Millions of seniors depend on Social Security to serve as a critical income stream in retirement. Whether you're about to claim benefits or want to plan for the future, here are five important rules about the program it pays to know about.
1. Your benefits are calculated based on your top 35 years of earnings
Your Social Security benefits are determined by your work history -- specifically, your highest 35 years of earnings -- so the more you make during the peak of your career, the more you stand to collect when you're older. That's why if you didn't work a full 35 years during your career (say, you took time off to raise children or care for an ailing family member), it pays to consider staying at your job longer in order to boost your benefits.
Imagine you only have 32 years of work on record. This means you'll have three $0s factored in when your benefits are calculated. But if you replace those $0s with an actual salary, your benefits stand to increase. The same holds true if you're earning far more at present than you were earlier on in your career, which tends to be the case for most workers. Replacing three years of $20,000 in earnings with three years of $120,000 in earnings could bring up your total benefit amount, leaving you with a higher income stream for life.
2. The earliest age you can file for benefits is 62
Eligible recipients get an eight-year window to file for Social Security that begins at age 62. Not surprisingly, 62 is the most popular age to claim benefits despite the fact that doing so comes with one major drawback: a reduction in your monthly payments.
As we just learned, your Social Security benefits are calculated based on your earnings record. But you're only entitled to your full monthly benefit upon reaching what's known as full retirement age, or FRA. FRA depends on your year of birth, as follows:
Year of Birth
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
Filing for benefits at 62, therefore, will result in the largest possible reduction you could face. Specifically, you'll take a 6.67% hit on benefits per year for the first three years you file early, and then a 5% hit on benefits for each year thereafter. This means that if you're looking at an FRA of 67 and you file at 62, you'll lower your payments by 30%. Ouch.
3. There's nothing to be gained by delaying benefits past age 70
While claiming benefits ahead of full retirement age will cause them to drop, holding off past FRA will have the opposite effect -- your benefits will increase by 8% for each year you wait. This incentive, however, runs out at age 70, which means you're looking at a maximum boost of 32% if you file at 70 but have an FRA of 66. Still, waiting on Social Security is a good way to secure a greater amount of monthly income throughout retirement.
4. You can collect Social Security even if you didn't work
Since Social Security benefits are based on earnings, you might assume that if you never worked a day in your life, there's no way you can possibly collect any money from the program. But actually, Social Security is designed to cover the spouses of workers who paid into the system, so once your spouse files for benefits, you'll be entitled to collect up to 50% of his or her monthly payments as well.
Furthermore, you can collect spousal benefits even if you do have a work history of your own. Social Security will pay you either your own monthly benefit or half of your spouse's benefit -- whichever is greater. This means that if you're entitled to $750 a month in benefits on your own, but your spouse collects $1,800 a month, you'll end up with $900.
5. Social Security isn't designed to serve as your sole income source
Though Social Security can provide a generous amount of income for seniors, it was never designed to sustain retirees all by itself. Most seniors need 70% to 80% of their pre-retirement income to pay the bills, but Social Security will only replace about 40% of the average worker's previous earnings. This means that while those benefits will come in handy, they can't take the place of personal savings or additional income sources.
The more you know about Social Security, the greater your chances of signing up at the right age and making the most of your benefits. Even if retirement is decades away, it still pays to learn how this important program works so that you're in the best position to capitalize on it later on.
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