Social Security is an essential program that the majority of retirees depend on. More than 60% of seniors are reliant on their SSI benefits for at least half their their monthly income. If we did not have social security benefits for our retirees, we would see the poverty rate among them skyrocket to above 40% whereas the rate right now is below 9%. With that being said, you want to start to plan ahead for those retirement years.
In 2014, the Social Security Administration (SSA) started sending out Social Security Statements to those in the workforce at ages 25, 30, 35, 40, 45, 50, 55, and 60+. These would be those people not currently collecting and those who do not have an account set up online. They usually send them out a few months prior to your birthday at each one of the ages listed.
When you receive yours, be sure to look at the reported earnings number for the year and compare that to your w-2 form. They use your average earning throughout your working career to calculate how much your benefit amount will be. If there are any errors, make sure to report them by contacting contact the SSA and have your w-2 or tax return handy.
Instead of waiting the long gap between statements, go online and create a my Social Security account. You will be able to check those reported earnings numbers very easily. In addition, you will have access to revised estimates of your disability, future retirement and disability benefits. If you meet certain requirements, you may even be able to request a replacement card if you lose yours.
Once you have earned the 40 credits necessary to receive retirement benefits, you can begin collecting on them at 62. For those receiving survivor benefits, those with disabilities as well as certain minors, the amount of credits needed may be lower. With that being said, if you look at what your benefits will be at 62, you will see they are drastically lower than if you were to wait. You can expect to receive about 75% less than what it would be if you were to wait until your full retirement age. For each month that you do not collect after age 62, your benefits go up by 0.4% until your full retirement age is reached.
People are living longer lives today, and if you have a family history of longevity, you may want to consider waiting until after your full retirement age to start collecting. If you were born in 1943 or after, you are given an extra 2/3 of 1% increase to your monthly benefits for each month that you delay retirement past your full retirement age. Just keep in mind age 70 is the cap for delaying your retirement benefits.
As a spouse, you have the right to choose to collect benefits based on your own earnings or get up to 50% of your spouses benefits if it is higher. Of course if you choose to start taking a payout at 62, that amount is reduced.
If you are divorced and your marriage lasted 10 years or longer and your benefits are less than what you would get from your ex spouse, you are entitled to half of your spouse's benefits. Even if your spouse has remarried. With that being said, you can only collect this if you remain single. Benefits will stop once you remarry.
Once you are in retirement, if you have any dependent children under the age of 19 living with you, you are eligible to receive additional SS payments. They need to be unmarried and either a dependent grandchild, a stepchild, an adopted child or a biological child. If you meet these requirements, then they can get up to half of your monthly retirement benefits. They can continue to collect this until their graduation or two months after their 19th birthday, whichever comes earlier. Each dependent child is eligible for this, but generally speaking, the most you can receive is approximately 150%-180% of your entire retirement benefit. You may even find it makes sense to retire earlier in order to take advantage of the higher overall benefit.
If you still plan to work after you start collecting your retirement benefits, keep in mind that there are tax penalties. Anywhere from half up to 85% of your benefits can be subject to federal taxes. The IRS will combine half of your Social Security income as well as your nontaxable interest and add that to your adjusted gross income. If that total comes to $25k-$34k for single filers, or $32k-$44k for joint filers, then up to 50% of your SS income could be hit with taxes. If you go above $34k for a single filer or $44k for joint filers, then you can expect up to 85% of your benefits to be taxable. You may be able to circumvent this penalty by spreading out your income so as not to trigger a higher tax.
SSA offers an option for those that started to receive benefits but may have changed their minds and want to wait to collect at an older age. The SSA-521 form also know as the "Request for Withdrawal of Application", allows you to do undo your current filing as long as it is submitted no later than 12 months after you start receiving benefits. The only caveat is that those benefits will need to be paid back. Only then will your status be restored and your benefits will go back to the typical growth period of 8% every year.