Nearly every American worker includes Social Security benefits as a part of their comprehensive retirement plan. Deciding when to receive your benefits, addressing tax implications and learning the impact it can have on your goals is an important step as you move closer to retirement. Let’s take a deeper look at the potential that your Social Security can provide you. To start, when you pay Social Security taxes, you will earn “credits,” that go toward your Social Security benefits over time. The amount of credit required to be eligible for retirement benefits depends on the year you were born. For example, according to the Social Security Administration, if you were born in 1929 or later, you need 40 credits (10 years of work). Once you earn credits, they stay on your record even if you stop working or go back to work. However, the government won’t pay any benefits until you earn the required amount of credits.
Key Points:
- Deciding the right time to start receiving Social Security retirement benefits.
- You’re eligible to receive Social Security benefits but want to continue working.
- Addressing Social Security benefits that are taxable.
- Managing Social Security benefits that are subject to tax.
- Family members that may be eligible for your Social Security benefits.
- Suggestions for applying for Social Security benefits.
- Could Social Security impact your pension from work?
- Social Security payments aren’t available in all countries.
- Getting the help you need from a financial professional.
Deciding When to Start Receiving Social Security Retirement Benefits
Deciding to receive Social Security benefits is a critical step in determining how much you will receive and how it may impact your retirement strategy and goals.
- Age 62: For people who are age 62 and are struggling financially, Social Security could be a very beneficial addition to their income. However, taking it before full retirement age (FRA), which is currently 67, you can expect to receive 30% reduction in monthly benefits with lesser reductions as you near FRA. If you can’t work due to health problems, you may consider applying for Social Security disability benefits. The amount of disability benefits received will be the same as full Social Security benefits. This will be converted to retirement benefits once you reach FRA.
- Age 67 (FRA): Age 67 is now considered full retirement age (for anyone born in 1960 or later). If you were born from 1943 to 1954, the full retirement age is 66. The full retirement age increases gradually if you were born from 1955 to 1960 until you reach 67. If you start receiving benefits at age 67, the percentage ranges from 28% for high earners, 42% for medium earners and 78% for low earners.
- Age 70: This is the optimal age to wait to take Social Security, if you can afford it. If you wait, your benefits will increase from the time you reach full retirement age, until you start to receive them. Doing so allows you to receive the largest monthly payment. Talk with a financial professional if you want to learn more about planning your retirement age.
Continuing to Work and Receiving Benefits Simultaneously
It’s possible to continue working and still qualify for retirement benefits. Income in (or after) the month you reach full retirement age will not lower your Social Security benefits while working. That only happens if your earnings exceed the limits before you reach FRA. For example, if you are younger than FRA, $1 is deducted from benefits for every $2 earned above the annual limit. In the year you reach FRA, 1$ of your benefits gets reduced for every $3 earned over the annual limit. Upon reaching FRA, you can work without having any benefits reduced, regardless of how much you earn. Talk to your financial professional about eligibility for the “special monthly rule.”
Are Social Security Benefits Taxable?
Your Social Security may be taxable at the federal level; however, it depends on your income level whether or not you have to pay anything. If you have other sources of income, such as a part-time job or retirement income through a 401(k), you may end up paying some income taxes on your Social Security benefits. Also, Social Security is taxed at any age if your income exceeds the specified limit. You may have heard that Social Security is no longer taxed after 70 or some other age but it isn’t true. To get an idea of whether you will owe any taxes on your Social Security benefits, take one-half of your benefits and add that to the amount of your other income. The technical term for this total is your “combined income.” It is calculated as follows:
- Nontaxable interest + adjusted gross income (AGI) + ½ of Social Security benefits = combined income.
If the combined income amount exceeds the limit set by the IRS, called the “base amount,” you will have to pay a tax. For 2024, the base amount is $25,000 for single filers, heads of household, qualifying widows or qualifying widowers with a dependent child. For joint filers, the base amount is $32,000. According to the IRS, those married and filing separately will likely have to pay taxes on their Social Security income. One crucial detail to remember is that if you do pay taxes on your Social Security income, you will never have to pay more than 85% of your Social Security benefits. This depends on your tax bracket, based on your filing status. For example:
- For single filers with a combined income between $25,000 and $34,000 would have to pay taxes on up to 50% of your Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of the benefits.
- For married couples filing jointly, if their combined income is between $32,000 and $44,000, they will pay taxes of up to 50% of their Social Security benefits. If their combined income is over $44,000, they would most likely have to pay taxes on up to 85%.
- If you’re married and file a separate return, you will most likely pay taxes on your benefits.
What Happens if Social Security Benefits Are Subject to Tax?
Approximately 40% of people who receive Social Security are subject to tax on their benefits. If 50% of your benefits are subject to tax, you would include the lesser of half the difference between your combined income and the IRS base amount or half of your yearly Social Security benefits. When it comes to more complex scenarios, such as 85% of your benefits being subject to tax, it's best to seek professional advice. Whether your benefits are partially or fully taxable, a financial professional can help you understand the potential impact on your financial situation.
Social Security Benefits for Family Members
If you’re eligible and receive Social Security retirement benefits, your family members might also qualify for benefits. Criteria for family members to be eligible include:
- Spouses age 62 or older
- Unmarried children age 18 or older with a disability that began before age 22
- Spouses younger than 62, if they care for a child entitled on your record younger than age 16 or has a qualifying disability
- Benefits for a divorced spouse
The Social Security benefits for family members section can be fairly complex and detailed, and a financial professional could help you determine which criteria apply to you and your retirement strategy.
What to do When You’re Eligible for Social Security Benefits
When you are of age, you can apply for retirement benefits using the following outlets:
- Online at ssa.gov
- Contacting a local Social Security office
Pensions From Work
If you paid Social Security taxes for the pension you get from work, that pension won’t affect your Social Security benefits. However, in some cases, a retirement or disability pension from work is not covered by Social Security, which could have an impact on what you receive.
Interested in Traveling to or Living in a Foreign Country?
Regarding most foreign countries, a U.S. citizen can travel to or relocate without having their Social Security benefits impacted. However, there are several countries where Social Security payments cannot be sent. If you work abroad, different rules apply. Contact a financial professional to learn more about receiving your Social Security in foreign countries.
Consider Consulting a Financial Professional
Consider consulting a financial professional before applying for your Social Security retirement benefits. Social Security is complex, and the content is modified annually. A financial professional can discuss with you the best direction on when to take your benefits, which aspects of Social Security impact you and your retirement goals and how to understand the financial language and concepts based on your real life scenarios. A financial professional may also be able to help mitigate unforeseen risks or challenges that you could face when a poor decision with long-term implications is made that wasn’t initially on your radar. Take the time to schedule an appointment for you and your family to meet with a financial professional today.
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