While most retirees depend on their Social Security benefits for retirement income, Social Security was never intended to be a worker’s sole source of income during the retirement years. Social Security replaces approximately 40% of pre-retirement income for the average worker and about 27% for high earners.1
Workers are expected to save for retirement in addition to receiving Social Security benefits. Therefore, accumulating a large account balance in a workplace retirement plan or self-directed generally will not reduce the amount of Social Security benefits you receive – although it may affect whether you pay tax on those benefits, as explained below.
Here are some of the factors that should be considered when you’re evaluating how to make the most of your Social Security retirement benefits.
The age at which you begin receiving Social Security retirement benefits is one of the main variables affecting the amount of your monthly benefit. The age workers can receive full Social Security retirement benefits has been gradually increasing from 65 to 67. (For anyone born after 1960, the full retirement age is 67.) But you have the option to begin receiving Social Security payments as early as age 62.
• If you claim benefits before you reach your full retirement age, your monthly benefit will be reduced. For example, if you begin receiving Social Security benefits at age 62 in 2019, your monthly benefit will be approximately 27.5% lower than if you waited to draw benefits until your full retirement age.1
• If you delay claiming benefits until after your full retirement age, your monthly benefit payments will be increased. If you were born in 1943 or later, benefit payments will increase by 8% for each year benefits are delayed beyond full retirement age until age 70.1
Your Taxable Income
Approximately 40% of those who receive Social Security benefits have to pay income taxes on those benefits.1 Currently, joint filers may have to pay taxes on up to 50% of their Social Security benefits if the spouses have combined annual income between $32,000–$44,000. If combined income is more than $44,000, up to 85% of Social Security benefits are subject to income tax. The comparable limits for individual filers are $25,000–$34,000.1
Your income for these IRS taxation purposes generally includes:
• Your taxable income (including pensions, wages, interest, dividends)
• Any tax-exempt interest (such as interest on municipal bonds)
• ½ your Social Security benefits
This means that any taxable IRA distributions (including conversions to a Roth IRA) and retirement plan distributions you take in a calendar year must be counted as income when calculating whether you reached the taxable benefits threshold.
Your Earned Income
Higher lifetime earnings equate to higher monthly benefit payments. Each year the Social Security Administration (SSA) reviews the records for all Social Security recipients who are working. If you continue working after you begin claiming Social Security and your latest year of earnings is one of your highest years, the SSA refigures your benefit and pays you any increase due in December of the following year.
If you continue to work and you claim Social Security benefits before your full retirement age, your benefits will be reduced if your earned income reaches a certain level. You don’t lose this amount forever though. Your benefit amount will increase at your full retirement age to account for any reduction in benefits while you were working.2
• If you are younger than full retirement age, your current benefits will be reduced by $1 for each $2 you earn above $17,640 for 2019. 2 (There is an exception to this income limit for the first year you retire and begin claiming benefits.)
• If you reach full retirement age in 2019, your reduction in benefits is $1 for each $3 earned above $46,920 until the month you reach full retirement age.2
After reaching full retirement age, there is no reduction in benefits no matter how high your earnings.
For more information
The Social Security Administration has developed several calculators that allow you to model changes to your monthly Social Security retirement benefit as a result of changing the age you begin drawing benefits or your earnings from work.
For more information on the taxation of Social Security benefits, including worksheets and examples, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
1 Social Security Administration, Retirement Benefits, Publication No. 05-10035, 2019, https://www.ssa.gov/pubs/EN-05-10035.pdf
2 Social Security Administration, How Work Affects Your Benefits, 2019, https://www.ssa.gov/pubs/EN-05-10069.pdf