Are you Social Security savvy? According to a recent survey by AARP¹ and the Financial Planning Association, many Americans nearing retirement age need to brush up on the rules of the program. The questionnaire revealed that a high percentage were woefully uninformed on some key provisions of Social Security, including when you could begin to access funds, the effect of delayed benefits acceptance, the rules regarding survivor benefits and several other details. Whether you’re in the homestretch toward retirement or just beginning your career, it’s important to learn the essential facts behind this federal program.

• “Social Security is not intended to fully replace your income.”

What Social Security is (and isn’t)

The Social Security program was created by the Social Security Act of 1935 and at its core, provides insurance for working Americans and their families, offering a degree of financial protection from disability and the early death of a family member. Its primary beneficiaries are senior citizens who are no longer able to work, but as the Social Security Administration points out, the program lists children of disabled or widowed parents as one of the largest groups of recipients. Social Security is not intended to fully replace anyone’s income, nor completely subsidize retirement. It simply serves as an extra cushion to supplement savings and investments. This is an important distinction that everyone should know when planning for their retirement. Always remember to factor in your expected Social Security income when putting together a retirement budget.

Timing is everything

One of the most misunderstood aspects of Social Security benefits is how age affects the timing and amount of money distributed. According to the AARP survey, while 88 percent of respondents knew that they could begin withdrawing benefits at 62, only a third knew that waiting until 70 would confer the highest benefit amount possible. And only 5 percent knew the exact amount that benefits would increase year over year. According to Carrie Schwab-Pomerantz of Charles Schwab, what many don’t know is that waiting until full retirement age boosts benefit amounts by 33 percent² over the earliest point, and waiting until 70 will guarantee benefits that are 76 percent higher. Take your health into consideration when planning for retirement benefits. If you are in good health and you have a family history of longevity, consider postponing your withdrawals to maximize your earnings.

Marriage and divorce

Married couples can take advantage of certain benefits in the Social Security plan that many aren’t aware of. If one spouse files for retirement before the other, the one who is still working can take up to 50 percent of the other’s benefit while their fund continues to grow. According to Schwab-Pomerantz, some couples take advantage of this by utilizing the “62/70 split.” This involves the spouse who earns the lesser salary filing as early as possible at 62, while the other, higher earning spouse waits until 70 to withdraw theirs. That way, the couple can maximize their earnings in a short amount of time. For couples who have divorced, Social Security benefits can still be derived from the former spouse’s income, a rule that only about 25 percent of survey participants were aware of. The caveats to this rule stipulate that the couple was married for at least 10 years and is 62 and single at the time of filing. The rules of the Social Security program also allow for widowed spouses to claim the benefits of their loved ones. Almost every survey respondent (97 percent) knew this, but only 7 percent knew that the amount received depends on the age of the living spouse. Waiting until full retirement age allows for the highest amount to be claimed.

• “Waiting until full retirement age allows for the largest benefit.”

Other essential information

Do you know where to go to get accurate information on Social Security? About half of the AARP survey’s respondents did not. There are several other rules and exceptions regarding Social Security benefits, all of which can be found on www.ssa.gov. There you can read about other conditions to acquiring your benefits, including tax information. As Kiplinger’s pointed out, the majority of retirees will not have to pay taxes³ on their retirement benefits. However, if your gross income plus one half of Social Security benefits (plus any other nontaxable interest) is greater than $25,000 for individuals ($32,000 for married couples), up to 50 percent of your benefits may be taxed.

Retirees should also be aware that benefits change depending on how close they are to full retirement age. Between 62 and full retirement age, $1 in earnings is deducted from every $2 of earnings over a predetermined limit. Once you reach full retirement age, $1 out of every $3 earned is deducted from benefits. Once you reach that full retirement age, you can earn any amount and still receive full benefits. This also does not apply to real estate, stocks, bonds or other “nonearned” income.

The rules and best practices surrounding Social Security benefits can be a complex thing to navigate. Fortunately, you don’t have to worry about registering for the program until you reach retirement age. Until then, your benefits continue to increase as you continue to work and pay taxes. When planning your financial future, it’s essential to factor in the income from Social Security benefits to get the most accurate picture of your financial health later in life.

The views expressed by the articles and sites linked in this post do not necessarily reflect the opinions and policies of Cash Central or Community Choice Financial®. 

¹AARP. (2015, Sept 28). Retrieved from: https://press.aarp.org/2015-09-28-FPA-AARP-Joint-Research-Reveals-Enormous-Social-Security-Knowledge-Gap

²Gordon, Kevin, Sonders, Liz Ann. (2023, Jun 12). Retrieved from: https://www.schwab.com/learn/

³(2015, Jan 6). Retrieved from: https://www.kiplinger.com/article/retirement/t051-c000-s001-a-rundown-of-social-security-benefits.html