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How Social Security Works After Retirement

For millions of Americans, the most anticipated upcoming birthdays aren’t whole numbers but fractions, like 66 and 2 months, or 66 and 4 months. That’s because for Americans born between 1955 and 1959, full retirement age occurs sometime between their 66th and 67th birthdays. At that point, people can start claiming their full Social Security benefits.

How, exactly, does Social Security work after you reach that magical full retirement age? Here are a few important facts to bear in mind.

Key Takeaways

  • Social Security income is an important source of income for retirees in America.
  • The process of applying for and calculating benefits can be complex. Maximizing benefits may mean taking past income and age into account when deciding on when to start benefits.
  • Social Security benefits may be subject to taxation, especially if you are still working while also receiving benefits.

What Are Social Security Retirement Benefits?

American workers pay Social Security taxes on their income. If they have paid enough into the system by the time they retire, they are eligible to receive benefits. In November 2020, the average retired beneficiary received a monthly payout of $1,522.70.

Social Security should be just one component of your plan to fund retirement. On average, beneficiaries only receive about 40% of their working income from Social Security.

Although workers can claim benefits before they reach full retirement age, as early as 62, experts say this is not advisable as it will result in permanently lower benefits.

“When you take benefits, it can significantly affect your overall retirement income. With pensions a thing of the past for most workers, Social Security remains the largest source of guaranteed lifetime retirement income,” says Stephanie Genkin, CFP®, founder of My Financial Planner, LLC in New York City. “Once you start collecting Social Security, the benefit amount—plus cost-of-living adjustments (COLA)—will be locked in for the remainder of your life.”

How to Apply for Social Security

When you’re ready to claim benefits, visit your local Social Security Administration (SSA) office, apply online at ssa.gov, or call 1-800-772-1213. 

After you apply, the Social Security Administration will review your application and contact you if it requires additional information. If it has all the necessary documents, the SSA will process your application and mail you a letter detailing its final determination.

Be sure to apply four months before you want your benefits to begin. However, keep in mind that “If you continue to work and are younger than full retirement age, your benefits may be clawed back ($1 for every $2 or $3 earned) due to earned income limits being exceeded,” says Peter J. Creedon, of Crystal Brook Advisors in New York City.

You need to apply for Social Security four months before you want your benefits to start.

To Postpone or Not to Postpone

You can start receiving Social Security at 62, but your monthly payments will be larger for every month you delay claiming them up to age 70. Once you turn 70, there is no benefit to holding off any longer.

For example, if you were born in 1960 and start your retirement benefits at age 62 while your full retirement age is 67, your monthly benefit is reduced by a whopping 30%. However, if you wait until you turn 70 to sign up, you could increase your benefit by 24%.

How benefits are calculated

Social Security benefits are calculated based on your 35 highest-earning working years. Therefore, if you keep working and earn a higher salary in your 60s than you did earlier in your career, you could boost your Social Security payments even more.

If you don’t really need the money as soon as you reach full retirement age and are in good health, it’s probably wise to wait until you turn 70 to apply. “When you think of Social Security the right way, as insurance against outliving your money, then it makes sense to wait until age 70 for the highest payout available,” says Robert R. Schulz, CFP®, president of Schulz Wealth in Mansfield, Texas.

Why wait

Mark Hebner, founder and president of Index Fund Advisors Inc. in Irvine, California, and author of Index Funds: The 12-Step Recovery Program for Active Investors, concurs about waiting until 70. “Because most baby boomers find themselves underfunded for retirement, they need every dollar they can possibly get,” he says.

There are, of course, instances when you shouldn’t postpone claiming your benefits. Two of them: if you are in failing health or if you determine that you should file sooner so that your spouse can start taking spousal benefits.

The amount of your Social Security benefit is determined by your 35 highest-earning years.

Land a Job? Suspend Your Benefits

Let’s say you file for Social Security and start receiving benefits—and then are hired for a new job a few months later. What should you do? If you have reached full retirement age, you can actually suspend your benefits and claim them later (up until age 70). This will allow you to earn a higher benefit when you do start receiving payments again.

Working longer

“Since Social Security benefit amounts are calculated based on a worker’s highest 35 earning years, benefits can be increased by landing a job, even if you’re already collecting benefits. High earning years, even after retirement, can be used to replace lower-earning years from earlier in your career, thus increasing average income, and, subsequently, benefit amount,” says Daren Dearden, director of North Capital Inc. in Salt Lake City, Utah.

Don’t Forget Taxes

Once you start collecting Social Security, you might have to pay additional taxes on those benefits. How much can you expect to pay? It depends.

If Social Security is your only source of income, your benefits probably won’t be taxed at all. However, if you receive additional income—for example, from pensions, individual retirement account (IRA) distributions, capital gains, or job earnings—you could be faced with a tax bill.

You will have to start paying taxes on Social Security payments if your taxable income is $25,000 and above for an individual or $32,000 for married couples filing jointly. The Internal Revenue Service uses a calculation to determine how much of the benefit is taxable.

Tax examples

Let’s say, for example, that you’re married filing jointly. If the sum of your income falls below $32,000, none of your Social Security benefits are taxable. But if your income is between $32,000 and $44,000, up to 50% of your Social Security benefits are taxable. Once your income is over $44,000, 85% of Social Security benefits may be taxable. Benefits are taxed at your ordinary-income tax rates.

With proper planning and the right timing, you can greatly reduce your tax burden from Social Security benefits. For instance, if you can live off distributions from your IRA, 401(k), or other retirement accounts, you might want to postpone receiving Social Security benefits until you turn 70.

Using this strategy could reduce the number of years your benefits are subject to taxes, or in some cases, eliminate taxes on your Social Security benefits altogether. Talk to your financial advisor or CPA about ways you can lower taxes on Social Security and other retirement distributions. 

Postponing Your Retirement

When it comes to Social Security benefits, there are many complicated rules and tax implications. While you might be tempted to file for Social Security as soon as you reach full retirement age, you could rake in a much bigger benefit if you wait. Therefore, you might want to tap into other retirement assets first. If that’s not a possibility, you might consider postponing your retirement.

Worrying times

A study by Wells Fargo found that the COVID-19 pandemic found that 31% of boomers don’t know if they can save enough to retire due to the impact of the pandemic. Thirty-five percent of retirees reported not knowing how to best protect their assets during an economic downturn. Thirty-seven percent of retirees reported being worried about running out of money during retirement.

One reason people worry about running out of money, even during non-pandemic times, is the issue of life expectancy. “Longevity is a big issue. Average life expectancy for those turning 65 is greater than most people realize,” says Barry Waronker, CEO of Informed Family Financial Services in Norristown, Pennsylvania. One in three 65-year-olds in 2020 will live past age 90, and one in seven will live past age 95, according to the Social Security Administration.

“Because Social Security is a guaranteed monthly payment that is adjusted for inflation, it can be extremely important for recipients who live into their 90s. The longer you wait to take Social Security, the larger your benefit, which can be advantageous for those with longer life spans,” says Georgia Bruggeman, CFP®, founder and CEO of Meridian Financial Advisors LLC in Holliston, Mass.

If you were to retire at 66 and start collecting Social Security benefits, would you have enough money to last you another 30 years? It’s important to take this into consideration before you start tapping into those benefits.

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