Millions of Americans rely on Social Security to help finance their retirement or pay benefits if they become disabled. Given the important role that Social Security plays in so many people’s lives, it’s surprising how many misconceptions there are about it.
Following is a primer on the basics of Social Security that addresses some of these misconceptions and answers some of the most common questions about Social Security.
When Can You File for Benefits?
One of the biggest questions many people have about Social Security is when can they file to start receiving benefits? There are several different options, and choosing the right one depends on a number of factors that are unique to every individual and couple.
You can file as early as age 62, as late as age 70 or anytime in between these ages. But remember that the earlier you file, the less money you’ll receive in benefits each month for as long as you collect Social Security. Conversely, the later you file, the more money you’ll receive each month for as long as you collect Social Security.
Your Full Retirement Age, or FRA, is the age at which you will receive the full amount of your Social Security benefits. FRA is based on when you were born:
- If you were born in 1937 or earlier, your FRA is 65.
- If you were born in 1960 or later, your FRA is 67.
- If you were born between 1938 and 1959, your FRA is between 65 and 67.
If you file for Social Security on your 62nd birthday, your monthly benefit will be reduced by about 8% annually compared to waiting until you reach FRA to file. However, if you wait until your 70th birthday to file for Social Security, you’ll receive delayed retirement credits that equal about 8% annually. These are to compensate you for waiting until after you reach FRA to file for benefits.
Are Social Security Benefits Taxable?
Most people do not have to pay income tax on their Social Security benefits. But a portion of benefits may be taxable if other sources of income during retirement bring your combined income above a threshold:
- If your combined income is less than $25,000 if you’re single or $32,000 if you’re married and file jointly, none of your Social Security benefits will be taxable.
- If your combined income is between $25,000 and $34,000 if you’re single or $32,000 and $44,000 if you’re married and file jointly, 50 percent of your Social Security benefits will be taxable.
- If your combined income exceeds $34,000 if you’re single or $44,000 if you’re married and file jointly, 85 percent of your Social Security benefits will be taxable.
Combined income consists of half of your Social Security benefits plus your adjusted gross income (AGI) and nontaxable interest.
What If I Work During Retirement?
Many people are choosing to gradually phase into retirement by working part-time when they first retire. In this scenario, Social Security benefits may be reduced if you haven’t yet reached FRA. In 2019:
- If you are between 62 years old and FRA and work while receiving benefits, these benefits will be reduced by $1 for every $2 you earn above $17,640.
- If you work during the year of your FRA while receiving benefits, these benefits will be reduced by $1 for every $3 you earn above $46,920.
- If you work after you’ve reached FRA, there is no reduction in your benefits.
Keep in mind that you’ll receive a positive adjustment to your monthly benefit when you reach FRA to compensate you for the reductions in benefits while you were younger and working.
Is Social Security Going Broke?
According to current projections, Social Security will be unable to pay the full amount of promised benefits to beneficiaries starting in 2034. If no action is taken by Congress before then, beneficiaries will only receive three-quarters of their promised benefits at that time.
However, this does not mean that Social Security is “going broke.” A number of proposals are being studied that could make up this shortfall.
For example, the maximum earnings subject to Social Security tax could be raised — it’s currently $132,900. Or the full retirement age could be raised. Other possible solutions are reducing future cost-of-living adjustments (COLAs) and reducing benefits for future retirees by escalating benefits based on increases in consumer prices instead of increases in wages.
Please contact us if you have more questions about Social Security and its role in your personal retirement plan.