If you’re nearing retirement age, you’ve probably heard about Social Security and how it can provide you with income during your golden years.
However, understanding the complexities of Social Security claiming can be overwhelming.
To help you navigate this important aspect of retirement planning, here are five key things to understand about starting Social Security benefits.
Claiming age affects your benefits
The age at which you choose to start claiming Social Security benefits can have a significant impact on your monthly benefit amount.
You can start claiming as early as age 62, but your monthly benefit will be permanently reduced if you do so before your full retirement age (FRA), which is typically between 66 and 67, depending on the year you were born.
On the other hand, if you delay claiming benefits past your FRA, your benefit amount will increase by a certain percentage each year, up to age 70. So, the longer you wait to claim, the higher your monthly benefit will be.
Your work history matters
The amount of Social Security benefits you receive is based on your earnings history.
Social Security calculates your average indexed monthly earnings (AIME) based on your highest 35 years of earnings, adjusted for inflation.
Your benefit amount is then calculated based on your AIME, which means that the more you earn during your working years, the higher your Social Security benefits are likely to be.
Spousal and survivor benefits are available
Social Security provides spousal and survivor benefits that can be an important source of income for married couples.
Spousal benefits allow a lower-earning spouse to receive up to 50% of their higher-earning spouse’s benefit amount. Survivor benefits can provide financial support to a surviving spouse after the death of their spouse.
Understanding the rules and strategies for spousal and survivor benefits can help you maximize your Social Security benefits as a couple.
Working while claiming can impact benefits
If you choose to claim Social Security benefits before your FRA and continue to work, your benefits may be subject to the earnings test.
The earnings test reduces your benefits by $1 for every $2 you earn above a certain limit, which changes annually.
However, once you reach your FRA, there is no earnings limit, and your benefits will not be reduced, regardless of how much you earn. It’s important to understand how working while claiming can impact your Social Security benefits and plan accordingly.
Social Security is taxable
Many people are surprised to learn that Social Security benefits can be subject to federal income taxes.
The amount of your Social Security benefits that may be subject to taxes depends on your provisional income, which is calculated by adding half of your Social Security benefits to your other sources of income.
If your provisional income exceeds certain thresholds, a portion of your Social Security benefits may be subject to federal income taxes. Understanding the tax implications of Social Security benefits can help you plan for the potential tax burden in retirement.
