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Understanding Social Security

Updated: Aug 16, 2023

Did you know that good Social Security planning can result in an extra $100,000 or more in lifetime benefits?

For anyone retiring within the next 10 years, understanding Social Security, how it works, and how to maximize your benefits is critical.

President Franklin Roosevelt signed the Social Security Act on August 14, 1935. Since then, Social Security has provided a foundation of income on which workers can build to plan for their retirement. About one in five Americans (64.7 million) receive a Social Security benefit today.

Social Security is a social insurance program that provides an inflation-indexed lifetime benefit to beneficiaries. Thirty percent of elderly beneficiaries derive 90% or more of their income from Social Security benefits, and another two-thirds of seniors receive 50% or more of their total income from the program. But, Social Security is more than just a retirement program. About one in three beneficiaries (29.1 percent) are not retired workers. Social Security provides benefits to young workers and their families if they become disabled, and it provides benefits to the survivors of deceased workers, including their children. Social Security remains one of the nation’s most important, successful, and effective programs. Because of that, it is important to understand the basics surrounding how Social Security benefits work and the future of Social Security.

1. Who gets Social Security and how much will they get?

In order to begin receiving retirement Social Security benefits, there are a few different checkboxes you must satisfy. Although these could change in the future, currently

  • You must be 62 or older AND

  • You must be “insured” by earning at least 40 work credits (if not blind or disabled).

    • You typically earn 1 “credit” per quarter, so you have the ability to earn 4 credits per year

    • As you work and pay taxes, you are building “credits” in the program. Each credit is worth an amount of earnings that changes year to year.

The amount of Social Security benefit you receive will depend on your income throughout your career. The average Social Security benefit was $1,543 per month in January 2021. The maximum possible Social Security benefit for someone who retires at full retirement age is $3,148 in 2021. However, a worker would need to earn the maximum taxable amount, currently $142,800 for 2021, over a 35-year career to get this Social Security payment.

Social Security payments are calculated using the highest 35 years of earnings indexed for inflation. For a worker who becomes eligible for Social Security payments in 2021, the benefit amount is calculated by multiplying the first $996 of average indexed monthly earnings by 90%, the remaining earnings up to $6,002 by 32%, and earnings over $6,002 by 15%. The sum of these three amounts, rounded down to the nearest 10 cents, is the initial payment amount. Cost-of-living adjustments and delayed retirement credits can boost your payments above this amount.

When receiving your Social Security Benefit statement, it will show the amount predicted for retiring at age 62 (the minimum age), age 67 (full retirement age), and 70 (maximum age). As you will see on this statement, there are effects to taking your benefit before full retirement age as well as after full retirement age. As you continue reading you will hear more about how timing can affect your overall benefit amount.

2. What happens if I decide to receive benefits early?

Although you can receive benefits before your full retirement age, they will be reduced. Full retirement age is the age when you are entitled to 100 percent of your Social Security benefit. If you were born between 1943 and 1954, your full retirement age is 66. For those born between 1955 and 1959, it gradually increases from 66 to 67, and for those born in 1960 or later, it is age 67.

There are advantages and disadvantages to taking your benefit before your full retirement age.The obvious benefit is the sooner you start collecting benefits, the more years you will get to collect. The negative is your benefit will be reduced, and in the case of collecting at age 62, your benefit will be reduced by a lot. Each person's situation is different, but it is important to remember:

If you start receiving benefits early, your benefits are reduced a small percent for each month before your full retirement age. In the case of early retirement, a benefit is reduced 5/9 of one percent for each month before normal retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of one percent per month. This ends up being a reduction of over 6% per year that you claim early.

These numbers may seem confusing and difficult to calculate, so let’s walk through an example. If the number of reduction months is 60 (the maximum number for retirement at 62 when normal retirement age is 67), then the benefit is reduced by 30 percent. This maximum reduction is calculated as 36 months times 5/9 of 1 percent plus 24 months times 5/12 of 1 percent.

Along with reducing your benefits, until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a certain amount of earned income for the year. For the year 2021, this limit on earned income is $18,960 ($1,580 per month). The amount goes up each year. Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit.

For many people, it is beneficial to delay Social Security benefits until full retirement age in order to receive your full benefit package. In fact, if you decide to delay benefits until beyond your full retirement age, your benefits could actually increase.

3. What are the benefits to delaying Social Security benefits?

Not everyone is always ready to retire around the age of 65. In fact, in one study, 52% of all workers said they planned to work past that age, including 16% who said they never intend to stop working. Many people choose to work longer as part of their retirement strategy – giving them more time to save for retirement, helping them keep their minds sharp, providing them with social interaction and increasing their social security benefit.

Many people wonder whether it is worth it for them to continue working past the full retirement age. Although this depends on each person’s unique situation, the increase in social security benefits could play a role in that decision. Social Security retirement benefits are increased by 8% for each year you delay starting your benefits beyond full retirement age. For example, if you begin receiving benefits at your full retirement age of 67 then at:

  • 68, you'll get 108 percent of the monthly benefit because you delayed getting benefits for 12 months

  • 70, you'll get 124 percent of the monthly benefit because you delayed getting benefits for 36 months

One important piece to remember about delaying your benefits is that the benefit increase stops when you reach age 70. Therefore, in no situation should you postpone receiving benefits to past age 70.

But remember, if you decide to wait past age 65, you may still need to sign up for Medicare. In some circumstances your Medicare coverage may be delayed and cost more if you do not sign up at age 65. While it’s important to consider your personal circumstances—it’s not always possible to wait, particularly if you are in poor health or can’t afford to delay—the benefits of waiting can be significant and should always be considered.

3. How are Social Security benefits taxed?

Keep in mind that Social Security benefits may be taxable, depending on your combined income. To find out if your benefits are taxable, you first have to determine what the IRS calls your “combined income.” This includes one half of your Social Security benefits plus all of your other income (salary, dividends, interest, retirement account distributions, etc.), and it even includes your tax-exempt interest.

As your combined income increases above a certain threshold (from earning a paycheck, for instance), more of your benefit is subject to income tax, up to a maximum of 85%. For example:

If you file a federal tax return as an "individual" and your combined income is

  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.

  • more than $34,000, up to 85 percent of your benefits may be taxable.

If you file a joint return, and you and your spouse have a combined income that is

  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.

  • more than $44,000, up to 85 percent of your benefits may be taxable.

You won't owe federal tax on your Social Security benefits if your total income falls below the taxable thresholds set by the IRS. If you do not fall in this category, there are some strategies you can use to limit Social Security taxes. One strategy to use is to try and keep some retirement income in Roth accounts. Then, when you take distributions from it, it will not be included in your taxable income. This advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits.

Each year, you will receive a Social Security Benefit Statement showing the amount of benefits you received in the previous year. You can use this Benefit Statement when you complete your federal income tax return to find out if your benefits are subject to tax.

4. Will Social Security go bankrupt in the future?

Social Security has always seemed like a future problem, with experts predicting a benefits squeeze in the decades ahead. But the coronavirus has affected our country in every way and economists are predicting that the recovery will take some time. Because there are less people working, there are less people paying into the Social Security system. Along with that, life expectancy continues to increase and birth rates decrease. This means that people are living longer and collecting Social Security benefits longer. As you can see, this means there is a bit of a supply and demand issue. There is a lot more demand for Social Security benefits for longer periods of time and less supply for Social Security as less people are in the workforce paying taxes to fund the benefits.

So, does this mean Social Security will go bankrupt in the future? We believe that will not happen. Although the funding of Social Security may look different in years ahead, we believe it should not completely go bankrupt. In fact, the 2020 annual report from the Social Security Trustees, released in April, projects that the Social Security Trust Fund has enough resources to cover all promised retirement benefits until 2037 when the reserves are used up. At the point where the reserves are used up, continuing taxes are expected to be enough to pay 76 percent of scheduled benefits. Thus, Congress will need to make changes to the scheduled benefits and revenue sources for the program in the future, but even if they do not, Social Security is not going away.

Although benefit cuts are possible, the government may come up with an alternate solution to ensure the sustainability of the program for generations to come. Politicians have already proposed several ideas, including raising the Social Security tax rate, raising the full retirement age, or raising the ceiling on income subject to Social Security taxes. Congress hasn't decided on anything yet, but you can still count on Social Security during your retirement.

However, what you may get just may not go as far as it does today. This means you'll need more personal savings to cover the bulk of your expenses during retirement. Beginning to invest early and save for retirement is already important and becomes even more important with the changes that could occur in the future with Social Security.


As you can see, there is a lot of complexity with Social Security qualification, benefits, and taxation. Although some of the rules regarding Social Security may change in the future, the importance of understanding the rules and using them to maximize your income will not change. Because of this, it is crucial to understand the detailed rules and calculations regarding your personal Social Security benefits.

If you have further questions about Social Security and how to maximize your benefits, we would love to talk further with you.

If you have any questions, we are happy to help. Please contact us here or visit our website for more information.


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