Everything You Need to Know About Social Security

School of Social Security & Medicare

Social Security retirement savings represented by miniature elderly people sitting on stacks of coins.

Social Security is an important part of many retirement plans. Since the program’s establishment in 1935, it has provided a guaranteed source of income for retirees. As pensions have been phased out, this guaranteed income has become even more important.

Like most government sponsored programs, the Social Security program is vast and can be confusing. But understanding how it works is vital to a successful retirement. To see how much you already know, test your Social Security knowledge with these common questions. If you find you don’t know the answers, continue reading for a crash course in Social Security.

Social Security Eligibility

When most people reference their Social Security benefits, they mean Social Security retirement benefits. These benefits are available to people aged 62 or older who worked and paid Social Security tax for 10 years or more. However, there are other types of Social Security benefits you could be eligible to receive.

Social Security Spousal Benefits

Social Security spousal benefits are available to those aged 62 or older whose spouse, or former spouse in some cases, worked and paid Social Security tax for 10 years or more. If you do not have sufficient earnings on your own record, or your spouse earned significantly more than you did, spousal benefits may be particularly important to your retirement plan.

Social Security Survivor and Disability Benefits

Widows, widowers, and dependent children may qualify for Social Security survivor benefits and those who are disabled for more than one year may qualify for Social Security disability benefits. To determine if you are eligible for Social Security survivor or disability benefits, review the eligibility criteria on the Social Security Administration website and speak with an experienced financial advisor.

While there are several types of Social Security benefits, and each can serve a purpose in your financial plan, this article will focus on Social Security retirement benefits. So, the term “Social Security benefits” will refer to the benefits you receive during retirement based on your previous employment.

Social Security Full Retirement Age

You may be eligible to begin Social Security at age 62, but you will not receive your full benefit unless you wait until your Full Retirement Age [FRA] to claim benefits. Contrary to popular belief, the typical FRA is not 65. For those born in 1954 or earlier, it is 66. For those born between 1955 and 1959, it is between 66 and 67, and for those born in 1960 or later, it is 67.

Social Security Full Retirement Ages by birth year displayed in a table.

Taking benefits too early is one of the biggest Social Security mistakes. That’s because your benefits are reduced for life when you begin Social Security before your FRA. For example, if your FRA is 67 and you begin receiving benefits at age 62, your benefit amount is reduced by 30% permanently.

In addition to being reduced if taken early, Social Security benefits are increased if you delay them past your FRA. For those born after 1942, Social Security benefits are increased by 8% for each year delayed up until age 70. Like with reductions for claiming benefits early, these increases permanently adjust the amount of Social Security you receive.

Social Security Benefit Amounts

Social Security retirement benefits are based on earnings during your working years. The calculation considers up to 35 years of earnings, adjusted for inflation. On average, monthly Social Security retirement benefits are $1,827 in 2023.

For most people, Social Security replaces between 11% and 35% of pre-retirement income. However, higher earners typically see a lower percentage of their pre-retirement income replaced by Social Security than those who earned less during their working years.

Once you begin taking Social Security benefits, your benefit amount is set. However, Social Security benefits do increase with inflation. Each year, the Social Security Administration reviews the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers and issues a Cost-of-Living Adjustment [COLA] if prices rose.

Several Factors Can Reduce Social Security Benefits

Once you understand the basics of Social Security, you also need to know which factors can reduce your benefits. Consider the following common situations that can reduce your Social Security benefits. With these factors in mind, you can more accurately predict your retirement income.

Taking Social Security Before FRA Can Permanently Reduce Benefits

As previously discussed, claiming your Social Security benefits before your FRA permanently reduces your benefit amount. That’s why it is important to discuss your anticipated retirement date, income needs, and other sources of retirement income with an experienced financial advisor as soon as possible. With this information, your advisor can help you determine the optimal time to claim benefits.

Windfall Elimination Provision and Government Pension Offset Rules Can Reduce Social Security Benefits

If you or your spouse receive a pension from a job that did not require you to pay Social Security tax, you could be subject to the Windfall Elimination Provision or Government Pension Offset rules. These rules can reduce the amount of your Social Security retirement, spousal, or survivor benefits based on pensions from non-covered employment.

The Earnings Test Can Reduce Social Security Benefits

If you are still working when you begin taking benefits, you could be subject to the Social Security earnings test. This rule withholds a portion of your benefits for each dollar you earn over certain thresholds in years where you work and receive benefits prior to your FRA. Once you reach FRA, the withheld amount is paid back to you over the course of your life.

Social Security Taxation

Taxes are another factor that can reduce your Social Security benefits. Some people owe tax on a portion of their Social Security benefits. The amount of tax you owe depends on the state where you reside and your provisional income.

Intersection between Social Security and Medicare

The earnings used to calculate your Social Security benefits also determine your eligibility for another government program – Medicare. Unlike Social Security, most people are not eligible for Medicare until age 65. If you are already receiving Social Security at that time, you will be automatically enrolled in Medicare.

Because the Social Security and Medicare programs are so closely linked, you will often hear them together when discussing retirement planning. In fact, working to maximize benefits from these government programs is one of the most important aspects of a successful retirement plan. To navigate the complexities of these programs, it can be helpful to consult a wealth management team that has decades of experience helping clients achieve their dream retirement.

Get Answers to Your Social Security Questions with Meld Financial

At Meld Financial, we have spent almost 4 decades helping clients achieve their retirement goals. Our comprehensive financial plan, Financial Fingerprint™ is quick to assemble, easy to understand, and simple to modify as your circumstances change. This nimble plan accounts for the most important aspects of your retirement like Social Security and Medicare. The Meld team has the experience to determine when you should begin receiving Social Security benefits and how they factor into your retirement plan.

To learn more or get started, contact us today.

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