Retire Smart: Your Social Security Guide

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). 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 pre-retirement 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.

Estimate your benefits

No matter where you are in your career, it's good to keep track of how much Social Security income you can expect. The Social Security Administration's Retirement Estimator Opens in new window lets you forecast your benefits based on your years of work, your income and how much you've paid into the system so far. (The SSA used to provide annual estimates by mail; now they ask you to sign up for a my Social Security account Opens in new window at ssa.gov Opens in new window and check your numbers each year.)

You can use the Estimator if:

• You've earned enough Social Security credits   PDF opens in new window to qualify for benefits but aren't yet receiving them;
• You're eligible for a pension based on work that isn't covered by Social Security; or
• You're awaiting a decision on your application.

If you can't use the tool, Social Security offers other calculators Opens in new window to help you figure out how much you might receive based on your income, expected retirement date and more.

Keep in mind that your estimate isn't necessarily your final benefit amount. The income you'll receive in retirement will also depend on whether your future earnings (or related laws) change. You'll find out your actual benefit amount when you apply.

Knowing how much to expect from Social Security can help you with your overall retirement planning. For example, if you think your Social Security and other retirement income won't be enough to afford the lifestyle you'll want, you might plan to keep working longer (if you can), try to save more aggressively, or adjust your retirement investments to seek more long-term growth. Or maybe you'll find that you're future income looks high enough to afford an earlier retirement than you'd thought.

Benefits for current or former spouses

Workers earn Social Security benefits and shared them with their spouses. Depending on how long you've been married, your age and income, you might be able to receive monthly Social Security payments based on your spouse's or ex-spouse's earnings.

The details depend on your situation, but in general:

• Spouses can get Social Security benefits even if they never worked/paid into the system.
• Your spouse can get benefits if you're receiving or eligible for benefits. (Even if you're working full-time and not yet receiving Social Security benefits, your spouse might be able to start.)
• Spouses (and ex-spouses) can receive Social Security benefits of up to 50% of your monthly benefit amount. This will not affect the amount of benefits you receive.
• If your spouse has their own Social Security benefit based on their years of work, but your benefit amount is higher, they will get more benefits to make up the difference.

Social Security's online benefits information Opens in new window can help you understand your options. Depending on your ages, income and financial goals, it might make sense for one spouse to retire sooner than the other.

When should you start taking benefits?

Don't be too quick to start collecting Social Security. Everyone's situation is different, but in general, you might be better off waiting until your full retirement age (or later).

There are several factors to consider:

• Health and life expectancy.

  Are you in good health, and do you reasonably expect to live for many more years? Do you have family history of early mortality? If you don't expect to live, say, 30 or more years in retirement, starting your payments sooner — even if each monthly check is smaller — could help provide financial stability and peace of mind.

• Other retirement income.

  Do you have other retirement savings, a pension from a current or former employers, an annuity or other forms of retirement income (rental properties, stock dividends, etc.)? If you don't have any other sources of retirement income, and you're retiring out of necessity rather than choice (being laid off, forced into early retirement), taking Social Security early might be your only option. But hopefully, you have other ways to supplement retirement income and you'll have some flexibility in deciding when to take Social Security.

• Taxes.

  Income from Social Security is federally taxable, so consider that when you plan to take your benefits. For example, will Social Security income put you in a higher tax bracket? Do you have retirement accounts, like Roth IRAs, that enable tax-free withdrawals? How might federally required minimum distributions Opens in new window (RMDs) from traditonal IRAs, 401(k)s and other retirement accounts fit into your equation?

Prepare to apply

If you're getting ready to retire, or even if you want to keep working but are nearing your full retirement age, think about applying for Social Security. You'll have three options:

• Apply online Opens in new window.
• Call the Social Security Administration at 800-772-1213 (TTY 800-325-0778).
• Visit your local Social Security office. Opens in new window (Make an appointment before you go.)

When you apply, you'll need to provide information and documents about your identity, citizenship status, employment and income history, etc. The list might include:

• Your date of birth, place of birth and Social Security number (SSN)
• Your spouse's (and any former spouses') name, SSN and birth date or age
• Proof of U.S. citizenship
• Your original birth certificate (or a certified copy)
• Copy of U.S. military service papers/Certificate of Release or Discharge from Active Duty for any active U.S. military service prior to 1968
• Copy of your W-2 forms and/or self-employment tax return for the previous year

Depending on your situation, you might have to provide other details and documents Opens in new window. To save time, review the full application, Form SSA-1 Opens in new window, before you start.

Bottom line

Calculating Social Security benefits Opens in new window is complicated, and everyone's situation is different. If you're healthy, going strong in your career and want to keep working into your late 60s (or beyond), consider delaying payments. This way you can maximize your monthly check for the rest of your life.

But if you're having health problems, you've been forced to retire early, or you're facing financial stress, it might make sense to start taking Social Security sooner than later, even if your monthly payments are smaller than you'd see otherwise.

Things get even more complex if you have a spouse whose earnings differ dramatically from yours or who expects to retire at a different time. So no matter what, talk with a financial or tax advisor about when starting Social Security makes the most sense for you.

Footnotes

Ben Gran is a freelance writer based in Des Moines, Iowa. He writes about personal finance, public policy, financial services, technology, and business.

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