Today let’s deep dive into everything you need to know about how Social Security works.

You should care about this because no other government program is as crucial to American retirement as Social Security.

It is the largest source of retirement income for a majority of seniors.

Virtually all Americans pay into the program and will receive Social Security benefits at some point in their lives.

This year Social Security will pay >$1 TRILLION to 66 million people. That’s 20% of the US population.

So whether you’re nearing retirement age or still young and healthy, there are lots of questions (anxieties) about Social Security:

1. How do Social Security benefits work?
2. How are benefits calculated?
3. When should I start claiming Social Security?
4. How much are Social Security benefits taxed?
5. How continuing to work (a job) affects your Social Security payments
6. Spouse, divorced, and survivor benefits
7. Social Security considerations for early retirees
8. Social Security is running out. Here is what it means for you.

If you’re confused about all this and want to know the best strategies for maximizing your Social Security payments (and your spouse’s), then this post for you.

It’s a one-stop-shop blockbuster post with everything you need to know about claiming and collecting Social Security.

So grab a coffee or two and get comfy for the next half hour – I promise it’ll be well worth your time.

Let’s dive in!

How do Social Security benefits work?

At a high level, you’re probably already familiar with the basics.

During your working years, you pay into the system. In your retirement years, you collect from the system.

Every month during your working years, part of your paycheck is withheld to pay into the nation’s Social Security coffers.

It’s a line in your paycheck called something like: “Social Security Employee Tax” or “FICA” (Federal Insurance Contributions Act) or “OASDI” (Old Age, Survivors and Disability Insurance).

Part of this money is used to pay seniors for Social Security. (For FICA, part is also used to pay for Medicare.)

During your later years, once you are age-eligible, you can start collecting Social Security.

This commonly coincides with retirement, but doesn’t have to.

You can collect Social Security whether you are formally retired or still working, as long as you are age-eligible. (There are some important rules if you’re working, though – more later.)

Once you start collecting Social Security, the monthly payments continue for the rest of your life. (Social Security is basically a lifetime annuity.)

Payments are adjusted for inflation each year.

This alone makes Social Security very valuable because it is very difficult to buy a lifetime annuity in the private market that is adjusted annually for inflation. But you get it just for being a working American!

Now some complexity.

Complexity in Social Security lies in making the decision of WHEN to start collecting payments.

There is a range of eligible ages you can choose from but there are tradeoffs, which we’ll discuss in detail below.

But at a high level, when you start collecting impacts not only your own payment amount, but also potential payments to your spouse and/or survivors.

For early retirees, there is an additional consideration when it comes to timing your early retirement date so as to not hurt your future Social Security payments too much.

Remember, this is because your Social Security benefit is not only a function of your age, but also a function of “how much you paid into the system.”

How are benefits calculated?

The main thing to know is: the age you decide to claim Social Security determines your monthly payment amount for the rest of your life.

You cannot change this decision once it is made. So think carefully about the best age to start Social Security.

Social Security first considers your 35 highest wage earning years. It uses these wage amounts (all indexed for inflation) to calculate a number called the “primary insurance amount.”

This is basically your monthly benefit amount.

Currently, the “full retirement age” where you will get 100% of your benefit is ~66 years and gradually rising to 67 years.

I say it’s “~66” years because your full retirement age actually depends on the year you were born, not the year right now.

Full retirement age increases by 2 months each year until it reaches 67, and then it stops (under current law). So:

However, there is a real possibility, given the looming shortfall (explained below), that Congress will increase the FRA past 67…so don’t get too comfy!

But even though FRA is 66-67, you can choose to start Social Security earlier. In fact, you can start as early as 62.

But if you start at 62, you will get a smaller monthly payment for the rest of your life: 25-30% less depending on your birth year.

But this “discount” shrinks on a sliding scale as you move month by month from 62 to full retirement age and disappears entirely at FRA.

So if you start Social Security before FRA, expect to take a lifetime hit depending on how early you collect.

You can also choose to start LATER than full retirement age which gets you a delayed retirement credit. The delayed credit is 8% per year.

That means your monthly payment for life will be 8% higher by delaying Social Security for 1 year.

Delaying another year will yield another 8% “return.”

This is like a risk-free, guaranteed 8% stock return EVERY YEAR…one which also gets favorable tax treatment (more on taxes below).

VERY few investments have a risk/return profile this attractive. Maybe none in fact.

So, other things equal, delaying Social Security is a really good financial investment. But there are also other considerations, which we’ll get to in a moment.

The 8% delayed credit doesn’t last forever. It stops when you turn 70.

So you only get it for a few years, since full retirement age is 66-67.

Also, since the 8% credit stops at 70, there is no additional incentive to wait past 70: you should start Social Security the moment that delayed credit runs out.

Also note that the 8% credit does NOT compound.

Delaying 2 years does not mean in Year 1 you get 108%, and in Year 2 you get 1.1664% (1.08 x 1.08). You only get 1.16%. Delaying a third year gets you 1.24%. And so on.

Let’s look at a little table of examples to see how this all works.

Assumptions:

• You retired in 2023
• Your FRA is 67
• You are at full retirement age
• You are collecting the max monthly benefit amount because your wages always exceeded the Social Security income tax cap for every year you worked
• You worked at least 35 years

Some important notes:

1. These are max benefit amounts. Your actual benefit may be lower if your earnings (and hence your contributions) were less than the max during your lifetime. Use the Social Security Administration’s online calculators to figure your own personal situation.

2. Months between years are pro-rated, so e.g. if you start at FRA minus 3.5, then your monthly benefit is adjusted to 77.5%, which is smack in the middle of 75% for FRA minus 4 and 80% for FRA minus 3. All months are pro-rated.

3. The max benefit amount gets adjusted each year, and next year’s max is usually announced in October.

When should I start claiming Social Security? (It depends on your break even point)

Earlier I said, “other things equal, delaying Social Security is a really good financial investment.”

And then I said, “But there are also other considerations.” Let’s talk about those considerations now.

Because although you get a nice credit for delaying Social Security, it does not necessarily mean you should wait until 70 to claim it.

What matters most for when to claim is the “break even point.”

The break even point is the age where someone who takes payment early (penalty) and someone who takes payment later (credit) actually end up with the same amount of money due to the fact that the later collector is collecting bigger monthly checks forever.

So even though the early guy gets a head start, the later gal eventually catches up because she collects more every month. The bigger that gap is, the faster you catch up.

At the same time, the bigger the TIME gap between the early guy vs. late gal, the longer it takes to catch up because the early guy simply got that much more of a head start.

Here’s a simple example using the same assumptions above.

Assumptions:

• Each person collects the max monthly benefit amount, with the earliest person starting Social Security collection in 2023
• 3% annual inflation
• 3 hypothetical seniors who are otherwise identical except they start SS at different ages

First guy starts right at FRA minus 5 and takes a 30% hit, with monthly payment = $2,570. Let’s call him Eager Eddie.

Full retirement age guy = no penalty/credit = $3,636 monthly payment. Let’s call this guy Neutral Ned.

Max credit at FRA plus 3 = 124%, $4,559 monthly payment. We’ll call her Patient Patty.

Let’s see what happens when they start at different ages:

Eager Eddie, because he started right at FRA minus 5, stays ahead of the other two for the first 14 years.

In the 15th year, Neutral Ned overtakes Eager Eddie, and then stays ahead for life.

But Patient Patty is still behind both – for 2 more years.

In the 17th year, Patient Patty overtakes Eager Eddie (and then stays ahead for life), but is still behind Neutral Ned – for 1 more year.

In the 18th year, Patient Patty additionally takes over Neutral Ned, and then stays ahead of both for life.

Now, I did this calculation simplistically: assuming 3% stable inflation year over year, but not considering things like investing the money to earn a return, tax implications, etc.

You can make the calculation very complicated by adding these things, but the principles will be the same and the answer won’t differ much.

We can conclude a couple things.

1. Eager Eddie stays ahead for quite a while before the others catch up.

Therefore, starting early is beneficial if you have good reason to believe you won’t live past the break even age.

The flipside is also true. Delaying is beneficial if you have every reason to believe you will live past break even.

What’s bad is delaying and then dying before break even.

You can’t predict when you’ll die (e.g. accident) but you at least know how healthy you are and can make some educated guesses about how far that’ll take you.

So, worth thinking about: how healthy are you?

2. Even though Eager Eddie eventually gets taken over, he did get the money early, which provided some freedom.

He could have retired earlier (perhaps).

He could have invested the money and stretched out how long he stays ahead even more.

So, it’s worth considering: how badly do you need the money? The more badly, the more it makes sense to claim early.

Flipside: maybe you don’t need it, but are you able to productively invest the money to stay ahead for longer?

Eventually everyone dies, so if Eager Eddie can stay ahead as long as possible by investing the money, past 15 or 17 years, then perhaps for all practical purposes he may be ahead for life, i.e. if everyone dies before break even.

On the other hand, if you don’t need the money at FRA minus 5 or FRA, and you can afford to wait until FRA plus 3, it simply means you have that much bigger of a monthly benefit, and that much greater assurance you’ll be financially secure for life.

The point is, even though you can calculate this, the real decision should be made according to your personal situation (nest egg), financial philosophy, risk tolerance, health/longevity, etc.

Do the calculation for yourself, with your own numbers, and then weigh these other considerations carefully before deciding when to start Social Security.

How much of my Social Security payments will be taxed?

Whether your Social Security payments are taxed depends on your total income.

“Income” here means:

adjusted gross income (AGI) +
non-taxable interest income +
HALF your Social Security benefits

Remember AGI = “income that is subject to tax, BEFORE taking standard/itemized deductions, but AFTER adjustments like 401k/IRA contributions, half of self-employment taxes, alimony payments, certain medical/dental expenses, etc.”

If your “income” exceeds $25k single filer or $32k married joint, then you’ll have to pay taxes on your Social Security benefits. Regardless of whether your benefit is a retirement, spousal, survivor, or disability benefit.

Below those amounts, your Social Security benefit is not taxed.

But if you are liable for taxes, how much will you have to pay?

Up to 50% of your Social Security benefit is taxed if:

• Single filers: your “income” is $25k – $34k
• Married joint: $32k – $44k

Up to 85% of your Social Security payments are taxed if:

• Single filers: your “income” exceeds $34k
• Married joint: “income” exceeds $44k

85% is the max regardless of how high your income is, so at least 15% of your Social Security benefit will always be tax-free.

Example: You file married joint with $100k income including $2k monthly Social Security. Up to 85% of your $24k Social Security payments over the year may be taxed, or $19.2k

When I say “up to” and “may be taxed,” it means the exact amount depends on your exact situation.

Each January, you will get mailed Form SSA-1099, which is your Social Security Benefit Statement summarizing how much Social Security payments you got over the last year.

You take this statement and use it to complete your federal tax return (specifically lines 5(a) and 5(b) on your 1040) to determine the exact tax liability based on your situation.

There are detailed instructions in the IRS 1040 guide.

If you do have to pay some taxes on your Social Security, you can either send in quarterly estimated tax payments or ask Social Security to withhold taxes (like a normal W2 paycheck).

Finally, we’ve only been talking about federal taxes here.

13 states also tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, North Dakota, Vermont, and Utah.

If you live in one of these states, look on your state tax authority’s website for details on how your state taxes Social Security.

How continuing to work (a job) affects your Social Security payments

In the old days, you:

1. Work
2. Reach retirement age
3. Retire
4. Kick back and relax

But with life spans increasing and more people unable or unwilling to retire at “traditional” retirement age, that old way is shifting.

Now, lots of people continue to work or have second (or third or fourth) careers past 60.

But working past retirement age impacts your Social Security benefits, so be aware of the rules as you plan things. (There are a lot.)

1. Before you reach “full retirement age.” If you start Social Security before FRA and still work (either because you never retired or you returned to work), then some or all of your Social Security may get temporarily withheld.

We’ll come back to “temporarily” in a bit.

The amount that gets withheld depends on how much you earn.

Before full retirement age, you can earn up to $21,240 (2023 numbers, adjusted for inflation each year).

After that you’ll get $1 withheld from Social Security for every $2 earned above that.

Example:

• Eager Eddie claims Social Security right at FRA minus 5 in January of this year and his monthly benefit is $600 per month ($7,200 per year)
• But through May of this year he continues working and earns $26,200 ($4,960 above the $21,240 limit)
• Social Security will withhold $2,480 ($1 for every $2 earned over the limit)
• How it actually gets withheld: Social Security will withhold all payments from January through May of this year
• Starting in June, Eager Eddie will receive his $600 monthly payment as usual, which will be paid every month for the rest of the year
• But wait! In May, he was withheld an extra $520, because January – May is 5 months, and $600 withheld x 5 months = $3k total withheld, even though he was only supposed to get withheld $2,480!
• So next year, Social Security will pay Eager Eddie back that $520 extra withheld from May this year (he gets no interest though)

2. Special rule in the first year of retirement before full retirement age. Sometimes people who start Social Security mid-year have already busted the annual income limit ($21,240) in the months before starting Social Security.

So there is a special rule: In the year you first start Social Security, you can collect a full Social Security payment for any calendar month (after your claims begin) where your salary earnings are less than the prorated income limit for that month.

This is true even if you already busted the full-year income limit prior to starting Social Security.

The two sentences above were a mouthful, so let’s look at an example:

• Eager Eddie earns a nice job income but plans to retire on June 30 and start Social Security July 1; he is FRA minus 5 this year
• Between January – June, he earned $100k in his job
• Starting July 1, he’ll no longer have that job but he plans to do part-time consulting which will earn him about $500 per month
• Even though he busted the income limit of $21,240 way before July, he can STILL collect full Social Security payments each month for the rest of the year, provided his monthly earnings from July – December do not exceed $1,770 ($21,240 / 12 months); in this case, they shouldn’t if he only earns $500 per month during that time
• This is because of the special rule that applies in the first year you start Social Security
• Note that if Eager Eddie exceeds $1,770 income for any month from July – December of that first year, the payment for that month will be withheld
• Starting the next year, this special rule goes away and only the annual income limit applies thereafter

3. After you reach “full retirement age.” The rules change at FRA.

After full retirement age, your payments will no longer be withheld even if you continue working. No matter how much you earn.

But note: if you reach FRA mid-year, another special rule applies: you can earn up to $56,520, or $4,710 per month (2023).

After that, your Social Security get withheld by $1 for every $3 you earn over that limit.

But that rule only applies to earnings during the portion of the year BEFORE you reach full retirement age. After FRA, no more withholdings at all.

I know it’s confusing, so let’s think about 3 scenarios. Say you reach FRA in 2023 (doesn’t matter which month).

1. In 2022, pre-FRA rules will apply (described above)
2. In 2023, the special partial-FRA year rule applies
3. In 2024, no more withholdings – you can continue working as much as you want, earning as much as you want

#2 is the confusing one, so let’s look more closely at an example, continuing with Eager Eddie from above:

• Eager Eddie has not reached FRA at the start of the year but will do so by November 1
• Remember, his monthly Social Security payment is $600
• His job salary earns $57,540 during the 10 months from January – October
• Because this is the year he reaches full retirement age, the special rule applies: his job salary is $1,020 over the $56,520 annual limit applicable during the FRA year
• Social Security will withhold $340 ($1 for every $3 earned above that limit), pro-rated monthly
• How it actually gets withheld: Social Security will withhold a pro-rated monthly amount starting in January and lasting until Eddie reaches FRA
• Once Eddie reaches FRA in November, he will resume receiving his $600 payment each month for the rest of the year
• Next year, Social Security will pay him back any excess amounts that may have been withheld in the prior year (again, no compensation for interest, though)

4. What if you are working abroad or self-employed? If you are working abroad and collecting Social Security, special rules apply which I won’t cover in great detail here, because it gets complicated very fast.

But the crux of it involves a “foreign work test” where if you work more than 45 hours in a month, regardless of how many hours per day or how much/little money earned, your Social Security for that month will be withheld.

There are international Social Security agreements existing with specific countries that can change these rules on a country by country basis.

The same pre-FRA and partial-year-FRA income limits explained above also apply for abroad workers.

Similarly, special rules apply for self-employed folks. Here, Social Security looks at how many hours you worked in your business to determine whether any withholdings apply (in addition to income limits).

If you work more than 45 hours in a month self-employed, again no matter how many per day or how much/little money earned, then your Social Security for that month will be withheld.

Less than 15 hours in the month, only the income limits apply.

Between 15 – 45 hours, withholdings apply but only for jobs requiring a lot of skill or that involve managing a sizeable business.

5. Social Security withholdings are not actually lost, only delayed. Earlier I said busting the income limit causes your Social Security to get “temporarily” withheld.

I said “temporarily” because those withholdings aren’t lost forever. They’re just delayed.

If you bust the limits and your Social Security is withheld, your monthly payment later will be increased to compensate for it.

Specifically, when you reach full retirement age, your monthly payment will increase to account for any prior withholdings.

Example:

• Say your full retirement age is actually 67 and you decide to start Social Security right at 62
• Because you decided to claim asap, you only get 70% of the FRA amount (for life)
• Let’s say that comes out to be $942 per month
• Now suppose, immediately after doing that, you change your mind and decide to go back to work for one more year after all, and you bust the income limit so much that your entire $942 monthly payment gets withheld for the next 12 months
• Then you retire for good exactly 1 year later
• In this case, Social Security will resume your $942 payment starting in month 13
• Then, once you reach FRA (67), that payment will increase to $1,007 per month (in today’s dollars)
• This is because during the 12 months you worked (age 62 to 63), all your payments were withheld – it is as if you didn’t actually start claiming Social Security until age 63!
• Had that been the case, you actually would have received 75% of the FRA amount = $1,009.28 per month!
• But because you requested right at 62, you won’t actually get your payment increased to $1,009.28 until full retirement age (67) unfortunately – from age 63 to 67, you’ll still only get $942 per month; it only increases to $1,009.28 at FRA

Another example:

• Same facts as above but, instead of working just 1 year, say you decide to work from 62 all the way until FRA at 67, and then retire for good
• During all those years, you earn so much that 100% of your Social Security gets withheld
• In this case, Social Security will simply pay you $1,345.71 per month starting at full retirement age for life
• Reason: it is as if you didn’t claim early at all, but rather only started claiming at FRA! If your age 62 claim was $942 per month, and that represented only 70% of the FRA amount, then your FRA amount is simply $942 / 70% which is $1,345.71 per month!

6. What types of income count toward the income limits? If you’re working a regular job, only your gross W2 wage earnings count. If you’re self-employed, only your net self-employment earnings (i.e. profits).

Income that does not count here: other government benefits, investment income, interest, pensions, annuities, capital gains, etc.

However, employee contributions to retirement plans (401ks, pensions) do count if they are included in gross wages (this would not include employer matching contributions).

You should also know about timing.

For regular W2 wages, income counts when it is earned, not paid. If income was earned at the end of one year, but paid early next year, it is counted in the prior year when it was earned.

This includes things like year-end bonuses and accumulated sick/vacation pay.

For self-employment earnings, the rule is the opposite: income counts when you receive it, not when you earn it…unless it’s paid in a year after you become entitled to Social Security but earned before you became entitled.

7. Impact to spousal, survivor, and other benefits. If your spouse or survivors get Social Security payments based on your work record, then any withholdings from you may reduce their payments, too.

However, unlike you, if their benefits get reduced due to your busting the income limits, they don’t get increased benefits to compensate for it when you reach full retirement age.

Also, their salary earnings, no matter how much, do not affect Social Security payments they receive an account of you.

It only affects their own personal Social Security benefits (i.e., based on their own work record).

8. Sufficiently high post-retirement earnings can permanently increase your monthly benefit amount. Social Security reviews annually the wages levels of all benefit recipients who continue to work.

If your latest earnings end up being one of your 35 highest wage earning years, they will recompute your monthly payment amount and increase it accordingly (for life).

This process is automatic, and any increases start in December of the next year.

Example: if your 2023 wages end up being one of your highest wage earning years, any Social Security benefit increase will start getting paid in December 2024 and will be retroactive to January 2024.

If I am self-employed, how much do I contribute to Social Security?

When you work a normal job, your employer will automatically withhold the correct amount from your paycheck for Social Security.

This way, you can be sure you’re getting “credit” during your working years so that, come retirement, you can collect.

Your employer will withhold 7.65% of your paycheck for Social Security and Medicare: 6.2% for Social Security, 1.45% for Medicare.

If you are self-employed, you’ll pay a self-employment tax instead: 15.3%.

12.4% for Social Security, 2.9% for Medicare.

In other words, you pay double what W2 employees pay, but keep in mind you can deduct half of that on your tax return, so you’ll come out even in the end.

Spouse, divorced, and survivor benefits

Many couples only think about Social Security in terms of their own earnings.

This is a mistake.

Because with a little bit of joint planning, married couples can actually get more combined Social Security benefits over their lifetime by simply coordinating how and when each person claims benefits.

Likewise, not working together will result in less lifetime payments.

Spousal and survivor benefits are one of the most misunderstood aspects of Social Security.

So pay attention!

1. Married. There is a spousal Social Security benefit for married couples. It lets a spouse collect Social Security up to a cap of 50% of the other claimant’s full retirement age amount (i.e., any delayed credits of the other claimant get excluded).

It matters not whether the spouse ever worked or contributed to Social Security.

Here, the spouse is not claiming Social Security based on his own record; he is doing it based on his spouse’s work record.

Rules:

1. Must be married at least 1 year
2. Spouse must be at least 62
3. Other claimant must already be claiming benefits (i.e., already filed)

Tips:

Maximizing the spousal benefit requires BOTH the spouse AND the other claimant to be full retirement age.

That is because the spousal benefit operates as a percentage of the other claimant’s benefit.

So, the other claimant gets 100% at FRA and the spouse gets 50%.

It is a sliding scale based on when each person retires:

Couple things here.

While the other claimant can get credits for delaying past FRA, the spouse is capped at 50% of the other person’s FRA amount; credits are excluded.

Both spouses can start as early as 62, but that will result in significantly reduced benefits. And that reduction in benefits (when you claim at 62) increases as FRA gradually increases with each passing year.

If (only) the spouse claims early, then only the spouse’s benefit will decrease (because taking a spousal benefit does not alter the other claimant’s benefit).

By contrast, if the other claimant claims early, BOTH amounts will decrease.

When to claim as a spouse:

If you were born before January 2, 1954, you have an option to file what’s called a “restricted claim” (online via the Social Security website or by scheduling an appointment in person).

This means you can choose to claim the spousal benefit without also claiming your own Social Security benefit based on your own work record.

This is significant because it lets you start collecting a spousal benefit payment even while you continue building up your own credits for delaying Social Security (up to 70) based on your own record.

Then, for example, when you turn 70, you could switch from collecting the spousal benefit to collecting your own higher monthly benefit.

If you were born on or after January 2, 1954, you cannot file a restricted claim to only collect spousal benefits.

You have to file for ALL benefits you’re eligible for (i.e. including Social Security based on your own work record). Which means any delayed credits you are personally accruing will stop.

This trips up a LOT of post-1953 spouses who would like to start collecting some Social Security spousal benefits while continuing to delay their own Social Security.

In other words, if you as a spouse are post-1953, then claiming your spousal benefit means BOTH of you must claim everything you’re eligible for, including all benefits based on each of your individual work records.

Consequently, neither of you will be able to continue accruing delayed credits.

How much you will get:

You will be paid your own benefit first. The spousal benefit will only be added to “true up” the amount if your own benefit is less than half your spouse’s total. (You get the higher of the two amounts.)

2. Divorced. You might be surprised to know you can still file for spousal benefits even if you are divorced.

Like the regular spousal benefit, the divorce benefit is up to 50% of your ex-spouse’s full retirement age amount (credits get excluded, just like with married couples).

The exact amount depends on both your ages. As with married couples, maximizing the divorce benefit requires both people to be full retirement age.

Rules:

1. Must presently be single
2. Were married to your ex-spouse at least 10 years
3. Been divorced at least 2 years
4. Cannot currently be receiving Social Security based on your own work record that exceeds the spousal amount you would get from your ex-spouse’s work record
5. Ex-spouse must be 62 or older: they need not have filed for their own benefits yet (unlike for married couples), just has to be entitled to benefits
6. If you remarry, you lose the divorce benefit (and cannot file for spousal benefit with your new spouse until you’ve been married at least 1 year) – but you regain it back if your later marriage ends (divorce, death, annulment, etc)
7. If your ex-spouse remarries, there is no impact on your right to claim the divorce benefit

As with married couples, if you are eligible for both your own Social Security and a divorce benefit, you will get paid your own Social Security first.

If your divorce benefit is still higher, you will get “trued up” to that amount. (You get the higher of the two.)

And same as with married couples, if you were born before January 2, 1954, you can file a “restricted claim” without triggering your own Social Security based on your own work record.

If you were born on or after January 2, 1954, you have to simultaneously file for all benefits you’re eligible for, so any delayed credits will stop.

If you work while collecting divorce benefits, the same income limit / withholding rules (explained above) apply.

3. Survivors. When a Social Security beneficiary dies, their surviving spouse is usually eligible for a survivor benefit.

Rules:

1. Married at least 9 months at time of death
2. Survivor must be at least 60
3. You will get the higher amount between your own benefit and your spouse’s, but not both

Unlike with the married/divorce benefit, you can file a “restricted claim” for just survivor benefits, then switch to your own at age 70 (or FRA) if it’s larger. (You can switch any time after 62.)

Survivor benefit = 100% of the deceased spouse’s benefit, if the survivor is full retirement age.

You can start survivor benefits as early as 60 (50 if disabled), but if you collect early, you will take a haircut and only get 71.5-100% depending on how early you claim it.

If your deceased spouse had not started claiming Social Security, then it is based on the amount they were entitled to collect based on their age and work record.

If you remarry before 60 (50 if disabled), you cannot get survivor benefits. But you can regain them if that later marriage ends.

If you remarry at or after 60/50, there is no impact to your survivor benefits. (But it may still be better to skip the survivor benefit in favor of a spousal benefit via your new spouse if that’s higher.)

What if you were collecting regular spousal benefits and then your spouse died?

Social Security will usually automatically convert you to survivor benefits once you report the death, which you should do quickly because the survivor benefit is much higher than the spousal benefit.

If you don’t get automatically converted, you can do it by phone (call the Social Security Administration) or go in person to a local Social Security office.

If you work while receiving survivor benefits, the same income limit / withholding rules (explained above) still apply.

4. Surviving Divorced Spouse. If you divorced and then your ex died, you might STILL be able to claim a divorced survivor benefit.

This benefit is the same amount as the survivor benefit.

Collecting it does not impact any amounts that other survivors may be getting based on the deceased’s work record.

Rules are essentially the same as for divorced people (#2 above) except that you can remarry after 60 (but not before) with no consequences to the benefit.

Social Security considerations for early retirees

There are special considerations if early retirement is in your plans.

As explained earlier, Social Security benefits are related to “how much you paid into the system.”

The more you paid (via higher and longer wages), the more your benefit will be.

But because Social Security averages your highest 35 wage earning years, if you retire early, you may not even have 35 wage earning years.

Social Security will fill those early retirement years with $0.

A bunch of zeros averaged across 35 years will hurt you by reducing your monthly benefit amount.

However, it doesn’t hurt you in a “straight line” because of the notion of Social Security “bend points.”

Bend points are the mechanism for making Social Security progressive, like the tax system.

With income taxes, the more you make, the higher your tax rate.

With Social Security, the more you make, the lower your Social Security “rate.” The less you make, the higher your rate.

By rate, I mean “the percent of your average 35 year wages that you collect back as Social Security benefits.”

People who paid a lot into the system may collect more dollars back than people who paid little, but they will collect a smaller percent of their overall earnings vs. lower income people.

The idea is, low income recipients critically depend on Social Security far more for their livelihoods than already well-off recipients do.

Here’s how bend points work in practice:

Remember earlier I said Social Security takes your average 35 year wages (indexed for inflation) to calculate a “primary insurance amount,” which becomes your monthly payment amount.

Well, the primary insurance amount (PIA) is the sum of:

1. 90% of your first $1,115 average inflation-indexed monthly earnings +
2. 32% of your average inflation-indexed monthly earnings over $1,115 and through $6,721 +
3. 15% of average inflation-indexed monthly earnings over $6,721, until you max out your monthly benefit based on your retirement age

These are 2023 numbers, which get adjusted for inflation each year.

As you can plainly see, just like the income tax system, you get more “credit” at the lower end of the scale vs. the higher end.

This shows you the progressive nature of Social Security:

• After each bend point, the slope gets less and less steep
• At the first bend point ($1,115) it gets cut by 2/3 from 90% to 32%
• At the second bend point ($6,721), it gets cut by half from 32% to 15%

So at each bend point, each incremental dollar thereafter earns you less Social Security credit.

Likewise, if your earnings record puts you past the second bend point, you’re not getting as much Social Security bang for buck for working more years beyond that.

Even if you earn $0 forever right after passing the second bend point, you’re not giving up too much incremental Social Security, in relative terms.

In contrast, if you stop earning BEFORE reaching the second bend point, you are giving up twice as much Social Security (32% vs. 15% rate) for each extra dollar not earned.

So if you’re thinking about early retirement, you might want to know exactly when you’ll reach the second bend point, right?

The math for calculating this isn’t very fun (due to the inflation indexing that must be done), so I won’t bloat what is already a very long blog post here with more brain-splitting math.

However, there are some tools that can help you calculate where you sit on the bend point chart, which I explain in my freebie for this post with step by step screenshots – click below to get it:

Social Security is running out. Here is what it means for you.

Starting in 2020, Social Security had more money going out than coming in.

That means the program will need to start drawing down principal to honor its commitments.

If this continues unabated, the main Social Security fund will be drained by 2034, or 11 years.

This is being caused by the large number of boomers retiring + slowing population growth.

About 10k boomers retire every day, meanwhile not enough young people are joining the work force and contributing to Social Security to keep pace with supporting them.

By 2035, the number of 65 and older seniors will exceed 76 million vs. 58 million today, according to estimates.

Adding to these challenges is the fact that life expectancies are simultaneously increasing.

Even worse, increasing wage inequality is putting greater strain on the system.

Wage inequality makes Social Security worse because, to maximize Social Security’s trust fund, you need as many people as possible earning and contributing as much as possible.

If few people earn a lot while most people earn peanuts, it reduces Social Security revenue because Social Security tax is capped at the first $160,200 of income (6.2% tax), 2023 numbers.

So, if 10 people earn $100k taxable income ($1M combined), Social Security will collect $6.2k from each person, $62k total.

Whereas if the same $1M is earned by 9 people who make $20k apiece while 1 person makes $820k, Social Security only collects $21,092.40 total: $1,240 per each of the 9 poor people, and $9,932.40 from the 1 rich person.

This is just a silly example to illustrate extremes, but it shows why wage inequality hurts everyone’s Social Security.

Unless Congress and the President pass legislation before 2034, payments to all retirees would immediately be cut ~20% across the board.

That is because current Social Security tax revenues are only sufficient to cover about 80% of obligations.

When Congress last set the wage cap for Social Security taxes (payroll tax) in 1977, its goal was to cover 90% of America’s wages.

But in the years since, due to increasing wage inequality, wages exceeding the cap (which is adjusted annually for inflation) have far outpaced median wages.

Hence, the current inflation-adjusted cap of $160,200 only covers ~84% of America’s wages (vs. 90% when the cap was first set).

This has reduced Social Security revenue with every passing year.

It’s Gen X, millennials, and Gen Z who will pay for this most dearly in the form of cuts to their retirement benefits – especially poor retirees.

And if things keep on going like this, those cuts would increase to ~25% over time.

Americans will have to either postpone retirement (work longer) or simply get by on less…even as inflation makes life more expensive each year.

So, according to the latest Social Security study on this, someone earning average $51,795 annually throughout her career would be entitled to $27,366 annually in inflation-adjusted Social Security benefits if she retires in 2037 at age 67.

But if Social Security runs out before then, her payment by law would be cut by 21% to $21,669.

As you can imagine, cuts this severe will most greatly harm the half of all retirees whose retirement income primarily comes from Social Security.

Social Security is called the “third rail” of American politics because messing with it is political suicide for a politician.

But given how much people want and depend on Social Security, it is also unthinkable that Congress and the President won’t intervene to save it, or at least balance things, before 2034.

Solutions will likely include raising taxes, cutting benefits, or both.

The challenge is that, 2034 still seems a bit far away…making it easy(ish) to kick the can down the road to another President, another Congress, and make it someone else’s problem.

But each year it goes ignored, the Social Security fund gets smaller and the eventual solution will be that much more painful.

The least painful solution would be to start rectifying taxes and benefits right now, yesterday already, so that we slowly ease into the long-term solution over the next 11 years.

But that would require bipartisan resolve of such magnitude that it is effectively impossible in today’s political climate.

What all this means to you is, at some fundamental level, not really knowable unfortunately.

Because the options you’re going to be considering are whether to delay Social Security so that you get the highest monthly amount at 70, or start early (with a smaller benefit) because the fund may get depleted anyway.

On the one hand, it seems unthinkable that our elected leaders would let Social Security drive itself into the ground, and if you’re confident about that, delaying payments could ensure a much higher monthly benefit.

On the other hand, if you’re not confident a solution can be found in the foreseeable future, then you might just grab what you can now (better than nothing, after all), rather than wait and find the fund drained right when you expected an increase for patiently waiting all those years.

Only you can make that decision.

But hopefully this post helps you clarify the issues and considerations, so you can make the best choice that helps you sleep well at night based on your income need and confidence level.

And if you’re on the younger side, i.e., more than 10-15 years away from claiming Social Security, my advice is to just have the mindset of not relying on it being there when it’s your time.

Better start building a nest egg for yourself. Earn more, spend less, be thoughtful.

If Social Security is still around when you’re eligible decades later, great that’s just a bonus.

Conclusion

I’ve shared a lot of info in this post about Social Security:

• how it works
• timing strategies
• how it’s taxed
• how work affects it
• how spouses/survivors are impacted by it
• how early retirees should think about it
• how the looming shortfall may impact things

This is a complicated and confusing topic that can rightly cause you to feel anxiety.

You might worry:

Will I have financial security when I retire?

How much Social Security can I depend on when I’m old? Have I saved enough to cover the difference?

When can I safely stop working?

Will my loved ones be taken care of if something happens to me?

Hopefully this post brings some clarity to these issues for you.

Now I’d like to hear from you.

What other critical info do you need about Social Security that I haven’t covered?

Or maybe you just have a question about something that still doesn’t feel clear.

Either way, leave a comment right now and share your thoughts. I try to respond to every comment (and email for that matter).

Plus: be sure to check out our companion post: How long will your savings last in retirement?

Schedule a private FIRE consulting session

Schedule a 1-2 hour session with me to analyze and plan your path to FIRE

Schedule Now