How Do Social Security Benefits Work When You Retire?

Social Security is a federal program in the United States run by the Social Security Administration (SSA). Under the program, retirement benefits and disability income are provided to qualified people including their spouses, children, and survivors. A person must be at least 62 years old and have contributed to the Social Security program for a period of 10 years or more to qualify for Social Security retirement benefits.

As per the 2021 Social Security Administration (SSA) Factsheet, most people rely on Social Security as their primary source of income during retirement. The report reveals that nine out of ten people aged 65 years or more were taking out their Social Security benefits in retirement. This was true as of December 2020. Moreover, among this group, Social Security made up around 30% of their retirement income. The numbers become even bleaker as the study outlines that 12% of men and 15% of women depend on Social Security to meet their basic expenses and it makes up 90% of their retirement income.

Social Security benefits are not enough to cover the living expenses of the retirees. Add to this the rising life expectancy, retirees need a bigger reserve of funds to support their retirement lifestyle expenses. If you were 65 years old in 1940, you could have expected to live for a further 14 years. However, in 2021, if you are 65 years of age, your life expectancy has increased to 20 years. It is expected that by 2035 the number of 65-year-old Americans will rise from 57 million in 2021 to 76 million in 2035. Thus, it is quite likely that the Social Security benefits may fall short and prove insufficient to cover the retirement needs of the coming generation.

Even though Social Security benefits are insufficient to support an average retirement lifestyle, they still form an essential part of a person’s retirement income. You can boost your retirement corpus and your Social Security paycheck by employing tactics like delaying your Social Security benefits till a later date rather than withdrawing them at your full retirement age (FRA). To do this, you will first need to understand how Social Security works and what steps you can take to maximize your payout.

Further, you need to consider the implications of Social Security for married couples, in case you are living with your spouse or divorced but paying combined taxes, on your Social Security benefits. In addition, you will need to factor in the effects of working after retirement on your Social Security paycheck. Also, you may need to consider the effects of some other aspects such as early retirement, and how they would affect your Social Security benefits. To identify and understand what strategies you can use to maximize your Social Security paycheck and stretch your retirement income, reach out to a professional financial advisor who can advise you on the same. We will discuss the different scenarios on how and when you can claim your Social Security benefits.

To find out how Social Security works after retirement, let us go through the following guide:

What is meant by Social Security benefits?

As stated above, Social Security is a federal program run by the SSA to provide economic security and a stable income to the retirees after their retirement. To receive Social Security benefits during retirement, you must accumulate at least 40 work credits. You can earn credits by paying taxes from your income during your working years. With that said, the amount of your benefits primarily depends on when you take out your Social Security funds. To keep pace with the rising inflation, each year cost-of-living adjustments (COLA) are made by the SSA to your Social Security benefits. These adjustments are made as per the Consumer Price Index (CPI). According to the latest numbers, the COLA adjustment stands at 5.9% from the start of December 2021 and is payable in January 2022.

How do Social Security benefits work?

The SSA states that a person can start withdrawing funds from their Social Security account once they turn 62. This, however, comes at a cost as your paycheck will reduce by as much as 30% if you do not wait until reaching your FRA. You would receive a bigger paycheck if you begin taking your benefits at FRA and even more so if you wait till you reach 70 years of age to withdraw your Social Security benefits. You can boost your Social Security paycheck by almost 32% compared to if you started drawing money at your FRA if you wait till you turn 70. If you would compare this gain in your Social Security benefits with the COLA adjustments made by the SSA, it would come out to be much higher.

If you believe that Social Security benefits would contribute a sizable chunk to your retirement expenses, it would be considered wise if you wait till your FRA or till you reach 70 years of age to start withdrawing funds from it. Even if you have opted for early retirement, you could still delay withdrawing your Social Security benefits until your FRA. As per a report, each year, on average, retirees lose over $3.4 trillion in Social Security income due to taking out their money earlier than their FRA.

What happens to your Social Security if you retire early?

As stated above, you would receive a reduced sum of money if you take out your Social Security benefits before reaching FRA. The SSA determines your FRA based on your birth year.

Please go through the table below to find out your FRA as per your birth year.

Please note that the SSA assumes that you were born on January 1 in the previous year at the time of calculating the birth year. Your Social Security paycheck is calculated on how early or late you withdraw your benefits compared to your FRA.

Also, you need to consider the impact of early retirement on your Social Security payouts. To be eligible for Social Security benefits, you must have a minimum of 40 credits. These credits can generally be earned in a period of 10 years. But if you take early retirement, you may find yourself ineligible for Social Security due to failing to collect the required amount of credits. However, your accumulated credits remain on your record post-retirement too. Thus, if you so wish, you could work in some capacity to accumulate the required Social Security credits, even after opting for early retirement. The credits earned during your retirement years will be added to your previous credits earned during your working years.

What impact does Social Security have on married couples?

Both spouses are entitled to Social Security benefits based on their work history. They also receive Spousal benefits wherein the partner earning a lower income may get Social Security benefits based on their other spouse’s work records. The SSA takes into consideration the higher number between your worker benefit at FRA and one-half of the spouse’s worker benefit at FRA to calculate your Spousal benefit. Consider, for example, that you are entitled to receive a worker benefit amounting to $2,500 per month at your FRA (66 years eight months). Your partner, on the other hand, is eligible to get a worker benefit of $1,000 at their FRA (66 years eight months). Thus, your partner can receive an additional $250 (1/2*($2,500) – $1,000) as a spousal benefit. Thus, if both you and your spouse claim your Social Security benefits at your FRA, you will be eligible to receive $2,500 and your partner will get $1,250.

There are three critical aspects that you must heed to claim spousal benefits. These are:

1. To claim spousal benefits, you must file for your worker benefits and include your spouse in the same.
2. You and your spouse can claim spousal benefits of $2,500 and $1,250 only if you withdraw them at your FRA. If you withdraw funds from your Social Security benefits before reaching your FRA, you will receive a reduced paycheck.
3. When either you or your spouse files for Social Security benefits, it is assumed that you are filing for both worker and spousal benefits. It is not permissible to claim only one benefit (spousal or worker).

The SSA also provides Social Security benefits to people who are filing on the work record of a deceased spouse. Herein, the survivor can file a claim for the benefit amount of their deceased spouse, provided that sum is higher than their individual Social Security amount at the time of their spouse’s demise.

Is there a limit on the number of hours you can work in retirement if you are claiming Social Security benefits?

In addition to the aforesaid aspects, what you do during your retirement years also affects your Social Security benefits. If you have retired but are planning to work part-time in retirement, you will need to figure out what impact your working hours will have on your Social Security payouts. There is an earning limit set by the SSA. Consider a scenario where you have taken early retirement and taken out your benefits before reaching your FRA but start working on a part-time basis. Herein, your Social Security paycheck will be reduced due to the earnings limit criteria.

The earning limit for 2022 is $19,560. Your benefits are reduced by $1 for every $2 earned by you over this limit. Suppose you reach your FRA in 2022. Herein, your earnings are revised to $51,960. Herein, for every $3 you earn over this limit, the SSA will withhold $1 from your Social Security fund. Do note that this rule will be applied only till the month you reach your FRA. As soon as you reach your FRA in 2022, your benefits will be restored to their previous sum and will not be reduced, irrespective of how much you earn.

Let us understand this with the help of an example. Say, you file for Social Security in January 2022, after turning 62. You take home $600 every month. But you intend to work during your retirement and will likely earn $23,920 per year. This amount is $4,360 higher than the earning limit set for 2022 i.e. $19,560. The SSA will withhold $2,180 from your paycheck as per the rule stated above ($1 for every $2 you get over the earning limit). From January 2022 till April 2022, you will not receive your Social Security payments. The SSA will start paying you Social Security again from May 2022 onwards. You will receive a check of $600 as your Social Security benefit each month for the remaining year. The next year you will be reimbursed $380 that was withheld by the SSA in April 2022. You should know that when your Social Security benefits are withheld due to high monthly earnings, you will start receiving a higher paycheck once you reach your FRA.

The table below shows your Social Security benefits for the year 2022 as per your monthly benefits and expected annual earnings. Do note that this table is for those individuals who have not yet reached their FRA in 2022.

Suppose you start a business post-retirement or pick up a paid hobby, your earnings will be considered a part of your net income for the earning limit calculation. Net income here means any money earned from work. It does not include any annuity, pension, capital gains from investments, etc. Also, you should note that your net income is only accounted for when you receive it and not at the time when it becomes due. In addition, if your Social Security benefits are reduced because of your earnings, your children will receive the same amount (in case of your death), irrespective of how much they earn themselves.

Hence, keep the SSA informed about any changes in your earnings. Any changes that occur in your earnings, the SSA adjusts your benefits accordingly, for the said year. That said, if you expect that your income would change either in the same year or the next year, do notify the SSA of the same as early as possible.

What impact do taxes have on Social Security?

Taxes have a significant impact on Social Security withdrawals. Did you know that you would likely owe tax on 85% of your Social Security sum if your annual provisional income exceeds $34,000? You could counteract this by filing for a joint tax return provided your combined annual provisional income is between $32,000 and $44,000. In this case, you would pay tax on up to 50% of your Social Security benefits. However, if your combined provisional income exceeds $44,000 annually, you would likely owe tax on 85% of your Social Security benefits.

To summarize

Understanding how Social Security works will help you make informed decisions regarding your retirement and Social Security withdrawals. You need to determine how much money you will bring home every month if you opt for early retirement or continue working after retirement. This would enable you to effectively plan for your future. Visit www.ssa.gov/myaccount to open a ‘My Social Security Account’. Herein, you can also learn more about the benefits and how different factors will impact your Social Security benefit amount. You can also calculate your Social Security paycheck sum by using the online Social Security calculator available at www.ssa.gov/benefits/retirement/estimator.

If you wish to learn more about Social Security withdrawal structures and how you can incorporate Social Security benefits in your retirement planning, use the free advisor match service. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.