How Does Social Security Work? A Beginner's Guide

How Does Social Security Work? A Beginner's Guide

August 31, 2022
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Social Security benefits can be extremely beneficial once you're in retirement to give you a fixed stream of income. Unfortunately, the world of Social Security can seem complicated when you’re getting ready to apply. Continue reading for a beginner’s guide to Social Security benefits.

 

What’s The Purpose Of Social Security Benefits?

The original purpose of Social Security benefits in reference to retirement is to protect the older population from the expenses of illnesses that could take up a large portion of their savings.

Do I Need To Qualify For Social Security Benefits?

Prior to adding Social Security benefits to your retirement plan, you need to make sure you’re eligible to receive benefits. As you work throughout your life, you’ll pay into Social Security taxes. This system allows you to earn credits towards receiving your benefits. If you were born after 1929, you need 40 credits to qualify for Social Security benefits.

When Can I Start Earning Social Security Benefits?

You can begin receiving Social Security retirement benefits at the age of 62. However, you will receive a discounted rate if you apply prior to your retirement age. Your full retirement age depends on the year you were born:

  • If you were born from 1943 to 1954, your full retirement age is 66 years old.
  • If you were born between 1955 to 1960, your full retirement age is between 66 and 67 years old.
  • If you were born after 1960, your full retirement age is 67.

If you choose to delay your Social Security benefits after your full retirement age, your benefit amount will increase. The benefit amount will increase each year until you reach 70 years old.

Can I Estimate My Social Security Benefits Earnings?

To estimate your monthly Social Security retirement benefit, you can create an account with the Social Security Administration to receive a personalized estimate. Your estimate will be based on your earnings history and what age you plan on beginning to receive benefits.

When Should I Begin Taking Social Security Benefits?

Whether you choose to start receiving your Social Security retirement benefits at age 62 or age 70 is entirely up to you. However, there are several factors you should consider when making this decision:

  • Your Income Needs

If you have an ample amount of other retirement income sources, such as disbursements from retirement accounts, you can delay your Social Security benefits since you will have enough income.

If Social Security retirement benefits will make or break your retirement income, you can start taking your benefits or consider other options, such as continuing working on a part-time or contract basis in retirement or postponing retirement entirely.

  • Your Employment Status

If you take Social Security benefits prior to your full retirement age and are still earning wages, your benefit amount could be reduced. The reduction is $1 for every $2 you earn above the annual limit, which is $19,560 in 2022. Once you reach the year you will turn your full retirement age, the reduction lowers to $1 for every $3 you earn above the annual limit, which is $51,960 in 2022. However, this reduction in benefits is temporary; you will receive the reduction back in an adjusted benefit when you hit full retirement age.

Are Social Security Retirement Benefits Taxed?

You can be subject to federal taxes for your Social Security benefits depending on your combined income. Your combined income is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. The percentage of your Social Security benefits that are taxed depends on your combined income:

  • In 2022, if you are a single tax filer:
    • You will have to pay taxes on up to 85% of your Social Security benefits if your combined income is more than $34,000.
    • You will have to pay taxes on up to 50% of your Social Security benefits if your combined income is between $25,000 and $34,000.
  • In 2022, if you are a joint tax filer:
    • You will have to pay taxes on up to 85% of your Social Security benefits if your combined income is more than $44,000.
    • You will have to pay taxes on up to 50% of your Social Security benefits if your combined income is between $32,000 and $44,000.

It can be difficult navigating your retirement finances on your own, but an experienced and knowledgeable financial advisor can make the process easier. Contact me for help in applying for Social Security benefits or understanding your retirement finances. Email me at jason@fp-wealth.com or call me at 402-454-7204 to schedule your consultation.