Social Security: What you need to know

January 08, 2024

Social Security is a key piece of most retirement plans. Unfortunately, many individuals don’t understand how things like marital status, taxes, and delaying benefits affect Social Security. Here is a quick guide to prepare you for taking Social Security benefits in the next stage of your life.

How benefits are calculated

The average Social Security benefit is $1,657. But how is this calculated? The Social Security Administration (SSA) takes into account several factors when determining your benefits. The most important is your average monthly income during the 35-year period of your highest earnings. Then, your benefits are adjusted for increases in the cost-of-living based on changes to the consumer price index. This helps the SSA derive your full benefit amount, which is the amount you would receive if you take benefits at your full retirement age.

Decide when to take benefits

Many people don’t know that you can choose when to take your Social Security benefits, and this decision will determine how much you will receive. You can actually start claiming benefits at age 62 and delay anytime until age 70. However, if you start taking benefits before your full retirement age (between 66 and 67 depending on when you were born), your benefits will be reduced.

For example, if you were born in 1960 and choose to take Social Security at age 62, you’ll receive 70% of your full benefit amount, while if you wait until age 65, you’ll receive 86.7%.

Changes to Social Security

The SSA is constantly updating their benefits policies. New updates that will take affect this year include:

  • A 3.2% increase to benefits payments to match inflation
  • An increase to maximum taxable earnings limit to $168,600 from $160,200
  • An increase to earnings limits which may reduce benefits for those working into retirement

Before making any benefits decisions, you should always consult the SSA’s latest guidelines to make sure you are using the most up-to-date information.


Income tax implications

You might be surprised to know that close to 40% of people who receive Social Security pay taxes on their benefits. Your personal tax liability will be dependent on your yearly income. For those making between $25,000 and $34,000, up to 50% of your benefits may be subject to tax. Meanwhile, if your income exceeds $34,000 ($44,000 for joint filers), you could be taxed up to 85% of your benefits. Make sure to account for taxes when budgeting for your future benefits.

Benefits for married couples

As a married couple, widow, or divorcee, there are several things you should know about your benefits and eligibility:

  • Your marital status doesn’t affect your Social Security eligibility
  • Every individual receives benefits based on their own work history, regardless of marital status
  • Lower-paid spouses can receive up to 50% of their partners’ benefits
  • Divorced spouses can receive benefits based on their previous partners as long as they were married for at least 10
  • Widows can receive up to the full amount of their spouses’ benefits, but the benefit amount will depend on the specific situation

Do your homework before taking benefits

There is so much to understand about Social Security, including tax implications, when to start taking benefits, and how your marital status impacts benefits. The more you understand about your benefits, the easier it will be to make an informed decision in retirement.