Social Security is a critical lifeline for millions of Americans, but even those who rely on it often don’t fully understand how it works or the nuances of the system. While most people know that Social Security provides a monthly income to retirees, the program has many complexities that can affect how much you receive, when you qualify, and how to make the most of your benefits. Here are three things you probably didn’t know about Social Security—but should.
1. Social Security Benefits Can Be Taxed
Many retirees are surprised to learn that their Social Security benefits may be subject to federal income taxes. Depending on your income level, up to 85% of your Social Security benefits could be taxed. The amount of tax you pay is determined by your combined income, which includes your Social Security benefits, as well as other sources of income such as pensions, wages, and investment income.
Here’s how it works: If you’re filing as an individual and your combined income exceeds $25,000, or $32,000 for married couples filing jointly, then a portion of your Social Security benefits may be taxable. It’s crucial to factor this in when planning your retirement income to avoid any surprises when it’s time to file your taxes.
2. Your Earnings Record Affects Your Benefits
Social Security benefits are based on your earnings record over the course of your career. The higher your lifetime earnings, the more you can expect to receive in monthly Social Security payments. The Social Security Administration calculates your benefits using your highest 35 years of earnings. If you worked for fewer than 35 years, zero earnings are factored in for the missing years, which can lower your monthly payment.
It’s important to note that Social Security uses your average indexed monthly earnings (AIME), which adjusts for inflation, to determine your benefit amount. This is why those who work consistently and earn a high income will generally receive larger Social Security payments. If you have gaps in your employment history, or if you were self-employed for part of your career, your Social Security benefits may be lower than expected.
3. You Can Start Receiving Benefits Before Full Retirement Age — But It’s Not Always a Good Idea
You may be eligible to start receiving Social Security benefits as early as age 62, but doing so comes with a significant trade-off: your monthly payments will be reduced. If you claim benefits before reaching your full retirement age (FRA)—which ranges from 66 to 67, depending on your birth year—your monthly benefit will be permanently reduced by a certain percentage. For example, if you start collecting at age 62, your benefits could be reduced by as much as 30%.
While starting early may seem tempting, especially if you’re in need of income, it’s important to weigh the long-term impact. Delaying benefits until you reach your full retirement age, or even further until age 70, can result in a larger monthly payment. Delaying your benefits allows your monthly payments to increase by 8% for each year you postpone collecting after your FRA, up until age 70. This strategy could make a significant difference in your retirement finances.
How to Maximize Your Social Security Benefits
To maximize your Social Security benefits, it’s important to plan ahead. Consider your retirement goals, the timing of your benefits, and how taxes may affect your monthly income. Understanding these lesser-known aspects of Social Security can help you make more informed decisions about when to claim your benefits and how to manage your retirement income.
It’s also worth noting that Social Security is evolving, with ongoing discussions about potential reforms. Staying updated on these changes and seeking advice from a financial advisor can help ensure that you’re making the most of your benefits in retirement.
For more details on Social Security benefits and tax implications, visit the Social Security Administration’s website.
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