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How Does Social Security Work After Retirement?

As you start saving for retirement or near your retirement age, you may start to wonder about Social Security. According to the 2021 Social Security Administration (SSA) Factsheet, Social Security is the primary income source for most people in their retirement. As of December 2020, nine out of ten people aged 65 years were receiving Social Security benefits in retirement. Of this lot, Social Security represents about 30% of their retirement income. Among the elderly Social Security beneficiaries, 12% of men and 15% of women are dependent on Social Security for 90% of their retirement income. However, the income level supported by Social Security benefits is not entirely sufficient for retirees to sustain their living expenses. Further, with the rising life expectancy figures, retirees require a higher reserve to support their retirement lifestyle expenses. In 1940, the life expectancy of a 65-year-old person was 14 years. However, in 2021, the life expectancy for the same age group has risen to 20 years. With the number of older Americans also steeply rising side-by-side (The number of 65-year-old Americans will increase from 57 million in 2021 to 76 million in 2035), the Social Security benefits are likely to fall short to cover the retirement needs of the future generation.

Despite the inadequacy of Social Security benefits in fully complementing an average retirement lifestyle, they are still an integral part of a person’s retirement income. By applying the right tactics, such as withdrawing your benefits later than the full retirement age (FRA), you can increase your Social Security paycheck, further reducing the strain on your retirement corpus. It is critical to understand how Social Security works and how you can claim them to maximize the payout. If you are married and living with your spouse or divorced but paying combined taxes, you might have to endure other Social Security repercussions. Hence, in this case, you would need to understand how Social Security works for married couples. Alternatively, if you plan to work after retirement, your Social Security paycheck will again be influenced by your work income. Therefore, it is vital to assess how many hours you can work on Social Security retirement. Apart from these aspects, there are a few other conditions, like early retirement, which influence your Social Security benefits. To learn more about such conditions and what strategies you can use to stretch your Social Security check and maximize your income, consult with a professional financial advisor who can guide you on the same.

You can consider all of these aspects and accordingly decide on how and when to claim your Social Security benefits.

If you are wondering how does Social Security work after retirement, here’s a quick guide that can help:

What are Social Security benefits?

Social Security is a federal program for retirees run by the Social Security Administration (SSA). Even though the program is primarily popular for its retirement benefits, it also offers survivor and disability benefits for workers. The program was launched to uplift the economic security of people, especially retirees, to provide them with a stable income after retirement.

You pay Social Security taxes from your income during your working years to accumulate at least 40 work credits, the minimum requirement to receive Social Security benefits during retirement. However, the amount of your benefits depends on when you withdraw your Social Security funds. Each year, the SSA also makes cost-of-living adjustments (COLA) to your Social Security benefits to keep pace with the rising inflation. The latest COLA adjustment is 5.9% beginning from December 2021 and payable in January 2022. COLA adjustments are made in accordance with the Consumer Price Index (CPI).

How do Social Security retirement benefits work?

Lawfully, you can start taking drawings from your Social Security account from the age of 62 years. However, withdrawing from Social Security before your full retirement age (FRA) will reduce your paycheck by as much as 30%. If you take your benefits at full retirement age, you are likely to get a larger benefit. Further, if you withdraw your Social Security benefits when you turn 70 or later, you can maximize your Social Security, increasing them by approximately 32% compared to if you took withdrawals at your FRA. This increase in your Social Security benefits is much higher than the COLA adjustments made by the SSA.

Postponing your Social Security benefits until your FRA or till the age of 70 years is a wise choice, especially if you are counting on Social Security to support the maximum of your retirement expenses. Even if you take early retirement, you could consider not withdrawing your Social Security benefits until your FRA. According to a report, each year, people lose over $3.4 trillion on average in Social Security income because of withdrawing their benefits earlier than their FRA.

How does Social Security work if you retire early?

As mentioned, if you take early retirement (before FRA) and decide to withdraw your Social Security benefits, you will receive a reduced sum than if you waited until your FRA. In this regard, the SSA uses your birth year to determine your FRA.

Here is a chart that can help you determine your FRA corresponding to the birth year.

Born On (Birth Year)

Full Retirement Age

1937 or before

65 years

1938

65 years 2 months

1939

65 years 4 months

1940

65 years 6 months

1941

65 years 8 months

1942

65 years 10 months

Between 1943 and 1954

66 years

1955

66 years 2 months

1956

66 years 4 months

1957

66 years 6 months

1958

66 years 8 months

1959

66 years 10 months

1960 or later

67 years

When calculating the birth year, the SSA assumes people were born on January 1 in the previous year. Your Social Security sum is determined based on how early or late you withdraw your benefits compared to your FRA.

Apart from the FRA, early retirement can also impact your work credits and mandatory eligibility for Social Security payouts. As per law, you have to accumulate a minimum of 40 credits to be eligible for Social Security benefits. 40 work credits can typically be earned in ten years. However, if you take early retirement, you might fail to accumulate the required credits and become ineligible for Social Security. But your credits remain on your record even after you retire. Hence, you could consider taking early retirement and then resuming work in some capacity to accumulate the required Social Security credits (these will accumulate with your previous credits).

How does Social Security work for married couples?

If you are married and working, each partner is entitled to Social Security benefits based on your work records. Apart from this, married couples also get Spousal benefits. This means that the lower-earning partner may get Social Security benefits based on their other spouse’s work records. To calculate the Spousal benefit, the SSA considers the higher number between your worker benefit at FRA and one-half of the spouse’s worker benefit at FRA.

For instance, you are eligible for a worker benefit of $2,000 per month at your FRA (66 years eight months). Your spouse is eligible for a worker benefit of $600 at their FRA (66 years eight months). This means that in terms of spousal benefit, your partner can get an additional $400 (1/2*($2,000) - $600). Hence, if you and your spouse claim your Social Security benefits at your FRA, you will receive $2,000, and your spouse will get $1,000.

However, to claim spousal benefits, there are three critical aspects you have to keep in mind. First, you must have filed for your worker benefits and included your spouse to get the spousal benefit. Second, you and your spouse will get $2,000 and $1,000, respectively, only if you withdraw them at your FRA. Claiming Social Security benefits before your FRA will lead to actuarial reductions. Third, when your spouse files for Social Security benefits, it is assumed they are filing for both worker and spousal benefits. The freedom to file for one benefit (spousal or worker) is not available under these circumstances.

In another situation, Social Security benefits are also applicable for survivors. The SSA pays the Social Security benefits to a person filing on the work record of a deceased spouse. In this, the survivor can claim the benefit amount for the deceased spouse if that amount is higher than their individual Social Security sum at the time of their spouse’s death.

How many hours can you work on Social Security retirement?

Other than the above aspects, your Social Security benefits during retirement are also influenced by what you do post-retirement. If you are retiring from your full-time job and plan to work in a part-time capacity after retirement, you will need to assess how your working hours impact your Social Security payouts. Social Security has an earnings limit criteria. If you take early retirement and withdraw your benefits before your FRA but then start working part-time, your Social Security amount is reduced because of the earnings limit criteria.

For 2022, your earning limit is $19,560. For every $2 you earn above this limit, your benefits are lowered by $1. If you reach your FRA in 2022, your earnings are revised to $51,960. If you earn higher than this limit, for each $3 you get over this limit, $1 will be withheld from your Social Security fund. This is only applicable till the month you reach your FRA. Once you are at your FRA in 2022, your benefits stop reducing, irrespective of how much you earn.

For instance, in January 2022, you file for Social Security at the age of 62 years. Your paycheck is $600 per month. However, you plan to work after retirement and will likely earn $23,920 annually ($4,360 higher than the earning limit of $19,560 for 2022). In this case, the SSA will withhold $2,180 ($1 for every $2 you get over the earning threshold). The SSA will stop your Social Security payments from January until April 2022 and start paying you Social Security again from May 2022. However, from May 2022, you will receive $600 as your Social Security benefit each month for the remaining year. In 2023, the SSA will reimburse $380 that was withheld in April 2022. When your Social Security benefits are withheld because of your high monthly earnings, your monthly paycheck will eventually rise when starting from your full retirement age (FRA).

Here is a table that can give you an idea about your Social Security benefits for the year 2022 according to your monthly benefits and expected annual earnings. This table is for people who will be younger than their FRA in 2022.

Monthly Social Security Benefits

Expected Annual Earnings

Yearly Social Security benefits

$700

$19,560 or less

$8,400

$700

$20,000

$8,180

$700

$22,000

$7,180

$900

$19,560 or less

$10,800

$900

$20,000

$10,580

$900

$20,000

$9,580

$1,100

$19.560 or less

$13,200

$1,100

$20,000

$12,980

$1,100

$22,000

$11,980

If you take up a paid hobby or start your business after retirement, your earnings will comprise your net income for the earning limit calculation. Your net income, in this case, refers to only money from work and excludes any annuity, pension, capital gains from investments, etc. Moreover, in this aspect, your net income is accounted for only when you receive it and not when it becomes due. That said, if your Social Security benefits are lowered because of your earnings, your children will receive the same sum (in case of your demise), irrespective of how much they earn.

Therefore, keep the SSA notified of any changes in your earnings. The SSA adjusts your benefits according to the earnings you specify for the year. However, if you expect your income levels to change in the same year or the next year, inform the SSA as soon as possible.

How does Social Security work with respect to taxes?

To gain a holistic understanding of how Social Security works for retirement, it is important to consider the impact of tax. Tax significantly affects your Social Security withdrawals. If your annual provisional income is above $34,000, you would likely owe tax on 85% of your Social Security sum. However, if you file a joint tax return and your combined annual provisional income is between $32,000 and $44,000, you would approximately pay tax on up to 50% of your Social Security benefits. If your combined provisional income is above $44,000 per year, you would likely owe tax on 85% of your Social Security benefits. 

To summarize

Understanding the various dimensions of how Social Security works when you retire will help you make informed decisions regarding your retirement and withdrawals. Determining what you will get every month if you take early retirement or if you work after retirement is essential in effectively planning for your future. You can open a ‘My Social Security Account’ by visiting the www.ssa.gov/myaccount link to know the exact benefit and how different factors will impact your Social Security benefit amount. Alternatively, you can also use the online Social Security calculator available at www.ssa.gov/benefits/retirement/estimator to determine your Social Security paycheck sum depending on different circumstances. 

 

If you find this complicated or need personalized guidance regarding retirement planning and Social Security withdrawal structures, use the free advisor match service. Answer a few simple questions about yourself and the match tool will help connect you to 1-3 financial advisors based on your financial requirements.

 

To learn more on how you can use effective retirement planning strategies to grow and manage your finances, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. In addition, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.