Choosing how and when to take Social Security benefits is one of the most important financial decisions you will ever make.
Social Security benefits have many nuances, though, and the choices you make can radically alter the benefits you ultimately receive.
Many people need help making decisions about Social Security.
One way to get advice is talk to someone at a local Social Security office. (Note that those offices are closed during the coronavirus pandemic, although you can still call for help.)
Another is to pay a small, one-time fee to get a Social Security analysis that’s tailored to your specific circumstances. For that type of help, go to our Solutions Center and check out “Maximize Your Social Security.”
Others prefer a DIY approach. Whichever path you choose, understanding the following Social Security terms will go a long way in helping you make the best choices for retirement.
1. FICA taxes
You face the reality of Social Security every time you get a paycheck. The stub shows that some of your pay has been diverted to pay FICA taxes. “FICA” stands for the Federal Insurance Contributions Act. FICA taxes fund both the Social Security and Medicare programs.
Think about the Social Security portion of the FICA taxes you pay like this, says the Social Security Administration:
“The money you pay in taxes is not held in a personal account for you to use when you get benefits. Today’s workers help pay for current retirees’ and other beneficiaries’ benefits. Any unused money goes to the Social Security trust funds to help secure today and tomorrow for you and your family.”
If you work for an employer, you each split payment of a 12.4% payroll tax for Social Security. You also split a 2.9% Medicare tax.
If you’re self-employed, you pay a self-employment tax of 15.3%, which includes the 12.4% for Social Security and 2.9% for Medicare.
In 2021, the maximum amount of earnings on which the Social Security tax will be collected is $142,800. Any earnings above that amount are not taxed for Social Security.
2. Earnings record
Your earnings record is the Social Security Administration’s record of your lifetime earnings — “a chronological history of the amount of money you earned each year during your working lifetime,” as the federal agency puts it.
Although employers are responsible for reporting your earnings to the SSA, you are responsible for checking it.
And it’s critical to check the accuracy of your earnings record at least annually because an error could result in a smaller monthly benefit.
For example, if an employer improperly reports your earnings for even one year, your monthly benefit upon retiring could be around $100 less, according to the SSA. That could amount to a loss of tens of thousands of dollars over the course of your retirement.
The longer you wait to review your earnings record, the harder it will likely be to spot or correct any errors. The SSA explains:
“As time passes, you may no longer have past tax documents and some employers may no longer be in business or able to provide past payroll information.”
You can review your earnings record online — see the “Social Security account” section of this article.
3. Full retirement age (FRA)
Your full retirement age is the age at which you can begin collecting your Social Security retirement benefits in full.
Your full retirement age is based on when you were born. For example, if you were born in:
- 1943-1954: Your full retirement age is 66
- 1955: 66 and 2 months
- 1956: 66 and 4 months
- 1957: 66 and 6 months
- 1958: 66 and 8 months
- 1959: 66 and 10 months
- 1960 and later: 67
It’s important to know your full retirement age because claiming your Social Security benefits before or after that age will lower or increase the amount of your benefit payment, respectively.
4. Delayed retirement credits
If you begin claiming benefits before you reach full retirement age, your monthly benefit will be less than your full benefit amount — for the rest of your life. In other words, you will receive a smaller benefit payment each month than you would have received if you had waited until full retirement age to start claiming.
If you wait past your full retirement age to start collecting benefits, however, your monthly benefit will be higher than the full benefit amount.
Specifically, for every year that you hold off past full retirement age through age 70, your benefit will jump by as much as 8%, as we detail in “7 Reasons You Should Not Claim Social Security Early.”
The Social Security Administration refers to this system as “delayed retirement credits.”
After age 70, there are no further increases. So, there is no further advantage to delaying claiming benefits.
Among other things, you can use your Social Security account, also known as a “my Social Security” account, to:
- Receive personalized estimates of future benefits.
- View your latest Social Security statement.
- Review your earnings history.
- Set up or change the direct deposit details for your benefit payments.
- Request a replacement card if you’ve lost yours.
Creating a Social Security account also prevents crooks from opening an account in your name and using it to divert your benefit payments to themselves, as we explain in “Don’t Overlook This Way to Protect Your Social Security From Identity Thieves.”
To create a Social Security account, visit SSA.gov, the official website of the U.S. Social Security Administration.
6. Cost-of-living adjustment (COLA)
Each autumn, Social Security recipients wait breathlessly to see if their checks will get larger the following year.
Any such increase is based on a cost-of-living adjustment, more commonly known as a “COLA.”
Federal law deems that the monthly Social Security benefits rate must tick up every year that the federal government’s Consumer Price Index rises.
As the Bureau of Labor Statistics defines it, a consumer price index is “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.”
The goal of a COLA is to make sure inflation doesn’t eat into a retiree’s standard of living.
Social Security COLAs are tied to the federal government’s Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for the third quarter — specifically, the average change in the index over the previous four quarters.
When the CPI-W shows no average change or falls over those four quarters, retirees get no Social Security COLA for the following year.
7. Combined income
Social Security can seem like free money from the government. Of course, in reality, you earned that money by paying FICA taxes for decades.
Now that you have retired and are collecting benefits, you might think your days of paying taxes are over. But not necessarily. If your “combined income” is too high, Uncle Sam can tax your Social Security benefits.
Combined income is defined as the sum of:
- Your adjusted gross income
- Any nontaxable interest
- One-half of your Social Security benefits
According to the Social Security Administration, you may owe taxes on up to as much as 85% of your benefits if your combined income is high enough.
Want the gory details about when you might have to fork over more cash to the government? The SSA website has the lowdown.
8. Spousal benefits
Even if you never worked, if you are or were married, you might be eligible to receive up to half of the amount of your spouse’s retirement benefit, which is known as “spousal benefits.”
If the benefit you would receive based on your spouse’s record is higher than the benefit you would receive based on your own earnings record, SSA will generally give you the higher amount, assuming you’re eligible for it.
Other restrictions may apply that could reduce your benefit, however.
If you are divorced, SSA says you might be eligible for benefits on your ex-spouse’s record if you were married at least 10 years, provided that you meet other conditions.
9. Survivor’s benefits
In some situations, family members of eligible wage earners who have died can receive what’s known as “survivor’s benefits.”
These benefits are based on multiple factors, including the deceased’s earnings and whether the deceased was receiving reduced benefits at the time of death.
Survivor’s benefits can be up to 100% of the deceased’s benefit amount.
Typically, eligible widows and widowers can begin getting these Social Security benefits at age 60, or at age 50 if disabled, the SSA says.