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1. Social Security Is a Critical Source of Retirement Income
Some have the perception that Social Security is of secondary or even tertiary importance in retirement. But according to a report by the Social Security Administration, Social Security replaces about 40% of an average wage earner’s income after retiring.¹
Keep in mind that Social Security makes annual cost of living adjustments based on the Consumer Price Index and, under current laws, pays income for life and the life of your spouse.²
2. You Have a Choice for When You Take Social Security
You have considerable flexibility for when you can begin receiving your benefits.
As the accompanying illustration shows, the full retirement age, i.e., the age at which full retirement benefits are payable, depends upon when you were born.
Age for Receiving Full Social Security Retirement Benefits
(Important Note: Though full retirement age varies, you also may want to consider applying for Medicare benefits three months before your 65th birthday; if you wait longer, your Medicare medical insurance and prescription drug coverage could cost you more.)
You may begin receiving benefits as early as age 62, though your benefits will be reduced at a rate of about one-half of 1% for each month you begin taking Social Security before your full retirement age.³
You may choose to delay receiving benefits until after attaining your full retirement age, in which case, your benefits are scheduled to increase by 8% annually. This increase under current law will be automatically added each month from the moment you reach full retirement age until you start taking benefits or reach age 70—the age at which these delayed retirement credits stop accruing. Plus, your benefit also will increase by any cost of living adjustments applied to benefit payment levels during that time.⁴
If you plan on continuing to work, you may still receive the full benefit for which you are eligible. Indeed, working beyond full retirement age can increase your benefits. However, your benefits will be reduced if your earnings exceed certain limits. If you work and start receiving benefits before full retirement age, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($17,040 in 2018).⁵
If you continue to work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($45,360 in 2018) until the month you reach full retirement age.
Once you have attained full retirement age, you can keep working and your benefits under current law will not be reduced, regardless of how much you earn.
As you can see, the decision of when to begin taking Social Security is a critical one.
Related: Do You Plan to Work After Retirement?
3. Social Security May Be Taxable
Depending on your income level, your Social Security benefit may be subject to taxation. The chart below illustrates how your combined income (adjusted gross income + your nontaxable interest + one-half of your Social Security benefit) can impact whether your Social Security retirement benefit is subject to taxation.
Will Your Social Security Benefits Be Subject to Federal Income Taxes?
This potential income tax exposure may have substantial implications for whether you choose to work in retirement, how your assets are invested, and the timing of withdrawals from other retirement accounts.
For instance, a withdrawal from a traditional IRA may lift your income beyond the thresholds described above, subjecting a higher proportion of your Social Security to income tax.⁶
The same is true of investment earnings in non-retirement savings. Retirees who have investment earnings in excess of their current spending needs may be subjecting their Social Security income to taxation. Shifting a portion of those assets to a tax-deferred instrument, such as an fixed annuity, may be one way to manage taxation on your Social Security benefit.⁷
4. Social Security Can Be a Family Benefit
When you start receiving Social Security, other family members may also be eligible for payments. A spouse (even if he or she did not have earned income) qualifies for benefits if he or she is age 62 or older, or at any age if he or she is caring for your child. (The child must be younger than 16 or disabled).
Benefits may also be paid to your unmarried children if they are younger than 18 or between 18 and 19 and enrolled in a secondary school as a full-time student, or if they are age 18 or older and severely disabled.
Each family member may be eligible for a monthly benefit that is up to half of your retirement (or disability) benefit amount. There is a family limit, which varies, but is generally between 150% to 180% of your retirement (or disability) benefit.⁸
Should you die, your family may be eligible for benefits based on your work record. Family members who qualify for benefits include:
Your survivors receive a percentage of your basic Social Security benefit—usually in the range of 75% to 100% for each member, though the limit paid to each family is about 150% to 180% of your benefit rate.
Related: The Six Most Overlooked Tax Deductions
5. A Divorced Spouse May Be Eligible for Benefits
If you are divorced, you may qualify for Social Security benefits based on your ex-spouse’s work record. To be eligible for benefits, your ex-spouse must have reached the age at which he or she is eligible to begin receiving benefits (though he or she does not necessarily need to be receiving them). To qualify, you need to:
If your former spouse is deceased, you may still receive benefits as a surviving divorced spouse (irrespective of the age he or she died), assuming that your ex-spouse was entitled to Social Security benefits, your marriage was at least 10 years, you are at least 60 years old and you are not entitled to a higher benefit amount based on your own work history. If you remarry before the age of 60, you will lose the ability to receive a survivor benefit from your deceased ex-spouse.
If your former spouse is living, the maximum amount that you are eligible to receive is 50% of what your former spouse is due at full retirement age. To receive the maximum benefit, you will need to wait until you have reached your own full retirement age.⁹
Your benefits are unaffected should your former spouse elect to take Social Security before reaching full retirement age or if your ex-spouse starts a new family.
1 Social Security Administration, 20182 Social Security Administration, 2018
3 Social Security Administration, 2018
4 Social Security Administration, 2018
5 Social Security Administration, 2018
6 Withdrawals from traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. Generally, once you reach age 70½, you must begin taking required minimum distributions.
7 The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).
8 Social Security Administration, 2018
9 Social Security Administration, 2018