A recent study found that 47 percent of Americans over 50 failed a basic, short true/false quiz on Social Security retirement benefits.1 Even though a significant portion of Americans over the age of 62 will tap into Social Security benefits at some point, the intricacies of this program can leave many feeling confused. What's worse—you could be leaving potential retirement income on the table.
While Social Security is unlikely to be your primary source of retirement income, it's important to understand where you can maximize your benefits. Here are seven fundamentals you should know.
1. You can claim spousal benefits (even as widows and divorcees)
If you don't have any earning history of your own, you are eligible to claim your spouse's Social Security benefits. The main caveat is that your spouse must be over the age of 62 and already be receiving benefits.
Spousal benefits, however, aren't only for those who are currently married: both divorcees and widows/widowers can claim benefits.
If you've been divorced for at least two years after having been legally married for at least 10 years, you can claim spousal benefits (this also applies if your former spouse is deceased). As long as you are not re-married—even if your former spouse is—you can apply for Social Security benefits based on his or her work history, even before your former spouse files for their benefit.
The same is true for widows and widowers, with a few added benefits. For one, you can claim your spouse's benefits at a reduced rate before your retirement age. Then, you can claim your own benefits down the road, which can help increase the longevity of your retirement income.
2. Your benefit is based on 35 years of income
To calculate your benefit, the Social Security Administration (SSA) will use your highest 35 years of income, averaged and adjusted for inflation. Most people will need a minimum of 40 quarters of covered employment, which is approximately 10 years of work, to qualify for benefits.
If you've had years when you earned nothing or you worked less than 35 years, $0 will be inputted into your average for the years you did not work. This is something to consider when trying to maximize your payout. As you approach retirement age, working a few extra years—especially if you haven't hit 35 years—can help improve your benefit payout.
3. Your benefits might be taxed
Keep in mind you might have to pay taxes on your Social Security benefits. If you have significant investments or savings, or a large 401k, you likely will not have to rely on Social Security as the primary source of your income. However, up to 85 percent of your benefits could be considered taxable income.
4. You can work while receiving benefits (with some reductions)
If you elect to continue working while receiving Social Security benefits before you reach the full retirement age, the SSA will systematically reduce your benefits if you earn over a specified annual limit. Depending on your age, this reduction could be as much as $1.00 for every $2.00 that's earned above the annual limit! Beginning with the month you reach your full retirement age, you will get your total benefits regardless of how much you make or how long you keep working.
5. Your earnings will get reviewed periodically
As you keep working, the SSA will perform an annual review of your benefit amount and recalculate as needed. Generally speaking, the longer you work, the higher your final benefit will be once you decide to claim.
6. There are timing rules around benefit payouts
Your Social Security benefit is paid out in the month after it's due. For instance, your March benefit won't be fulfilled until April. That's something to think about when you first decide to claim your Social Security if you're aiming for a particular date or deadline.
7. Social Security offers more than just retirement benefits
Social Security is designed to provide for more than only retirement benefits. This could include:
- Disability benefits for retired or disabled workers
- Benefits to the survivors of eligible spouses
- Benefits to the family or dependents of retired or disabled workers
- Benefits to the family or survivors of deceased workers