Social Security benefits can be a major source of retirement income for many people. Your Social Security retirement benefit is based on the number of years you've been working and the amount you've earned. When you begin taking Social Security benefits this also affects the size of your benefit.
How do you qualify for retirement benefits?
When you work and pay Social Security taxes (FICA on pay stubs), you earn Social Security credits. You can earn up to four credits each year. You need at least 40 credits (10 years of work) to be eligible for retirement benefits. The years do not need to be sequential.
If you worked and contributed to the Social Security system but also worked for an organization and did not contribute to Social Security, you may have Social Security benefits. They may be reduced under the Windfall Elimination Provision. Evaluating this is an important step in drawing not only Social Security benefits, but a potential pension.
How much will your retirement benefit be?
The Social Security Administration (SSA) calculates your primary insurance amount (PIA), upon which your retirement benefit will be based, using a formula that includes your 35 highest earnings years. At your full retirement age (FRA), you’ll be entitled to receive your full retirement benefit. Because your retirement benefit is based on your average earnings over your working career, if you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily.
Your age at the time you start receiving benefits also affects your benefit amount. Although you can draw benefits early at age 62, the longer you wait to begin receiving your benefit (up to age 70), the more you’ll receive each month.
You can estimate your retirement benefit under current law by using the benefit calculators available on the SSA’s website, ssa.gov. You can also create a secure my Social Security account so that you can view your online Social Security Statement. Your statement contains a detailed record of your earnings, as well as estimates of retirement, survivor and disability benefits. If you’re not registered for an online account and are not yet receiving benefits, you’ll receive a statement in the mail every year, starting at age 60.
Retiring at full retirement age
Your FRA depends on the year in which you were born. If you retire at full retirement age, you'll receive an unreduced retirement benefit. Drawing benefits any earlier than your FRA will reduce your benefit.
Your retirement benefit will be reduced according to a calculation as established by Social Security. This reduction is permanent—you won't be eligible for a benefit increase once you reach full retirement age.
Even though your monthly benefit will be less, you might receive the same or more total lifetime benefits as you would have had you waited until full retirement age to start collecting benefits. That's because even though you'll receive less per month, you might receive benefits over a longer period of time. So not only do you need to consider your current income needs, evaluating your expected life span is important to the decision.
Delaying retirement will increase your benefit
For each month that you delay receiving Social Security retirement benefits past your full retirement age, your benefit will permanently increase by a certain percentage, up to the maximum age of 70. For anyone born in 1943 or later, the monthly percentage is 2/3 of 1%, so the annual percentage is 8%. So, for example, if your full retirement age is 67 and you delay receiving benefits for 3 years, your benefit at age 70 will be 24% higher than at age 67.
Working may affect your retirement benefit
You can work and still receive Social Security retirement benefits, but the income that you earn before you reach FRA may temporarily affect your benefit. Here's how:
- If you're under full retirement age for the entire year, $1 of your benefit will be withheld for every $2 you earn over the annual earnings limit ($19,560 in 2022)
- A higher earnings limit applies in the year you reach full retirement age, and the calculation is different, too—$1 of your benefit will be withheld for every $3 you earn over $51,960 (in 2022)
Once you reach full retirement age, you can work and earn as much income as you want without reducing your Social Security retirement benefit. Continuing to work after drawing Social Security has the benefit of increasing your benefits.
Retirement benefits for qualified family members
Even if your spouse has never worked outside your home, he or she may be eligible for spousal benefits based on your Social Security earnings record. Other members of your family may also be eligible. Retirement benefits are generally paid to family members who relied on your income for financial support. If you're receiving retirement benefits, the members of your family who may be eligible for family benefits include:
- Your spouse age 62 or older, if married at least 1 year
- Your former spouse age 62 or older, if you were married at least 10 years
- Your spouse or former spouse at any age, if caring for your child who is under age 16 or disabled
- Your children under age 18, if unmarried
- Your children under age 19, if full-time students (through grade 12) or disabled
- Your children older than 18, if severely disabled
Your eligible family members will receive a monthly benefit that is as much as 50% of your benefit.
However, the amount that can be paid each month to a family is limited. The total benefit that your family can receive based on your earnings record is about 150% to 180% of your full retirement benefit amount. If the total family benefit exceeds this limit, each family member's benefit will be reduced proportionately. Your benefit won't be affected.
For more information on retirement benefits or the application process, visit the Social Security Administration at ssa.gov.
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This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
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