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These days there’s a lot of doom and gloom about Social Security’s solvency - or lack thereof. And regardless of whether you think Social Security’s future is secure, the fact remains that you shouldn’t plan on living exclusively off your Social Security benefits. After all, Social Security wasn’t designed to make up a retiree’s entire income.

Still, many people do find themselves in the position of having to live off their Social Security checks. And even if you have other income sources in retirement, Social Security can make up a significant part of your retirement income plan. That's why it’s important to know all the rules surrounding eligibility, benefit amounts, taxation and more.

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Who Is Eligible for Social Security Benefits?

Anyone who pays into Social Security for at least 40 calendar quarters (10 years) is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that - you can put it off as late as age 70 - you’ll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.

The bottom line: You’re eligible for Social Security Benefits if you’ve paid into the system for at least a decade, but your actual benefits will depend on what age – between 62 and 70 – you begin to claim them.

How Does the Social Security Administration Calculate Benefits?

Benefits also depend on how much money you’ve earned in life. The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat “zero” for each year you don’t have earnings, so people who worked for fewer than 35 years may see lower benefits.

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The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to inflation. It’s a big perk that doesn’t get a lot of attention.

Is There a Maximum Benefit?

Yes, there is a limit to how much you can receive in Social Security benefits. The maximum Social Security benefit changes each year. For 2024, it’s $4,873/month for those who retire at age 70 (up from $4,555/month in 2023). Multiply that by 12 and you get $58,476 in maximum annual benefits. If that's less than your anticipated annual expenses, you’ll need to have additional income from your own savings to supplement it.

What If I Continue Working in My 60s?

Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something you’d like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you don’t outlive them. If you claim Social Security benefits early and then continue working, you’ll be subject to what’s called the Retirement Earnings Test.

If you’re between age 62 and your full retirement age, and you’re claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly. For 2024, the Retirement Earnings Test Exempt Amount is $22,320/year ($1,860/month). If you’re in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits you'll receive. (Note that only income from work counts for the Earnings Test, so income from capital gains and pensions won’t count against you.)

Contrary to popular belief, this money doesn’t disappear. It gets credited back to you - with interest - in the form of higher future benefits. You may hear people grumbling about the Social Security “Earnings Tax”, but it’s not really a tax. It’s a deferment of your benefits designed to keep you from spending too much too soon. And after you hit your full retirement age, you can work to your heart’s content without any reduction in your benefits.

Are Social Security Benefits Taxable?

If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits won’t be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.

If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if you’d like the government to withhold taxes from your Social Security benefits. Otherwise, you’re expected to file quarterly tax returns to pay these taxes over the course of the year.

That covers federal income taxes. What about state income taxes? In 12 states, your Social Security benefits will be taxed as income, either in whole or in part; the remaining states do not tax Social Security income.

As you approach retirement, keep track of your expenses so you know how much income you’ll need to maintain your current standard of living. While conventional wisdom says you don’t have to plan on replacing 100% of your salary in retirement income, the high costs of medical care in retirement could result in you needing just as much money as you did while you were working.

It’s a good idea to check back with a Social Security retirement income calculator periodically throughout your career. That way, you can see whether you’re saving enough for retirement in other ways (401(k), IRA, etc.) to round out the money you can expect from Social Security. The best bet is to contribute to your retirement accounts early and generously, and not get overwhelmed by the mountain of money you’ll need to save.