The Essential Social Security Rules You Need to Know

Social Security rally

Social Security is in jeopardy. | Scott Olson/Getty Images

Unprecedented doubt surrounds what used to be considered guaranteed retirement income. The Social Security program is struggling with increased worry, as almost all Americans contribute but not everyone might receive their checks. The program is well on its way to burning through its assets by 2034. If we burn through the cash, beneficiaries can expect to receive only 77% of their payouts moving forward — a stat that flips the stomachs of those who rely heavily on these checks to make ends meet.

There’s no denying the outlook surrounding Social Security is less than pleasant. How much should the average American expect to receive and when is the best time to withdraw for maximum effect? We answer these questions and other essential rules you must know about Social Security (If you must work, do this No. 8).

1. Your benefits are determined by your 35 highest-income years

  • It’s possible a portion of your earning years will become irrelevant when calculating benefits.

Your Social Security benefits are calculated using your 35 highest-income years. If you worked more than 35 years, it’s probable some of your additional work history will be irrelevant for your benefits calculation. On the other hand, working a few so-called “extra years” could help remove lower earning years from your history and result in higher payments. The taxable maximum for 2017 is $127,200, so working additional years beyond 35 could prove worthwhile for increasing your future payments.

Next: How you might actually lose benefits if you do this

2. Some retirement benefits cancel out other benefits

Retirement planning written on a notepad

You might not get all of your benefits. | designer491/iStock/Getty Images

  • You can’t claim two benefits at once. In fact, in some cases, you could lose out on your own benefits entirely.

There are three kinds of Social Security benefits available during retirement: basic retirement benefits, spousal benefits, and survivor benefits. Even if your situation warrants all three, it doesn’t mean you’re entitled to all of them. If you claim two benefits at once, you could lose one of the two, as the government will not pay out two different benefits simultaneously. Instead of having your cake and eating it, too, you’ll likely receive the larger benefit.

For example, if you are married and thus eligible for both spousal and standard retirement benefits, you can only claim one. If your spouse earned significantly more than you did, you might never actually get your own retirement benefits. The government views this Social Security strategy as a way to cut back, only giving you your retirement benefit plus the difference between the two instead of both. And rest assured, it’ll make sure you don’t get a dime more than legally required by law.

Next: A Social Security secret that could help boost your benefits

3. Claim benefits late for larger monthly checks

Social Security Benefits Application Form with pen and glasses

Applying later could get you more money. | photojournalis/iStock/Getty Images

  • Your monthly benefit check will usually increase by 8% for every year you wait.

If you wait until after full retirement age to claim your Social Security benefits, your monthly benefit check will usually increase by 8% for every year you wait. However, all good things come to an end. And for those vying for larger monthly checks, that limit is age 70. If you can swing working until the last minute, you’ll receive 132% of the benefits you would have received at full retirement age. But if the thought of working until age 70 brings a tear to your eye, consider retiring and delaying filing for benefits until age 70 to receive your maximum payout.

Next: The alternative to delaying benefits isn’t all that appealing.

4. Taking benefits early will cost you forever

Treasury check

You lose out when you take benefits early. | William Thomas Cain/Getty Images

  • Taking benefits at the earliest possible second can reduce your monthly check by 30%.

Considering over 40% of workers claim retirement benefits early, one would assume there’s a large incentive to do so. That’s not actually the case. Taking benefits before full retirement age permanently reduces your monthly payment amount. In fact, those who claim benefits at age 62, the earliest start date, received 30% less in benefits than those who do not.

There are some valid reasons for why people claim Social Security early, including health concerns, professional burnout, or spousal benefit conditions. Either way, it’s imperative future retirees consider both pros and cons to claiming benefits before taking the leap, as it could have a substantial impact on your financial future.

Next: How to determine your full retirement age

5. Baby boomer full retirement age is 66 — sort of

senior couple

Retirement age depends on birth year. | monkeybusinessimages/iStock/Getty Images

  • The date you are eligible for full retirement benefits depends on your birth year.

All this strategic talk about the best time to claim your benefits can be confusing if you’re unsure what exactly constitutes “full retirement age.” When you can claim full benefits depends on when you were born. The full retirement age for those born during or before 1937 is 65.

If you were born between 1938 and 1959, the full retirement age ranges from 65 and 2 months to 66 and 10 months, depending on your birth year. Everyone born after 1960 can achieve full retirement at age 67. Regardless of your birthday, you can claim benefits as early as 62. But, as we now know, such eagerness could result in reduced benefits between 20% and 30%.

Next: Who determines the adjustments?

6. It’s all about cost-of-living adjustments

Richard Nixon

President Richard Nixon first required Social Security adjustments. | Wikimedia Commons

  • Richard Nixon signed legislation that requires adjustments pertaining to the cost of living.

It was former President Richard Nixon who signed legislation stating Social Security benefits be automatically adjusted for inflation using the Consumer Price Index for Urban Wage Earners and Clerical Workers. The formula compares the index for the third quarter of the year with the inflation rate in which the cost of living was last adjusted. The most recent adjustment was 2014 and serves as the year adjustments are compared against.

Next: The hard truth about Social Security increases

7. Cost-of-living increases may not be enough

filing for Social Security

Social Security doesn’t increase with inflation. | Mark Wilson/Getty Images

  • The next projected Social Security increase is set for a whopping 2.2%.

Despite cost-of-living adjustments, Social Security payments are not keeping pace with retirees’ increasing expenses. So be prepared to supplement your income. The next projected increase could be 2.2% in 2018, the biggest rise in six years. But inflation usually hovers around 1.6% year over year.

Social Security serves as primary income for many Americans (as we’ll see later). But if you have any hopes of surviving retirement, you’ll need to cash in on other money streams, such as 401(k)s, pensions, IRAs, and even employment, to get by.

Next: Speaking of supplementing your income, be careful how you do it.

8. If you must work, work part time

professor, teacher

If you don’t work at all, your finances could be in trouble. | monkeybusinessimages/iStock/Getty Images

  • Working while receiving Social Security could reduce your benefit checks.

To supplement a dismal benefit payout, some people might choose to find additional employment upon retirement. But what you think might help support you could actually result in a partial benefit. If you’re under full retirement age and earn more than $16,920 per year while also receiving Social Security benefits, your benefits will be reduced by $1 for every $2 you earn above the limit. But once you surpass full retirement age, your earnings will no longer affect your benefits.

Working during retirement is sort of like a catch 22: Make too much money, and it’s taxed. Don’t make any money, and you’ll likely sink to poverty level. It’s for this reason almost 19% of people 65 and over are working at least part time in 2017.

Next: The monthly check you can expect

9. The average earnings are smaller than you might expect

Social Security office

It’s hard to survive on government checks alone. | Justin Sullivan/Getty Images

  • The average check is just $1,355 per month.

One thing about Social Security is clear: It’s hard to make do with what the government is giving you. The maximum is $2,687 per month if you claim your Social Security benefits at full retirement age, but that number is pretty unrealistic. The per-check average is just $1,369 per month.

Nevertheless, people are relying on it more than ever. More than a third of all retirees rely on Social Security for at least 90% of their income, and that number only increases for minorities and lower income workers.

Next: Why you must consider potential benefit taxes

10. Your Social Security benefits are subject to tax

woman helping senior

You’ll still have to worry about taxes. | Highwaystarz-Photography/iStock/Getty Images

  • Up to 85% of your benefits are taxable.

As we’ve seen before, there are a few ways your Social Security benefits can be taxed. The general rule of thumb is if your combined income is greater than $32,000 (for married filing jointly) or $25,000 (for unmarried taxpayers), then up to 85% of your Social Security benefits will be taxable. Congress says this will help fund Medicare. The exact tax amount, however, depends on how much taxable income you have for the year.

If you anticipate owing taxes on your benefits, you can make a proactive move and have a percentage of the benefits withheld for taxes. This option would prevent you from having to pay a big tax bill at the end of the year.

Next: Nearly everyone has access.

11. Non-U.S. citizens are eligible for benefits, too

Social Security checks

Non-citizens who have worked can receive Social Security, too. | William Thomas Cain/Getty Images

  • Non-citizens have access to benefits just like U.S. citizens.

Despite Social Security being readily available for millions of Americans, retirement benefits are also given to non-citizens. Lawfully abiding workers can claim Social Security benefits when they retire. As long as non-citizen workers meet the eligibility requirements they will have access to the benefits.

Next: How does the United States compare with other countries?

12. U.S. Social Security benefits are smaller than most other countries

senior woman looking out window

The U.S. benefit amount hardly compares to other countries. | giocalde/iStock/Getty Images

  • Out of all the Organization for Economic Cooperation and Development countries, the United States comes in 31st for Social Security benefits

Compared to international standards, Americans get far less Social Security than other countries. The Center for Budget and Policy Priorities found the U.S. ranks depressingly low in benefits paid in relation to earnings. In fact, Social Security benefits cover just 41% of the earnings for a median worker in the United States compared to over 90% of workers in the Netherlands, the top-performing country on the list. And America falls well below the average of 57.9% across all OCED countries, which further supports the need for retirees to fund their lifestyle with other income methods in addition to Social Security.

Next: What about the kids?

13. Kids get benefits, too


Survivor benefits help children | Rawpixel/iStock/Getty Images

  • Your children, stepchildren, grandchildren, step-grandchildren, and adopted children could all receive benefits under certain circumstances.

Social Security allows you to plan for the unexpected to some extent. Under the guise of survivor benefits, your unmarried children under 18 might be eligible to receive benefits if you die. Your work history credits will determine how much your survivors receive, but minors can also get benefits at any age if they were disabled and remain disabled before age 22. Grandchildren also are eligible for benefits on a grandparent’s record if they are dependents and receive no financial support from a parent.

Next: What if you change your mind about Social Security?

14. Your decision to withdraw is not set in stone

senior couple holding hands

You have the option to change your mind | Jacob Ammentorp Lund/iStock/Getty Images

  • You have a year after starting benefits to withdraw your application

Life happens. Luckily, not all things related to Social Security are set in stone. If you regret taking your reduced benefits early, you have a year after the benefits start to withdraw your application. But there’s a catch. You only get one chance at withdrawal, and you must repay your benefits received so far. If you’ve reached full retirement age but are still under age 70, you can ask to suspend benefits without having to repay what you already received.

Next: A demographic that’s reliant on benefits

15. Social Security is particularly important for women

Social Security protest

Women get less Social Security than men | Alex Wong/Getty Images

  • Typically women receive less Social Security than men for various reasons

Women are reliant on Social Security, as they traditionally earn less than men, take more time out of the paid workforce to raise families, live longer, and accumulate less savings. Of course this means they have less time to contribute to their Social Security. Women represent about 56% of all Social Security beneficiaries age 62 and older and about 66% of beneficiaries over age 85. Still the Social Security Administration reports the average annual Social Security income received by women 65 years and older was $13,150, compared to $17,106 for men in 2014.

Follow Lauren on Twitter @la_hamer.

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