Applying for Social Security benefits should feel like a happy moment of accomplishment—you've worked hard for the money you're due! But it can also be cause for confusion and fear. That's because the decisions you make on Social Security will affect your finances for the rest of your life.
If you're ready to retire, or even if retirement is a few years away, this guide can help you understand the process, know what to expect—and plan ahead.
But first, a few steps back.
Social Security is the nation's public pension program. Designed as a safety net to help keep retirees out of poverty, it provides lifetime income to millions of Americans and their families.
The system is funded equally by employers and employees through payroll taxes: A percentage of your salary (currently 6.2% on up to $137,700 a year) is withheld from each paycheck, while your employer pays the same amount separately; those payments earn you credits toward future retirement income. (If you're self-employed, you're on the hook for both the employer and employee portions—12.4% of your pay.)
Even so, Social Security faces a number of financial strains. When the program began in 1937, people didn't live as long. In fact, on average Social Security was expected to cover just 12.7 years in retirement for 65-year-old men (14.7 years for women).
Also, as the size of the U.S. workforce changes, the amount of money going into the system doesn't always match the amount coming out. For example, the huge baby boom generation now entering retirement (and taking Social Security benefits) was followed by the much smaller Generation X (who provide less money for future retirees).
How much will Social Security cover?
According to AARP, in 2020 the average Social Security benefit Opens in new window is $1,503 a month (the maximum is $3,011 for someone who starts taking benefits at their full retirement age Opens in new window). If you think about your monthly budget, how much would $1,503 cover?
That's why you shouldn't assume you'll be able to retire comfortably on Social Security alone. On average, retirees receive about 40% of their preretirement income Opens in new window from Social Security. Depending on where, how and how long you live, that might be enough to support you. But if you want to travel, cover future health care costs, and live life to the fullest—in a retirement that could last 30 years or more—you'll probably need other sources of income.
Also, the program's future is uncertain. The Social Security trust fund, which collects and invests Social Security taxes to pay for future retirees' benefits, could run out of money by 2035 Opens in new window. Unless Congress authorizes more funding or changes the law, tomorrow's retirees might not see 100% of the benefits they expect.
How much can you expect?
The overall income you'll get from Social Security depends on things like how many years you've worked, your income in your highest-earning years, and how much Social Security tax you paid.
But the size of your monthly Social Security check also depends on when you begin taking benefits. You can do so as early as age 62, but the sooner you start, the smaller your monthly check will be. Once you claim benefits, that amount is locked in for life. And if you're married and your spouse works, your decision can be even more complicated.
What's your "full" retirement age?
The first number to know is your "full" or "normal" retirement age—when you'll be able to claim 100% of your benefits, every month, for life. (Use Social Security's Retirement Age Calculator Opens in new window to determine yours.) If you claim benefits earlier than that, you'll get a smaller monthly check; if you wait until later, each payment will be bigger. (Specifically, the amount rises by 8% for each year you hold off from age 62 to age 70.) So, knowing your full retirement age is key to deciding when to start collecting your money.
For example, if you were born in 1960 or later Opens in new window, your full retirement age is 67. If you claim benefits when you become eligible at 62, you'll receive only 70% of your "full" amount each month. But if you wait until age 63, you'll get 75%. At age 67 you'd get 100%, and if you can delay until age 70, you'll be getting checks worth 124% of your full amount, for life. (Social Security's benefits table Opens in new window has the details.)
What's that worth in dollars? Say your "full" Social Security benefit (at age 67) is $1,500 a month, but you start taking payments at 62. In that case you'd receive only $1,125 a month—or $375 less ($4,500 a year) than if you wait until you turn 67. If you delay until age 70 instead, the difference would be even greater ($735 more a month, or $8,820 a year), than by starting at 62. Over the rest of your life in retirement, all that lost income can really add up.