Social Security Strategy Planning: 10 Questions to Ask

You earn “credits” toward benefits by working and paying Social Security taxes. Up to four credits are assigned each year. If you were born after 1928, you need 40 credits (10 years of work) to qualify for benefits.

A complex formula determines your benefits. Factors include how long you’ve worked, how much you’ve earned each year, how inflation impacted your earnings and what age you choose to take Social Security benefits. In practice, a number of other variables can affect the calculation.

In its simplest form:

• Social Security uses your highest 35 years of earnings — adjusted for inflation — to calculate your Average Indexed Monthly Earnings (AIME).
• Your AIME is used to calculate your Primary Insurance Amount (PIA).
• Social Security adjusts your PIA for the age you will begin collecting benefits.
• Once you start receiving benefits, you may receive cost-of-living adjustments effective each January.

You can begin receiving benefits at age 62. Any family members who relied on your income for support can start collecting at this time as well. However, your benefit significantly increases if you begin collecting at your full retirement age, which is based on the year you were born.

You will collect the maximum benefits if you wait until age 70. In fact, your benefit increases 8% per year from your full retirement age through age 70, but benefits stop increasing after reaching this age.

This depends on a number of variables, including your other sources of retirement income, your overall financial picture and your family history of health and longevity. For those with sufficient assets, however, waiting until age 70 will offer the maximum monthly benefit.

Social Security provides benefits to family members who relied on a worker’s income for their support. Importantly, the worker’s benefit doesn’t get reduced based on family members who collect based on their work history. Here is a quick checklist of family members who are eligible to receive benefits:

Once you reach full retirement age, you can work and earn as much income as you want without reducing your Social Security retirement benefit. Moreover, working in retirement can increase your Social Security benefit, which is calculated beginning at age 62 and recalculated annually thereafter. Any new earnings will increase that benefit.

An important caveat: If you are under your full retirement age and working while collecting Social Security, your benefit may be reduced.

Additional income only affects your benefit if you are working under full retirement age and collecting benefits. If both of these conditions are met, the types of income that might reduce your benefit include:

• Employee wages
• Net earnings from self-employment
• Other work-related income, such as bonuses, commissions and fees

Pensions and retirement pay, IRA distributions and investment income won’t reduce your benefit.

If you’re under full retirement age, $1 in benefits is withheld for every $2 of earnings in excess of the annual exempt amount. In 2024, the annual exempt amount is $22,320 for those under their full retirement age and $59,520 for those in the year in which they reach full retirement age.

In the year in which you reach full retirement age, $1 in benefits is withheld for every $3 in earnings in excess of the annual exempt amount.

It depends on your taxable income level, but 85% of most high-income retirees’ Social Security benefits are taxable.

The Social Security program had asset reserves of approximately $2.788 trillion at the end of 2023 in its two trust funds. The Social Security and Medicare Boards of Trustees estimate these reserves will be depleted by 2033. To address the shortfall in funding that will follow, changes to the program — by way of increased payroll taxes or reduced benefits — are likely.