Social Security is likely to be one of your most important sources of retirement income. But the amount you will receive can vary considerably based on when you sign up and your marital status. Here are seven things you should know as you decide when to claim Social Security benefits.
1. Your full retirement age. Your full retirement age is when you first become entitled to full or unreduced Social Security benefits. For example, if you were born before 1937, you can start collecting your full benefit at age 65. If you were born after 1960, you will have to wait until age 67 to collect your full benefit. For most baby boomers the full retirement age is 66.
2. What happens if you start benefits early. You can start Social Security payments at age 62, but there is a catch. If you sign up for benefits before your full retirement age, your monthly payments will be permanently reduced. If your full retirement age is 67, starting benefits at age 62 will result in 30 percent smaller payments. This would reduce a $1,000 monthly Social Security payment to $700 per month. Those who sign up at age 63 will see their payments reduced by a quarter. Even claiming payments one year early at age 66 will result in 6.7 percent less every month.
3. How delayed retirement credits work. If you delay claiming your Social Security benefit until after your full retirement age, you become eligible for delayed retirement credits. Delayed retirement credits increase your Social Security benefit by about .67 percent per month that benefits are delayed until age 70, or approximately 8 percent per year.
4. Eligibility for spousal benefits. Spousal benefits are paid to the lower earning spouse based on the other spouse’s earning record. Spouses are entitled to an amount equal to up to 50 percent of the higher earning spouse’s benefit, if that’s larger than the payment based on their own earning record. You can also take spousal benefits early, but the payout is reduced for early claiming.
5. Benefits for ex-spouses. Divorce doesn’t automatically disqualify you from receiving spousal payments. If you were married to your ex-spouse for at least 10 years, you may be eligible to receive spousal benefits.
6. How the earnings test affects what you’ll receive. An earnings test is applied to filers who have not reached their full retirement age. If you work and file to receive benefits during the years before you reach your full retirement age, your Social Security payments will likely be reduced. Social Security temporarily withholds benefits if your earnings exceed a certain level. Social Security will deduct one dollar from every two dollars you earn above the annual limit of $16,920 in 2017.
7. Your benefits may be taxable. If your only income is from Social Security, your benefit will probably not be taxable. However, if you have other retirement income such as 401(k) distributions, pension income, rental income, dividends, capital gains or income from tax-exempt bonds, there is a good chance that your Social Security benefit will be taxable.
If your adjusted gross income, nontaxable interest and half of your Social Security benefit totals more than $25,000 ($32,000 for couples), income tax could be due on half your Social Security benefit. If these income sources top $34,000 ($44,000 for couples) as much as 85 percent of your benefit may be taxable.