What to Know About Social Security Retirement Benefits

Social Security is a key source of retirement income, but when and how you claim it can greatly affect your long-term benefits. This guide explains what every investor should know about eligibility, timing, spousal coordination, and how Social Security fits into a broader retirement income plan.

What Is Social Security and How Does It Work?

Social Security is a federal program that provides income to retirees based on their work history and payroll taxes. You become eligible after earning 40 credits, which typically happens once you’ve worked 10 years. Key factors that help calculate your Social Security retirement benefit include:

• Work history: Your 35 highest-earning years are used to calculate your benefits. If you've worked fewer than 35 years, zeros are factored into the calculation, potentially reducing your benefits.
• Inflation: Benefits are adjusted annually to keep up with inflation. This helps ensure that the purchasing power of your Social Security income is maintained over time.

Considerations for When to Claim Your Benefits

You can receive Social Security retirement benefits as early as age 62. But you will only receive 100% of your benefit at something called your full retirement age (FRA). Your FRA depends on the year you were born. Filing before or after will reduce or increase your benefit. Here’s what you can expect:

• Reduced benefits when claiming at 62. For example, if your full retirement benefit is $2,000 per month, claiming at 62 might reduce it to $1,400 per month.
• 100% of your calculated benefit at your FRA. FRA varies between 66 and 67 based on your birth year.
• Increased benefit when claiming after your FRA. Delaying beyond your FRA increases your benefits by 8% per year until you turn 70.

Snapshot: Social Security by Filing Age

This chart details how the Social Security benefit is calculated based on filing age for someone with an FRA of 67.

When should you claim your Social Security retirement benefit? There's not a one-size-fits-all answer. It’s unique to your situation, depending on your health, income needs, and longevity expectations. A break-even analysis can help determine how long you need to live to make delayed claiming beneficial.

Two other points bear mentioning when it comes to Social Security eligibility.

1. Married individuals may be eligible for spousal benefits worth up to 50% of their spouse's benefit, so coordinating claiming strategies can maximize total household income. For example, one spouse might claim early while the other delays, to optimize the combined benefits.
2. Surviving spouses may receive survivor benefits, often the higher of the two spouses' amounts. Divorced spouses who were married for 10+ years may also qualify for benefits based on their ex-spouse's record.

Social Security and Your Broader Retirement Plan

Social Security typically replaces 30% to 40% of preretirement income for the average worker. In addition, many financial professionals say that a typical person will need about 75–80% of their preretirement earnings to comfortably maintain their standard of living. Put all of these percentages together and in essence, Social Security could provide roughly half of what the average person will need — with things like IRAs, 401(k) plans, and other investments making up the difference. How much specifically will you need for retirement? Calculate your retirement savings now.

One other thing to consider is how your Social Security benefit is taxed. Up to 85% of your Social Security benefits may be taxed, depending on your combined income. Your combined income includes wages, investments, and 50% of your Social Security benefits. For single filers, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. Above $34,000, up to 85% may be taxable.

If you claim before your FRA and continue working, your benefits may be temporarily reduced. Earnings limits apply until you reach FRA, after which your benefits are recalculated to account for any withheld amounts

Next Steps

Clearly, there’s a lot to take in and account for when it comes to Social Security. But you don’t have to go it alone. There are tools and resources to help you.

1. Check your social security statement. Visit SSA.gov to sign in or create an account.
2. Estimate your benefit and run a break-even analysis: Use online tools to determine the best claiming strategy for your situation.

Discuss with a financial professional. They’ll work with you to understand your needs and desires and develop an investment strategy to help you fund your goals.