings.
You can also minimize your Social Security taxes by retiring in a state that doesn’t tax them. Currently, 12 states tax Social Security payments in some form. These states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Each state has its own laws about income thresholds and Social Security exclusions. These laws are also subject to change. So it’s a good idea to check for your state’s laws before you begin drawing Social Security.
No matter how much you earn, a maximum of 85% of your Social Security income is taxable.
Conclusion
Social Security has been a staple of American retirement since its implementation. But it can still cause confusion. Like all the regulations and rules about how benefits and taxes are calculated, and how they are affected by income. Do you have any unanswered questions about Social Security? Send us a message! Ask us in the comment section!
Looking for new ways to earn income as you near retirement? Starting a consulting business could be a great choice to optimize the experience you’ve gained over your working years.