Understanding Social Security

Social Security: Files and folders in desk drawer with labels and tabsThe Social Security Administration (SSA) pays benefits to around 65 million people, about 49 million of whom are retirees. As a guaranteed source of income, Social Security benefits can be an important part of your retirement income plan. To get the most out of your benefits, it’s important to understand how Social Security works.

The SSA determines Social Security eligibility based on “work credits,” which you earn by paying Social Security taxes during your earning years. You earn one credit for every $1,470 in earnings, up to a maximum of four credits per year. Most people need 40 credits, or the equivalent of 10 years of work, to qualify for Social Security benefits. Once you’ve earned enough credits, you can begin receiving Social Security retirement benefits as early as age 62. 

Now that you understand the basics, here are a few other important facts you should know about Social Security before you start receiving your benefits.

Chapter 1

How Much Will I Get?

Everyone’s Social Security check will look different. In 2021, the average monthly Social Security benefit for all retired workers is $1,543, but the amount of Social Security you receive will be determined by your lifetime earnings and when you start receiving benefits. The more you earn during your career and the later you start receiving benefits up to age 70, the higher your Social Security benefit will be.

As long as you wait until your full retirement age, which is based on the year you were born, to begin receiving benefits, you’ll receive your full benefit amount. Receiving benefits before your full retirement age will reduce your benefit amount, while continuing to work after reaching your full retirement age up to age 70 will increase your benefits. Full retirement ages range from 66 years old for people born between 1943 and 1954 to age 67 for people born in 1960 or later.

It’s important to note that Social Security is not intended to provide all of your income in retirement. It replaces only a percentage of your pre-retirement income, as determined by your lifetime earnings and when you start receiving your benefits. In 2021, this is anywhere from 28 percent for high-earners to 78 percent for low-earners. Retirees generally need about 70 percent of their pre-retirement income to live comfortably in retirement (remember, your situation may not fall into the general category). High net worth professionals will want to supplement Social Security with other sources of retirement income.

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Chapter 2

What If I Retire Early?

You can start receiving Social Security benefits as early as age 62. That said, if you retire early and start receiving your benefit before your full retirement age, the SSA will reduce your benefit amount by about 0.5 percent for each month you receive benefits before your full retirement age.

For example, if your full retirement age is 67 and you start taking your Social Security benefits when you turn 62, your benefit would be reduced by 30 percent (0.5 percent for each of the 60 months you started receiving your benefit before your full retirement age). As a result, you’d receive 70 percent of your full benefit. For this reason, many retirees try to delay taking Social Security to maximize the benefit they receive. But again, this isn’t the best solution for every situation.

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Chapter 3

What If I Work in Retirement?

If you receive Social Security benefits and continue to work before the year you reach your full retirement age, the SSA will reduce your benefit amount if your earnings exceed the annual limit. The SSA will deduct $1 for every $2 you earn above the annual limit. In 2021, that annual limit is $18,860.

In the year you reach your full retirement age, the SSA will deduct $1 from your benefit for every $3 you earn over a higher annual limit ($50,520 in 2021). 

Once you reach your full retirement age, your earnings will no longer reduce your Social Security benefit.

Generally, working in retirement can be a good strategy if it means you can delay taking your Social Security benefits. Your monthly benefit will increase for every month you wait to begin taking Social Security after reaching full retirement age up to age 70. For instance, if your full retirement age is 66 but you wait until three months after your birthday to begin taking benefits, you’ll receive 102 percent of your total benefit.

Your benefit will increase by 8 percent each year you delay until your 70th birthday. This means you could get up to 132 percent of your full benefit if you wait until you turn 70 to start receiving your Social Security benefits.

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Chapter 4

Cost of Living Increases

Legislation in 1973 provided for Cost Of Living Adjustments (COLAs) to help Social Security benefits keep pace with inflation. COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which are calculated by the Bureau of Labor Statistics. It’s based on the average CPI-W from the previous time a COLA became effective.

In 2021, the SSA provided a COLA of 1.3 percent beginning January 2021. Beneficiaries are normally notified by mail in early December if their benefit will be increasing the following year. You can also usually view your COLA online through your Social Security account.

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Chapter 5


Some Social Security recipients have to pay federal income taxes on their benefits. Typically, this is only the case if you receive a substantial income along with your Social Security benefits. You’ll pay taxes on up to 85 percent of your Social Security benefits depending on your combined income, which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefit.

Here is how taxes may apply to your Social Security benefit:

  • If you file taxes as an individual and your combined income while receiving Social Security is:
    • Between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • More than $34,000, you may have to pay income tax on up to 85 percent of your benefits.
  • If you file a joint tax return, and you and your spouse have a combined income while receiving Social Security benefits that is:
    • Between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • More than $44,000, you may have to pay income tax on up to 85 percent of your benefits.
  • If you’re married filing separately, you’ll most likely pay taxes on your Social Security benefit.

If you do owe federal income taxes on your benefits, you can pay these through quarterly estimated tax payments or have them withheld from your benefit. Talk to your financial advisor about the role taxes have on your retirement plan.

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Chapter 6

Family Considerations

You aren’t the only person who can receive benefits based on your Social Security record. Your other family members may also become eligible for benefits, including your spouse and unmarried children. Sometimes the SSA will pay benefits to a stepchild, grandchild, step-grandchild or adopted child, even if they didn’t become your child until after you started receiving benefits.

Each of these family members may be entitled to a monthly benefit that is up to half of your benefit. That said, there is a limit to how much a single family can receive. While that amount varies, the SSA generally caps total family benefits at 150 to 180 percent of your benefit.

Your family members can also receive benefits based on your work record after you pass away. Your survivors can receive a percentage of your Social Security benefits, usually between 75 and 100 percent of your benefits. As with living benefits, however, the SSA caps how much a single family can receive by generally only paying up to 150 to 180 percent of your benefit.

Spouses, children and even parents can be eligible for survivor benefits if certain criteria are met. 

Surviving ex-spouses may be able to claim a survivor’s benefits, too, provided they meet certain requirements. If this happens, any amount paid to the ex-spouse won’t affect the benefits paid to other survivors. For an ex-spouse to qualify for a spousal benefit based on your record, your marriage must have lasted at least 10 years. Your ex-spouse also must be currently unmarried, at least 62 years of age and either ineligible to receive benefits on their own or be eligible for a higher spousal benefit based on your record. If you haven’t started receiving benefits when your ex-spouse applies for a spousal benefit, the divorce must have occurred at least two years prior.

Social Security is an often-complicated, yet extremely important decision to make. Once you begin receiving your benefits, the amount is permanent. Unfortunately, retirees make mistakes when it comes to this decision all the time. Don’t make a rash decision or simply follow the herd. At Heritage Capital, we can walk you through your options so you make the right decision based on your situation. 

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