Determining just how much you can count on from Social Security benefits is an important part of planning for your retirement.
According to the Social Security Administration, the average monthly benefit for retirees is $1,461 as of January 2019. Without additional retirement income, that is hardly sufficient for most retirees, and Medicare payments and taxes could further deplete that amount.
The good news is that all beneficiaries can learn their projected benefit amount before they retire, and use that estimate to plan accordingly. When you choose to take your Social Security benefits can also affect how large they are.
Here’s what you need to know about your Social Security benefits.
How your Social Security benefits are determined
The size of your Social Security benefits depends on two factors: your work history and when you take your benefits.
Work history and your Social Security benefits
Workers who earn income and pay taxes toward Social Security earn “credits” through the Social Security program. As of 2019, workers earn one credit for every $1,360 earned, up to a cap of four credits each year. Once you earn forty total credits (that is, you’ve worked and paid Social Security taxes for about 10 years), you are eligible to receive Social Security benefits based upon your work record.
However, even though you only need 10 years worth of work to qualify for benefits, the Social Security Administration calculates your benefits based upon your 35 highest earning years. If you have worked fewer than 35 years, your benefit calculation uses zeroes to create the average for your calculation. For instance, if you only worked 25 years, the Social Security Administration would average those 25 years of earnings with 10 years of $0, lowering your total average earnings and monthly benefit amount.
This means one of the best ways to increase your Social Security benefit amount is to continue working until you have at least 35 years of income under your belt. Even if you have 35 years (or more) or work experience, if you are at the top of your lifetime earnings before you retire, putting off retirement for one or more years can replace lower-earning years in your calculation and increase your monthly benefit.
The importance of timing your Social Security benefits
The calculated monthly benefit based upon your work history is called your primary insurance amount (PIA). This is the amount of money you will get each month if you retire as of your full retirement age, which is between age 65 and 67, depending on what year you were born.
However, you’re not required to take your Social Security benefits at your full retirement age. You may choose to receive benefits as early as age 62 or as late as age 70. But when you choose to take your benefits affects how much you will receive. Starting with your PIA, Social Security will reduce or increase your benefit depending on whether you take it before your after your full retirement age.
Specifically, taking your benefits prior to reaching your full retirement age will reduce your monthly benefit by approximately 0.4% for each month between the date you take your benefits and your full retirement age. That means taking your benefits as of age 62 would reduce those monthly benefits by as much as 25% to 30%, depending on your full retirement age.
However, waiting to take your benefits means you are eligible for delayed retirement credits. These add as much as 8% to your PIA for each year that you wait, up until age 70. That means that waiting to take your benefits as long as you can gives you the highest possible Social Security monthly benefit.
Don’t forget about Medicare and taxes
While the initial size of your benefit depends on your work history and timing, you do need to be ready to see some money taken from your monthly Social Security check. Both Medicare Part B premiums and income taxes could take a bite out of your monthly benefit.
Medicare Part B charges a monthly premium to all beneficiaries. Medicare beneficiaries with incomes below $85,000 (or $170,000 for married couples) pay $135.50 per month in 2019. The vast majority of beneficiaries see that premium amount deducted from their monthly Social Security benefit check. Considering that the average monthly benefit for retirees in 2019 is $1,461, this premium cost could be a painful loss of nearly 10% of monthly Social Security income.
Many retirees are surprised to learn that their Social Security benefits may be subject to income tax. Unless your retirement income falls below a certain threshold, you can expect to pay taxes on anywhere from 50% to 85% of your Social Security benefits. (Remember: Paying taxes on 50% to 85% of your benefits does not mean Uncle Sam is coming for half of your benefit check. It just means up to 50% to 85% of your benefits may be subject to taxation at your marginal tax rate).
To determine if and how much your benefits will be taxed, Social Security calculates what’s known as your provisional income. This is calculated by adding together:
- Half of your Social Security benefits, plus
- All of your other income, including tax-exempt interest.
Your provisional income is then compared to base amounts. A provisional income lower than $25,000 for singles and $32,000 for married couples means no taxes on Social Security benefits. An income between $25,000 and $34,000 for singles and between $32,000 and $44,000 for couples means that up to 50% of Social Security benefits will be subject to tax. And income over $34,000 for singles and $44,000 for couples means up to 85% of benefits may be taxable.
Determining your personal eligibility for Social Security
Thankfully, the Social Security Administration has fully embraced the digital age and it provides a number of easy-to-use applications, calculators and information portals through its website SSA.gov. Among the most useful for both current workers and retirees are:
- Benefits calculators: These calculators will help you estimate everything from the size of your benefits to your life expectancy to how early or late retirement will affect your benefits.
- My Social Security account: Every taxpayer can sign up for “My Social Security account” which can give you a personalized and detailed look at your earnings record, anticipated benefits and other information.
Other ways to save for retirement
Social Security benefits alone likely cannot provide for a secure retirement, let alone a retirement that allows you to live the life you want. That’s why it’s important to also set aside money for retirement.
Contributing to a workplace retirement account such a 401(k) can give you a tax break now and income in retirement. If you don’t have access to a work-sponsored retirement account, a traditional IRA can give you some of the same benefits as a 401(k). Finally, you may also want to invest some money in a Roth IRA while you are working because the money comes out tax-free in retirement and will not trigger taxes on your Social Security benefits.
The bottom line
The amount you will receive from Social Security will depend on your work history and when you take your benefits. Though you can increase your benefits by working at least 35 years and waiting as long as possible to take them, the monthly Social Security payout is often not enough to live on, especially considering the potential reductions for Medicare premiums and taxes.
To provide yourself with the most financially secure retirement, you need to understand what to expect from Social Security and set aside money now.