Learn the Basics of Social Security

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Imagine you saved an average of 9.2% of every single dollar that made since you’ve been working. I would wager that would be a pretty sizable amount of money. 

Now what if I told you that’s exactly what you’ve been doing?

The government has been taxing you anywhere from 1.0% to 12.4% since 1937 for an average of roughly 9.2% over that time span. However, if you haven’t been working since 1937, your average is much higher considering it has been 12.4% since 1990.

W2 employees are on the hook for half of those amounts while employers cover the rest. Self-employed individuals are responsible for the entire amount.  

Now it’s time for you to get that money back. The problem is Social Security isn’t exactly straightforward. Sometimes it feels like you need to work for NASA to figure out when you should claim your benefits. 

According to an article from CBS News, 96% of Americans lose “an average of $111,000 per household” because they “start taking the benefit at the wrong time.”

And that isn’t even including the fact that Social Security is subject to taxation… again. Remember, you’ve already been taxed on this money. 

When you add all of these factors together, it can have you pulling out your hair. 

While there are many different types of benefits you can file to receive, here is a quick snapshot on the basics. 

Social Security Eligibility Requirements

To receive Social Security benefits, you must meet certain eligibility requirements. While this list is not exhaustive, it does cover the main core qualifications. 

  • Age. Typically, the earliest age you can file for your benefit is Age 62. There are some exceptions to that rule, however, specifically disability and survivorship benefits. 
  • Credits. You must have 40 working credits. This is equivalent to working for 10 years, as you can earn one credit per quarter each year. In 2024, if you earn $1,730 in a quarter, you will receive one credit. Accomplish that four times and you’ve maxed out your credits for the year. 
  • Citizenship. You must be a United State citizen or legal resident to be eligible for benefits. 

How Much Benefit Will You Receive?

The Social Security Administration calculates your benefit using a formula called AIME (average indexed monthly earnings), which is roughly an average of your 35 highest earning years. This formula creates your primary insurance amount (PIA), more commonly known as your monthly benefit. 

Your PIA is what you receive at your full retirement age (FRA), which is based on the year that you were born. 

Year of BirthFull Retirement Age
1943-195466
195566 and 2 months
195666 and 4 months
195766 and 6 months
195866 and 8 months
195966 and 10 months
1960 and later67

Reductions and Increases

In most circumstances, you can file for your benefit as early as Age 62. However, this decision will permanently reduce your benefits and subject you to earnings limitations (see below). 

You may also decide to delay your benefit. For each year that you postpone your benefit past your FRA up until age 70, you will start to accrue delayed retirement credits, which equal 8% simple interest. 

Here is an example on how much an individual’s benefit will be reduced or increased based on the age they file for their benefit assuming their FRA is age 67. 

Filing AgeBenefit Adjustment
62-30%
63-25%
64-20%
65-13.3%
66-6.7%
670%
68+8%
69+16%
70+24%

Earning Limitations for Filing Early

If you decide to file for your Social Security early and continue to work, you will be subject to an earnings limit threshold. This determines how must income you can earn without having any of your benefit withheld. 

You are only subject to an earnings limit until you reach your FRA. For example, if your FRA was age 67 and you filed at age 62, you would be held to the earnings limitations from Age 62 to 66 and 11 months.

2024 Earning Limitations

  1.  In 2024, if at no point in time you will reach your FRA, you can earn up to $22,320 without having any of your benefit withheld. For every $2 that you exceed that amount, however, $1 of your benefit will be withheld. For example, if you earned $32,320, you surpassed the limit by $10,000, which means $5,000 of your benefit would be withheld. 
  2. If at some point you will reach your FRA in 2024, you have more leeway. You can earn up to $59,520 without having any negative impact on your benefit. For every $3 that you exceed that amount, $1 will be withheld. 
 
Withheld benefits are repaid to you once you reach your FRA. Unfortunately, it is not paid in a lump sum. Instead, your benefit will be increased to account for the withholding. 

 If you are married and filing taxes jointly, Social Security does not include your spouse’s income with your earnings. It is purely determined on your earnings history. Your spouse’s income will only affect you if they filed early and you are receiving a spousal benefit on their work record. In this scenario, if they were to eclipse the earnings threshold, it would reduce both their own individual benefit and your spousal benefit. 

MONEY IS MEANT TO BE ENJOYED

Ask us how we can help you worry less, spend more, and pay fewer taxes in retirement. 

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