Millions of Americans currently receive Social Security benefits, with many relying on it for their retirement. This public welfare program has helped lay a solid economic foundation for Americans, by providing reliable income for retirees. Here are seven key facts about Social Security that you should be aware of:

1. How Are Your Benefits Calculated?
Your Social Security benefits are calculated based on the highest 35 years of your income. These 35 years do not need to be consecutive or occur before you reach 65. Summer jobs making minimum wage are considered equally as much to your job today.

It is important to note that if you do not have 35 years of earnings, periods of $0 will be factored into the calculation of your Social Security benefits. For some people, working beyond 65 may be advantageous because it can increase their benefit amount.

2. You Can Work and Still Collect Benefits
You are allowed to claim your benefits while still working. For 2024, the Social Security Administration instituted the following limits on “outside earnings”:

  • If younger than full retirement age for all of 2024, $1 will be withheld from benefits for every $2 earned over $22,320.
  • If reaching full retirement age in 2024, $1 will be withheld for every $3 earned over $59,520 (until the month FRA is reached)
  • There are no restrictions starting in the month you reach FRA

It’s important to note that the amount reduced from benefits is not lost permanently. According to the SSA, the benefit will increase at the individual’s full retirement age to account for the benefits withheld due to earlier earnings.

3. Your Benefit Amount Depends on Your Retirement Age
The amount of your Social Security benefits depends on when you apply. You can file for benefits before your full retirement age (FRA), which is the age at which you can receive 100% of your benefits. However, if you file early, your benefit will be permanently reduced by a certain percentage. The earliest you can file is at age 62, and there is no additional benefit for delaying past the age of 70.

For example, if you were born in 1960 and claim your benefits at 62, you will receive 70% of your full benefit. If you wait until age 70 to retire, you will receive 124% of your full benefit.

The full retirement age varies depending on your birth year. For those born in 1954, the FRA is 66. For those born in 1960 or later, the FRA gradually increases to 67.

4. Benefits Are Subject to Income Taxes
If Social Security benefits are your sole source of income, they won’t be subject to taxation. However, if you have other income sources, such as dividends or retirement account distributions, a portion of your Social Security check could become taxable.

Regardless of your income, no more than 85% of your Social Security benefits will be taxed. If you are near the threshold, you may benefit from using strategies to reduce your income and lowering the portion of benefits that will be subject to tax.

5. Cost-of-Living Adjustments
The easiest way to increase your Social Security benefits is to do nothing. Congress authorized automatic cost-of-living adjustments (COLA) in 1975, based on the Consumer Price Index. The higher the benefit, the more significant the COLA increase will be. The past few years we have seen some of the highest adjustments (2022: 5.9%, 2023: 8.7%, and 2024: 3.2%)

Let’s take someone with a benefit of $3,000 per month and a full retirement age of 67. If they claim their benefit at 62, they’ll receive a monthly benefit of $2,100 ($3,000 x .70). For 2024, the cost of living adjustment was 3.2% and which would result in an annual increase of $806.

However, if they claimed their benefit at 70 and are receiving $3,720 per month ($3,000 x 1.24), a 3.2% COLA would cause their benefit to jump by $1,428 a difference of $622 per year. These minor adjustments can start to add up year after year.

6. Surviving Spouse Benefits
A surviving spouse is entitled to the full retirement benefit of the higher earner. They can start receiving reduced benefits at age 60 or earlier if they have a child under age 16 or a disabled child.

Before reaching full retirement age (FRA), they can claim reduced benefits based on one working record and then switch to the higher benefit later, allowing the higher benefit to continue to grow over time.

7. A Divorced Spouse May Be Eligible for Benefits
If you are divorced, you might be eligible for Social Security benefits based on your ex-spouse’s work history. To qualify, your ex-spouse must have reached the age of eligibility for benefits (though they might not necessarily be receiving them).

To qualify, you need to:

  • have been married to your ex-spouse for at least 10 years;
  • have been divorced for two years or longer;
  • be at least 62 years old;
  • be unmarried; and
  • not be entitled to a higher Social Security benefit based on your own work history.

The maximum amount that you are eligible to receive is 50% of what your former spouse is due at full retirement age. To receive this maximum benefit, you must wait until you reach your full retirement age.

Your benefits from Social Security will remain the same even if your ex-spouse chooses to receive benefits before reaching full retirement age or if they start a new family.

We encourage you to reach out to your advisor at PMG Wealth Management with any questions on Social Security or other topics regarding your financial planning.

George Maroudas, CFP®

George Maroudas, CFP®

847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor

Disclaimer / Sources:

Social Security information from SSA.gov.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.