What Pre-Retirees Need to Know About Social Security

Social Security is a simple concept: you retire, file for benefits, and receive a monthly check for the rest of your life. Pretty great, right?

While the idea is simple, the system is complex and requires strategic planning to get the most out of the program. Understanding Social Security is crucial for building a stable retirement income plan as you approach retirement. Social Security represents a significant portion of the income for many retirees, so making informed decisions is vital.

However, many misconceptions about how the system works exist, and inaccurate information can lead to costly mistakes. In this blog, we’ll explore the basics of Social Security, including how to maximize benefits payouts, to help pre-retirees make educated choices about when and how to claim their benefits.

Understanding Social Security Basics

Social Security is a government program designed to provide financial assistance to retired workers, disabled individuals, and survivors of deceased workers. Many people build their retirement plans off the income from Social Security, so it’s a critical program for pre-retirees to understand.

However, Social Security isn’t just a retirement program. There are three main types of benefits:

Retirement benefits: Based on your earnings history, you can receive benefits as early as age 62, but the amount is reduced if you claim before your full retirement age (FRA). You will receive a monthly check that you can use for day-to-day expenses.
Disability benefits: These are available to individuals who can no longer work due to a disability. More than one-fifth of beneficiaries receive Social Security Disability Insurance (SSDI).
Survivors benefits: These benefits are paid to family members of deceased workers eligible for Social Security. Surviving spouses who are 60 or older (or age 50 or older and disabled) can collect benefits. If the surviving spouse is caring for a child younger than 16, they may also be eligible for benefits.

To be eligible for Social Security benefits, you must earn at least 40 work credits, which typically equates to 10 years of work, be a U.S. citizen, and be at least 62 years old. Your benefit amount is calculated based on your highest 35 years of earnings, adjusted for inflation.

4 Key Factors Affecting Social Security Benefits

Your Social Security check will be a significant portion of your retirement income, so you need to know what affects the size of your check. Several factors influence the amount of Social Security benefits you will receive, including:

Age of retirement: If you elect benefits before your FRA (full retirement age), your benefits will be permanently reduced. Conversely, delaying benefits beyond your FRA can increase your monthly payments.
Spousal benefits: Spouses are entitled to up to 50% of their partner’s benefit, and strategic claiming can maximize combined benefits. If you’re at least 62 and have a spouse who worked and earned more than you did, you may be eligible for a higher Social Security benefit.
Work and earnings history: Your earnings over your working life are essential in determining your benefit amount. Gaps in employment or lower-income years can reduce your average earnings, leading to lower benefits.
Birth year: Your full retirement age depends on the year you were born. For example, if you were born between 1943 and 1959, FRA is 66. However, if you were born after 1960, FRA is 70.

Fact: You’re not “officially” retired in the eyes of the Social Security Administration until you start taking benefits.

6 Ways To Maximize Social Security Benefits

Who doesn’t want to make the most of their Social Security benefits? There are several ways to maximize your Social Security benefits:

Remain in the workforce for 35 years: You can receive benefits after working for ten years, but your benefit amount is based on the average of your 35 highest earning years. If you work fewer years, those zeros are averaged in.
Wait until FRA: Retirees should wait to claim benefits until they reach full retirement age to receive higher benefits.
Collect spousal benefits: Couples can coordinate their claiming strategies to ensure they get the most from their spousal and individual benefits. It’s important to note that spousal benefits will be reduced if the primary recipient claims their benefits before reaching FRA.
Evaluate your circumstances: Consider your health, financial needs, and other retirement income sources when deciding the best time to claim benefits. For example, if expected longevity is a concern, it may be wise to wait until 70 to claim your Social Security benefits.
Monitor your earnings: The Social Security Administration limits how much additional income you can earn while receiving benefits before your FRA. In 2024, if you’re under FRA, the annual earnings limit is $22,320, after that each $2 dollars your earn will reduce Social Security benefits by $1.
Wait until 70: The SSA offers delayed retirement credits for people who wait until after their full retirement age to collect benefits. If you wait until age 70, your monthly benefit increases by approximately 8%.

Common Social Security Mistakes To Avoid

Unfortunately, messing up retirement benefits is pretty easy, and mistakes can cost you thousands of dollars over your lifetime. Try to avoid these mistakes when it comes to Social Security:

Claiming benefits too early: Many people claim benefits at 62, not realizing the long-term impact of reduced monthly payments.
Not factoring in longevity: Thanks to incredible advances in healthcare, people are living longer, and your decision on when to take Social Security should reflect that.
Earning too much while receiving benefits: If you claim benefits before your FRA and continue working, your benefits may be reduced if your earnings exceed the annual limit.
Ignoring spousal benefits: Some couples must work on maximizing their benefits by properly coordinating their claiming strategies. Spousal benefits extend to divorced couples as well. Even if your ex-spouse has remarried, you can receive spousal benefits if you were married for at least ten years and are currently unmarried.
Not understanding your benefit payment: You need to know the size of your benefit check to make a smart decision about when to claim your benefits.

Simplify Social Security Planning

If you need help estimating your benefits, the Social Security Administration offers an online calculator to estimate your benefits based on your work history and planned retirement age. Alternatively, you can turn to a financial advisor for help. At Michael Brady & Co., we utilize advanced retirement income software to help clients determine the most effective strategy for maximizing their lifetime Social Security benefits.

As you approach retirement, seeking guidance from a financial professional is an excellent step toward ensuring your retirement income strategy is optimized for your specific needs. Get in touch with our team to ensure you’re on the right track for a blissful retirement!