Pop quiz! What's your full retirement age for Social Security? How much money might you expect to collect from Social Security? Many people can't answer these questions, and that's not good, because Social Security income is likely to be critical to them in retirement. Indeed, it represents about 30% of the average elderly person's income.
Here are five questions you need to be able to answer in order to make smart Social Security decisions.
1. What's my full retirement age?
Each of us, in the eyes of the Social Security Administration (SSA) has a "full retirement age" (FRA) -- the age at which we can start collecting the full benefits to which we're entitled, based on our earnings records. For most of us, that age is 66 or 67 -- or somewhere in between.
Our FRA is important because it's not just at that age that we can start collecting benefits -- we can actually start as early as age 62 and as late as age 70. And depending on when we choose to start, we will end up receiving more or less than what we'd get at our FRA.
2. How much can I expect to collect at my full retirement age?
So what would you receive at your FRA? Well, the sum varies, as it's based on our earnings record, and each of us has had a different working life, with different earnings. But for some context, know that recently the average monthly Social Security benefit was $1,559 -- or about $18,700 per year.
That certainly may not seem like much, but if you earned more than the average over your working life, your benefits will be above average, too. They'll top out at $3,895 per month (as of 2021), though.
For a more precise estimate of how much Social Security income you can expect, visit the SSA website and set up a "my Social Security" account. Then you can click over to the SSA website anytime and access the latest estimates of your future benefits. Note that the estimates are based on the latest earnings information the SSA has -- you can check out that information at the site, too. If you spot any errors, look into having them fixed -- that alone might increase your future benefits.
3. When should I start collecting my benefits?
So... when should you start collecting if you can start as early as age 62? Many people do start at age 62, often because they have little choice; some have been laid off and others are not healthy enough to work. Starting early means your checks will be smaller -- but you'll receive more of them, so it's not necessarily a money-losing move. Delaying as late as age 70 will make your checks bigger -- but again, you'll receive fewer. Delaying can be great if you can delay and if you stand a decent chance of living longer than average.
The table below shows the approximate percentage of your full benefits that you'll receive, depending on when you start collecting:
Age You Start Collecting
Full Retirement Age of 66
Full Retirement Age of 67
When deciding when to start collecting your benefits, be sure to consider your big retirement picture. If you think you'll start collecting at 62, will you stop working then? Will you have sufficient income on which to live? Many people will need to keep working longer than they'd like -- possibly even until age 70.
4. Should I coordinate with my spouse?
Next, if you're married, a little coordination with your spouse can end up bringing more Social Security dollars into your household over the long term, and may make a huge difference to the lower-earner between you. That's because when one spouse dies, the survivor is allowed to receive either Social Security benefit check -- their own or their late partner's -- whichever is bigger. So the higher earner might want to try to delay starting to collect, in order to build up that bigger benefit further.
5. Have I considered taxes?
Be sure to learn a little about Social Security and taxes, too, because Social Security benefits can be taxed. Specifically, up to 85% of your benefits can be taxed. It all depends on your "combined income," which is your adjusted gross income ("AGI"), plus non-taxable interest, plus half of your Social Security benefits. The following table shows the thresholds for taxation:
Percentage of Taxable Benefits
Between $25,000 and $34,000
Up to 50%
Married, filing jointly
Between $32,000 and $44,000
Up to 50%
More than $34,000
Up to 85%
Married, filing jointly
More than $44,000
Up to 85%
It's not as bad as it may seem to you, because it doesn't mean that you'll face a tax rate of 50% or 85% on your benefits -- those numbers refer to the portion of your benefits that would count as taxable income.
Some states also tax Social Security benefits -- 13 states recently did, while 37 states didn't. This isn't necessarily terrible, either, because even if your state does tax benefits, it may have a low tax rate or may only tax those with high incomes. Learn your states details before despairing.
There's also the matter of withholding. If you are still working while collecting your Social Security benefits, the SSA may hold back some of your benefits. Here's how it has explained it: "If you're younger than full retirement age during all of 2021, we must deduct $1 from your benefits for each $2 you earn above $18,960. If you reach full retirement age during 2021, we must deduct $1 from your benefits for each $3 you earn above $50,520 until the month you reach full retirement age."
Don't worry too much about this, though, because what's deducted is not forfeited -- you'll just get it later. As the SSA explains, "If some of your retirement benefits are withheld because of your earnings, your monthly benefit will increase starting at your full retirement age to take into account those months in which benefits were withheld."
Being able to answer the five questions above can go a long way to making you Social Security-savvy and able to get more out of the program than you otherwise would have. You might also want to learn more about other ways to increase your benefits. The more you know, the more comfortable your retirement is likely to be.
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