Planning for Social Security Retirement Benefits

Article | September 13, 2022

Authored by Lyvonnia Poppell, CPA

Planning for Social Security benefits is an important task for those nearing retirement. There are several factors to consider, including when to begin collecting and how to maximize one's Social Security retirement benefits. Taking benefits too early can reduce your benefit amount, while waiting too long can mean missing out on potential earnings. Additionally, it is important to understand how benefits are calculated, as this will determine your monthly retirement benefit.

By educating yourself about Social Security, you can ensure that you'll make the best possible choices when planning for retirement benefits. This article will provide an overview of factors you need to consider when planning to receive Social Security benefits. 

Who qualifies for Social Security retirement benefits? 

Payroll taxes fund the Social Security program. Employers and employees each pay 6.2% of an employee's wages, up to the Social Security tax limit, into the Social Security Trust Fund. Self-employed individuals must pay the full 12.4%.  

You can earn up to four Social Security credits each year you work and pay Social Security taxes. In general, you need 40 credits, or ten years of work, to be eligible for retirement benefits. However, a minimum amount of earnings is required to earn each credit, which may change from year to year. For instance, in 2022, you can earn one credit for every $1,510 in covered earnings each year. Thus, you must earn at least $6,040 to get the maximum four credits for the year. 

How are benefits calculated? 

Your social security benefit amount is calculated using a complex formula that considers your age, earnings history, and date of birth. The Social Security Administration (SSA) uses a formula to calculate your average monthly earnings during your highest 35 years of earnings. The SSA then applies a factor to this average based on the age at which you elect to start receiving benefits. 

Full retirement age is when you can start receiving your full retirement benefit amount. The Social Security Administration determines your full retirement age differently depending on the year you were born. 

If you were born:	Your full retirement age is:
1943-1954	66
1955	66 and 2 months
1956	66 and 4 months
1957	66 and 6 months
1958	66 and 8 months
1959	66 and 10 months
1960 or later	67

 

If you start drawing benefits before your full retirement age, you will receive less than if you wait until your full retirement age. For example, if you retire at age 62, your retirement benefits may be reduced by as much as 30%. It's also worth noting that this reduction is permanent, and you will not receive increased benefits once you reach full retirement age. 

Although you can draw benefits as early as age 62, the longer you wait to draw - up to age 70 - the higher your retirement benefit will be. Each month you delay receiving retirement benefits past your full retirement age, your benefit amount will increase by a certain percentage which will vary depending on your birth year. For example, if you were born after 1942, your benefit will increase by 8% each year you delay receiving benefits up until age 70.  

Working past your full retirement age also allows you to add years to your earnings, typically at a higher earnings rate. As a result, you may receive a higher benefit when you delay receiving retirement benefits. 

Can you still work and receive retirement benefits? 

You can still work and receive benefits, but the income you earn may affect the benefit amount you receive. If you are working and under full retirement age for the entire year, your benefits will be reduced by $1 for every $2 in earnings above the annual limit ($19,560 for 2022). 

In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn over the annual limit ($51,960 for 2022). This only occurs for the months prior to your birthday.

Once you reach full retirement age, you can work and earn as much income as you want without reducing your retirement benefit amount. 

Qualified family members can receive retirement benefits as well

Many people are unaware that certain family members may be eligible for benefits even if they have never worked or contributed to Social Security. Eligible family members will receive a monthly benefit of up to 50% of your benefit amount, depending on your age at retirement. 

The following family members are eligible for family benefits: 

• Your spouse aged 62 or older as long as you've been married for at least one year. 
• Your former spouse aged 62 or older if you were married at least ten years.
• Your spouse or former spouse at any age if they are caring for your child under age 16 or a child who is disabled.
• Your unmarried child under the age of 18.
• Your unmarried child under the age of 19 if they are a full-time high school student or over 18 if they are disabled and the disability began before age 22. 

There are limitations on the total that can be paid each month to your family. The aggregate benefit your family can receive is about 150-180% of your full retirement benefit amount (depending on your age at retirement). If the total family benefit exceeds the limit, each family member's benefit will be reduced proportionately, but your benefits won't be affected. 

Are social security benefits taxed? 

Your social security benefits could be taxed if your total income is high enough. To determine whether your social security will be taxed at the federal level, you'll have to calculate your total income plus half of your social security benefits, which we'll call your "combined income."

If your combined income plus half of your benefits is less than $25,000 for individuals or $32,000 for married filing jointly, your benefits will not be taxed. 

If your combined income is more than $25,000 but less than $34,000 for individuals or is more than $32,000 but less than $44,000 for married filing jointly, up to 50% of your benefits may be taxable.  

If your income exceeds $34,000 for individuals or $44,000 for married filing jointly, up to 85% of your benefits may be taxable.  

In addition to federal taxes, you may be subject to state taxes. Twelve states tax social security benefits, so you could be subject to state taxes if you reside in one of the following states: 

• Colorado
• Connecticut
• Kansas
• Minnesota
• Missouri
• Montana
• Nebraska
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

Register Online to View Your Potential Social Security Benefits

If you haven't already, now is an excellent time to create an online account with ssa.gov. The Social Security Administration's online platform enables you to be able to see valuable information, such as your historical earnings, earned work credits, and projected retirement benefits based on the age at which you begin taking benefits. 

The online account registration process is simple and only requires basic information such as your name, date of birth, and social security number. After creating your free account, you will have access to your personal benefit information and can start planning for your retirement. 

This article provides an overview of social security retirement benefits and is not a substitute for speaking with one of our expert advisors. If you'd like to learn more about social security benefits and planning for your retirement, please contact our office.