How Social Security Works After Retirement

Millions of Americans, specifically Baby Boomers, are anxiously counting down the days until their 66th birthday. That’s because 66 is the U.S. full retirement age for Boomers born between 1946 and 1954. This is the age when U.S. workers are finally eligible to start tapping into their full Social Security benefits. Although workers can claim benefits before they reach full retirement age, as early as 62, experts say this is not advisable as it will result in permanently lower benefits. (For more on this topic, see Social Security Mistakes: How to Avoid Them.)

It’s understandable why American workers are looking forward to tapping into their Social Security nest egg. The average Social Security benefit for a  person who retires at 66 is $1,370 a month or $16,440 a year – not too shabby.

“When you take benefits can significantly affect your overall retirement income. With pensions a thing of the past for most workers, Social Security remains the largest source of guaranteed lifetime retirement income,” says Stephanie Genkin, CFP®, founder of My Financial Planner, LLC, New York, N.Y. “Once you start collecting Social Security, the benefit amount – plus cost-of-living adjustments – will be locked in for the remainder of your life.”

How, exactly, does Social Security work after you reach that magical full retirement age and start collecting benefits? Here are a few important facts to bear in mind.

When you’re ready to claim benefits, visit your local Social Security office, apply online at ssa.gov or call 1-800-772-1213.  After you apply, the Social Security Administration will review your application and contact you if it requires additional information. If it has all the necessary documents, Social Security will process your application and mail you a letter detailing its final decision about your benefits.

Be sure to apply for Social Security four months before you want your benefits to begin. However, keep in mind two things: First, that the absolute earliest you can apply for those retirement benefits is three months before you turn 62. And second: “If you continue to work and are younger than full retirement age, your benefits may be clawed back ($2 or $3 for every $1 earned) due to earned income limits being exceeded,” says Peter J. Creedon, CFP®, ChFC®, CLU®, CEO, Crystal Brook Advisors, New York, N.Y.

Granted, you can start receiving Social Security at 62, but your monthly payments will be larger for every month you delay claiming them up to age 70. Once you turn 70, there is no additional benefit to holding off on getting your payments.

Nearly half of Americans claim Social Security at the earliest possible age. However, this number is on the decline, according to an analysis of Social Security Administration data by the Center for Retirement Research at Boston College. In 2013, 48% of women and 42% of men signed up for Social Security at age 62, compared with 60% of women and 55% of men in 2005.

There’s good reason why many retirees are choosing to postpone their checks. If you start your retirement benefits at age 62, your monthly benefit is reduced by a whopping 30%. But if you wait until you turn 70 to sign up, you could increase your Social Security benefit by 32% – which would turn a $1,000 monthly Social Security payment into $1,320. However, a mere 4% of women and 2% of men wait until they hit 70.

To top it off, Social Security benefits are calculated based on your 35 highest-earning working years. Therefore, if you keep working and earn a higher salary in your 60s than you did earlier in your career, you could boost your Social Security payments even more. If you don’t really need the money as soon as you reach full retirement age, it’s probably wise to wait until you turn 70 to apply.

“When you think of Social Security the right way, as insurance against outliving your money, then it makes sense to wait until age 70 for the highest payout available,” says Robert R. Schulz, CFP®, president of Schulz Wealth, Mansfield, Texas.

Mark Hebner, founder and president of Index Fund Advisors, Inc., Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors,” concurs about waiting until 70. “Because most Baby Boomers find themselves underfunded for retirement, they need every dollar they can possibly get,” he says.

There are, of course, instances when you shouldn’t postpone claiming your benefits, such as if you are in failing health. (For additional insights, see 4 Reasons You May Not Want to Delay Social Security Payments.)

Let’s say you file for Social Security and start receiving benefits – and then get hired for a new job a few months later. What should you do? If you’ve been collecting Social Security for less than a year, you can actually suspend your benefits and claim them later. This will allow you to earn a higher benefit when you do start receiving payments again. However, there’s a catch: You’ll have to repay all of the benefits you’ve already received. (See also How Does My Part-time Job Affect Social Security? and Work & Collect Social Security in Retirement?)

“Since Social Security benefit amounts are calculated based on a worker’s highest 35 earning years, benefits can be increased by landing a job, even if you're already collecting benefits. High earning years, even after retirement, can be used to replace lower earning years from earlier in your career, thus increasing average income, and subsequently, benefit amount,” says Daren Dearden, director, North Capital, Inc., Salt Lake City, Utah

Once you start collecting Social Security, you might have to pay additional taxes on those benefits. How much can you expect to pay? It depends. If Social Security is your only source of income, your benefits probably won’t be taxed at all. However, if you receive additional income from pensions, IRA distributions, capital gains or job earnings, you could be faced with a tax bill.

For Social Security tax calculations, the benefit base amount is $25,000 for single people and $32,000 for married couples filing jointly, and the IRS uses a calculation to determine how much of the benefit is taxable. Let’s say, for example, that you’re married filing jointly. If the sum of your income falls below $32,000, none of your Social Security benefits are taxable. On the other hand, if your income is between $32,000 and $44,000, 50% of your Social Security benefits are taxable. Once your income is over $44,000, 85% of them are taxable. Benefits are taxed at your ordinary income tax rates.

With proper planning and the right timing, you can greatly reduce your tax burden from Social Security benefits. For instance, if you can live off distributions from your IRA, 401(k) or other retirement accounts, you might want to postpone receiving Social Security benefits until you turn 70. Using this strategy could reduce the number of years your benefits are subject to taxes – or, in some cases, eliminate taxes on your Social Security benefits altogether.

Talk to your financial advisor or CPA about ways you can lower taxes on Social Security and other retirement distributions. 

When it comes to Social Security benefits, there are many complicated rules and tax implications. While you may be tempted to file for Social Security as soon as you reach full retirement age, you could rake in a much bigger benefit if you wait. Therefore, you might want to tap into other retirement assets first. If that’s not a possibility, you might consider postponing your retirement.

In fact, 82% of American workers age 60 and older say they either are, or expect to be, working past the age of 65, according to a survey from the Transamerica Center for Retirement Studies. Nearly half (44%) of survey respondents say their top retirement concern is outliving their investments and savings, and one-third of the surveyed workers believe their standard of living will diminish once they stop working.

“Longevity is a big issue. Average life expectancy for those turning 65 is greater than most people realize,” says Barry Waronker, CEO of Informed Family Financial Services, in Norristown, Pa. One in four 65-year-olds today will live past age 90, and one in 10 will live past age 95, according to the Social Security Administration.

“Because Social Security is a guaranteed monthly payment that is adjusted for inflation, it can be extremely important for recipients who live into their 90s. The longer you wait to take Social Security, the larger your benefit, which can be advantageous for those with longer life spans,” says Georgia Bruggeman, CFP®, founder and CEO of Meridian Financial Advisors, LLC, in Holliston, Mass.

If you were to retire at 66 and start collecting Social Security benefits, would you have enough money to last you another 30 years? It’s important to take this into consideration before you tap into those benefits.