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Social Security and Retirement

For the average American, Social Security retirement benefits will replace only about 40 percent of pre-retirement earnings. This percentage is lower for those in the upper-income brackets and higher for those in the lower-income brackets.

Since you may need a higher replacement percentage to maintain your current lifestyle, Social Security should only be one part of your retirement income, along with personal savings, and income from a pension or a defined contribution plan, such as a 401(k) or earnings from part-time work.

If you have worked long enough at a Social Security-covered job (generally about 10 years), you could be eligible for Social Security benefits as early as age 62. The amount of your Social Security benefit is based on your earnings over your working career. If you have some years of no earnings or low earnings, your benefit amount may be lower than if you had worked steadily. 

Three things to keep in mind

For most people, Social Security benefits will represent a portion of their income during retirement years—not their sole source of income. It's important to be aware of three important factors that will affect the amount of Social Security benefits you will eventually receive:

  • When you choose to begin taking benefits 
  • Whether or not your benefits are taxed 
  • Whether or not you continue working

Retire early, get less; retire later, get more

In 2000, Congress raised the full retirement age (the age at which you can receive your full Social Security retirement benefits) to help offset the financial costs of increasing life expectancies among Americans.

For those born in 1937 and earlier, full retirement remains at age 65. However, for those born after 1937, the full retirement age increases incrementally until those born in 1960 and after will have to wait until age 67 to receive full benefits.

Despite this, anyone who has paid into the system for at least 10 years can start receiving benefits as early as the first full month after reaching age 62. However, accessing benefits at 62 will permanently decrease the amount you may receive each month by 20 to 30 percent. Conversely, if you delay taking benefits past your full retirement age, your monthly benefits will increase until you turn 70 and reach the maximum benefit amount. 

The decision to receive Social Security benefits before full retirement age is contingent on individual circumstances. Even the month in which you choose to begin benefits may make a difference. In addition, other benefits (such as Social Security disability benefits or survivor benefits) may be available if you are eligible. Not everyone has the financial flexibility to defer Social Security benefits, but if you’re considering it, you must compare the advantage of increased monthly benefits against the cost of receiving benefits for fewer years.

Will you pay taxes on your Social Security benefits?

If, in addition to Social Security benefits, your retirement income includes taxable income in the form of wages, interest, dividends, and other sources, you could end up paying taxes on part of your benefits. 

It all depends on your “provisional income.” Provisional income includes your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits. Single taxpayers reporting $25,000 or less in provisional income pay no taxes on their Social Security benefits. For married taxpayers filing jointly, the threshold is $32,000. If your taxable income exceeds those limits, a part of your Social Security benefits will be taxable.

Continuing to work may reduce your benefits

Another consideration when determining whether to take Social Security benefits before your full retirement age is that your work activity during this time may decrease your benefit payments. 

After you reach your full retirement age, you can earn as much as you like and still receive your full Social Security benefits. However, the rules for how work affects your benefits are complicated; if you would like to work while receiving benefits, you should contact the Social Security Administration before making any decisions. 

Note: You should apply for Medicare at age 65, even if you decide to continue working. If you’re still working, you might need just Part A of Medicare; your local Social Security office can tell you whether taking Part B is a good idea. In some cases, waiting to apply will result in higher premiums. 

Generally, Social Security recipients who have not yet reached full retirement age will see their benefits reduced by $1 for every $2 they earn over an annual limit. Once recipients reach the year in which they attain their full retirement age, the reduction changes to $1 for every $3 they earn over a different limit. Once recipients reach the month and year of full retirement age, there is no limit on work activity. 

Retirement benefits for your family

Even if your spouse has never worked outside your home, he or she may be eligible for spousal benefits based on your Social Security earnings record. Children may be eligible as well. Spousal (or child) benefits can be as much as 50 percent of your benefit. There are additional options for widows and widowers. The rules vary depending on the situation, so you should talk to a Social Security representative about the options available to you. 

Change Is Always Possible

It's not hard to understand why the solvency of Social Security has been the center of a growing national debate over the past few years. It's simple economics.

More people are retiring than entering the workforce, which will eventually reduce the ratio of workers to retirees to 2-to-1 (that ratio was about 4-to-1 in 1965). In addition, people are living much longer in retirement, sometimes decades longer. 

Under the pressure of possible insolvency, Congress has debated several Social Security reform measures in recent years. While no new legislation has been passed, the possibility continues to exist for dramatic revisions to this social insurance system to come about in the future, changing how Social Security factors into your retirement planning. 

To learn more about your benefits, visit the Social Security website at www.ssa.gov.

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