After retirement, Social Security provides you with some income to help you pay for your living expenses. The exact amount of Social Security income you receive through monthly payments will depend on when you start to accept Social Security income and what you earned during your working years.
Learn how Social Security works, what factors affect the amount of payment you will receive, including more about how your full retirement age plays a role. Also learn how your Social Security income is taxed.
Key Takeaways
- Social Security income provides a source of income for retirees in the U.S. that is financed through a payroll tax.
- The amount of your Social Security check will depend in part on when you start taking payments.
- You can take Social Security payments as early as age 62, but if you delay taking payments the amount you are paid will be larger.
- Social Security benefits may be subject to taxation, especially if you are still working while also receiving benefits.
What Are Social Security Retirement Benefits?
Social Security benefits are payments for retired American workers who have paid Social Security taxes on their income. If you have paid enough by earning 40 work credits, which is about 10 years of work, you could receive these benefits in your retirement years.
The amount of your Social Security benefit depends in part on when you start taking Social Security checks. You can take Social Security checks as early as age 62, but you will receive a reduced benefit. If you wait until your “full retirement age,” you will receive your full benefit.
Your retirement age depends on the year in which you were born. For people born between 1943 and 1954, the full retirement age is 66. However, the full retirement age increases each year gradually until it reaches age 67 for those born in 1960 or later.
Note
You can choose to receive Social Security benefits even if you haven’t reached full retirement age as long as your earnings are under the income limit, which for 2023 is $21,240. For earnings above the income limit, $1 in Social Security will be withheld for every $2 you earn.
Monthly Benefits
Your monthly payment will depend on your specific situation, including whether you are part of a retired couple, are a widow, or if you have children. As of April 2023, the average monthly Social Security payment was $1,698.05.
The Social Security Administration (SSA) increases benefits periodically via a cost-of-living adjustment (COLA) to keep pace with inflation. In 2023, beneficiaries of Social Security and Supplemental Security Income (SSI) received an 8.7% COLA adjustment.
Social Security Planning
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.
You can claim benefits as as early as 62, but your benefits will lower than if you waited until your full retirement age. Delaying benefits longer than your full retirement age can increase your monthly benefit even more. Each year you delay benefits up until age 70, you will receive a larger amount of Social Security 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. The SSA will process your application and mail you a letter detailing its final determination if it has all the necessary documents.
To get a head start on the application process, you are allowed to apply up to four months before you want your benefits to begin.
When to Postpone Social Security Benefits
You can start receiving Social Security as early as 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 advantage to delaying your benefits.
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 30%. however, if you wait until you turn 70 to sign up, you could increase your benefit by 8% every year.
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.
Whether you should postpone your Social Security benefits will depend on a number of factors about your personal situation, including whether you continue working. Consider other sources of income, such as any funds you may receive from a retirement account, when you plan a good time to start taking your Social Security benefits.
If you don’t need the money as soon as you reach full retirement age and you are in good health, consider waiting 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.
Note
Instances when you may want to claim your benefits sooner include if your health is failing or if you want your spouse to have the ability to start taking spousal benefits.
Social Security After Retirement
You can continue to work and claim retirement benefits, but your benefits will be reduced. If you take Social Security benefits before your full retirement age, they will be reduced by a fraction of a percent for each month you take it early. They’ll also be reduced for every $1 for every $2 you earn beyond the yearly earnings limits, which in 2023 is $21,240.
After your reach full retirement age, the Social Security Administration will recalculate your benefits so that you will get credit for the benefits you did not receive because of your earnings. You will receive a letter explaining any increase. After your full retirement age, any earnings you make will not affect the amount of your benefit.
You will automatically be enrolled in Medicare Part A and B when you turn 65 if you start taking your Social Security benefits before age 65. You need to apply for Medicare benefits three months before you turn 65 if you aren’t receiving Social Security benefits by then, or you will face a penalty.
Suspending Social Security Benefits
Let’s say you file for Social Security and start receiving benefits—and then you are hired for a new job a few months later. If you have reached full retirement age, one option is to suspend your benefits and claim them later and receive an increasingly larger benefit up until age 70.
“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,” says Daren Dearden, product manager at Franklin Templeton in Salt Lake City, Utah. “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.”
How Social Security Benefits Are Taxed
Once you start collecting Social Security, you might have to pay additional taxes on those benefits. How much you will pay, if at all, will depend on whether you receive other sources of income and how much you receive.
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 (IRS) uses a calculation to determine how much of the benefit is taxable.
Example of How Social Security Benefits Are Taxed
Let’s say, for example, that you’re married filing jointly. If the sum of your income is 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 to receive a larger benefit.
Using the right 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.
Consider talking to a financial advisor or CPA about ways you can lower taxes on Social Security and other retirement distributions that fit with your specific financial situation.
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 receive a larger benefit if you wait. So, you might want to tap into other retirement assets first. If that’s not a possibility, you might consider postponing your retirement.
A 2021 survey by Natixis Investment Managers found 40% of respondents said “it will take a miracle” to retire securely, and 42% of respondents reported worrying that retirement wouldn’t be an option at all.
One reason people worry about being able to retire 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, an investment advisor in Norristown, PA. 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, MA.
It’s important to consider whether you would have enough money to last, say, another 30 years if you collected Social Security benefits early. If not, you may want to delay your benefits.
How Does Social Security Calculate Your Benefits?
Social Security benefits are calculated using the averaged indexed monthly earnings method. This method summarizes 35 years of a worker’s indexed earnings. A formula is applied to this, which takes into consideration changes in general wage levels, to compute the primary insurance amount (PIA), which is the basis for the benefits.
What Is the Average Social Security Benefit per Month?
In April 2023, the average Social Security benefit was $1,698.05. The total number of beneficiaries was 66.56 million people.
What Are the Types of Social Security?
The different types of Social Security benefits paid out are retirement, disability, and survivor. Each of these includes its own sub-categories, such as spouses and children.
The Bottom Line
Many people look forward to retirement when they no longer have to work and can enjoy their free time. Social Security helps retirees fund part of the lifestyle they want, and there are strategies that can help your maximize your benefits. However, Social Security should not be the only retirement income that you rely on. Utilizing other retirement plans, such as 401(k)s and IRAs can help make retirement more enjoyable by reducing financial stress.
