Social Security is a complex program. If you don’t know understand these rules, you might lose some of your benefits.
Social Security is the cornerstone of many Americans’ retirement budgets. About half of all U.S. households with a member 65 or older receive at least 50% of their household income from the program, according to data compiled by the Social Security Administration. As such, the budgets and lifestyles of a huge number of Americans depend heavily on how large a benefit they get each month.
Unfortunately, there are pitfalls that could result in a disappointing amount of benefits if you don’t understand the most important rules. Here are three ways you could miss out on some of the Social Security benefits you’re entitled to.
1. Claiming benefits too early
Most people become eligible to claim Social Security retirement benefits when they turn 62, but claiming as soon as possible could end up costing you in the long run.
For those Americans who aren’t retired yet, the government defines “full retirement age” as 66 to 67 years old, depending on your birth year. And when the Social Security Administration calculates what it considers your “full” benefit, it is based on the premise that you’ll start collecting benefits at that age.
If you claim before your full retirement age, your monthly benefit gets reduced relative to what it would have been if you waited. Someone with a full retirement age of 67 (anyone born in 1960 or later) will receive just 70% of their full benefit if they claim at 62. On the other side of the coin, every month you delay claiming Social Security past your full retirement age earns you a slightly higher benefit (until it maxes out at 70).
The table below details what percentage of your retirement benefit you’ll receive relative to your benefit at full retirement age (for those born in 1960 or later).
| AGE WHEN CLAIMING | PERCENTAGE OF FULL RETIREMENT BENEFIT |
|---|---|
| 62 | 70% |
| 63 | 75% |
| 64 | 80% |
| 65 | 86.67% |
| 66 | 93.33% |
| 67 | 100% |
| 68 | 108% |
| 69 | 116% |
| 70 or older | 124% |
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION. CALCULATIONS BY AUTHOR.
While you will receive more monthly checks over your lifetime if you claim early, that’s not necessarily the optimal strategy in the long run. A 2019 study from United Income found just 8% of retirees would maximize their retirement income by claiming before 65. The optimal age to claim Social Security for the average retiree is actually 70.
2. Working while receiving benefits
Many people choose to keep working well into their 60s, 70s, or even later. But if you continue to work while you’re receiving Social Security benefits, you could receive smaller checks than you anticipate.
Anyone collecting Social Security benefits while below their full retirement age is subject to the Social Security earnings test. If you earn more than $22,320 in wages during 2024, the government will reduce your monthly benefit $1 for every $2 you earn above that limit. Those reaching full retirement age in the current year have a higher limit of $59,520, and the reduction is $1 for every $3 above the limit.
However, those benefits aren’t permanently lost. The Social Security Administration will adjust your monthly payment once you reach full retirement age to make up for the benefits withheld due to the earnings test. What’s more, you can continue to work and earn any amount without penalty once you reach full retirement age.
3. Taxes
Taxes on Social Security benefits are becoming harder and harder to avoid.
The IRS uses a metric called “combined income” to determine what percentage, if any, of your Social Security benefits are subject to federal income tax. Combined income is equal to the sum of half your Social Security benefits plus your adjusted gross income from other sources and any nontaxable interest income. If your combined income exceeds a certain threshold, a portion of your Social Security income becomes taxable.
| TAXABLE PORTION OF SOCIAL SECURITY BENEFIT | INDIVIDUAL COMBINED INCOME | MARRIED FILING JOINTLY COMBINED INCOME |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | Greater than $34,000 | Greater than $44,000 |
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
You’ll notice those thresholds are quite low. That’s because they haven’t been updated for inflation for at least 30 years. As a result, more and more retirees owe taxes on their Social Security income.
On top of that, 10 states tax some of their residents on a portion of their Social Security benefits. Laws differ from state to state, so be sure to consult a professional if you live in one of the states that taxes Social Security.
With careful planning, it’s possible to make the most of your Social Security benefits. But if you’re not mindful of key rules around the benefits program, you may not get as much out of it as you could.
