The best place to begin this guide is with a quick review of Social Security rules and guidelines that apply to retirement benefits. This section includes a wide range of topics, so I decided to list them in bite-size paragraphs to break them up in an organized manner. Understanding these basic guidelines from the beginning will make it easier to apply the strategies discussed later to your own personal situation.
• The 2019 average retirement benefit is $1,461 per month, according to the Social Security Administration. That equals $17,532 per year, which of course is not a lot. But keep in mind that Social Security was not created to be a standalone retirement account. It should be combined with a retirement portfolio that includes savings, investments and/or pensions.
• Social Security benefits are calculated using the 35 highest years of earning years in your career. If you have less than 35 years of earnings then your non-earning years will be represented with zeros. This will negatively affect the average of your benefits calculation and lower your monthly benefit.
• There is a minimum requirement of 10 earning years to qualify for any amount of retirement benefits. Social Security measures years in quarters, so it takes 4 quarters of earnings or credits to equal one year, and 40 quarters or credits to meet the minimum of 10 years.
• As mentioned, the fewer “zero years” you have will improve your income averages, so it makes sense to pursue more years/quarters of work if you are just short of the 10 year or 35 year baseline. Each $1,360 in earnings counts as a quarter in 2019 and you can earn a maximum of 4 quarters of coverage per year. Thus, if you earned $5,440 in January of 2019 then you will have earned the maximum 4 quarters in only one month.
• The absolute earliest you can receive retirement benefits is at the age of 62. You can delay your benefits as late as age 70. Most people understand that the earlier they enroll the less they will receive on a monthly basis. A 27.5% reduction in benefits is applied when you enroll at age 62. This reduction amount decreases the closer you get to your full retirement age.
• A common myth about the early retirement reduction is that it is a “penalty”. This is not true. The reduction simply re-calculates your monthly benefits based on the fact you will receive more payments over your expected lifetime. It is the 7% interest return that you miss out on by claiming early.
• Earnings limits apply to benefit recipients younger than full retirement age – age 66 for people born in 1943 through 1954, 66, 6 months if born in 1957. For 2019 this limit is $17,640. If you take benefits early, which is any time before your full retirement age, Social Security will deduct $1 of benefits for each $2 earned over $17,640.
• In the year you reach full retirement age there is an earnings limit of $46,920 for the months leading up to your birthday. For example, if your birthday is June 2nd then you can earn up to $46,920 between January and May without penalty. However, Social Security will deduct $1 from benefits for each $3 earned over $46,920 during this time. Once you reach your full retirement age, there is no penalty and no limit on the amount you can earn.
• Some people must pay federal income taxes on their Social Security benefits if they have what is called other substantial income. 50% of benefits are taxable for individuals with a combined income between $25,000 and $34,000, and 85% of benefits can be taxed on individuals whose income exceeds $34,000. For couples, the 50% threshold begins between $32,000 and $44,000, while the 85% threshold begins for joint incomes more than $44,000.
• Everyone who works must pay Social Security and Medicare taxes on their earnings, regardless of age. Yes, even a 69 year old part-time employee who collects Social Security benefits is required to pay into the Social Security system!
• One VERY important consideration for early retirees is health insurance. Keep in mind that you cannot claim any Medicare benefits until age 65. If your employer currently provides your health insurance then you run the risk of paying high insurance costs (or having no insurance) if you opt leave your employer’s plan.
• Social Security is configured to provide lower wage workers with a higher percentage of their average working income in retirement. For example, a low wage worker might earn a Social Security benefit close to 50% of their pre-retirement income. The average replacement rate for high income workers is around 25%.
• Your Social Security benefits are protected from most debt collections, but they can be taken to collect unpaid federal taxes, federal student loan balances, and child support or alimony. Clearing these debts will leave your Social Security benefits untouched.
• Your Social Security retirement payments do not begin magically appearing in your bank account when you reach retirement age. If you do not apply for them you will never receive a single dime from Social Security.
• Social Security disability benefits are automatically converted to retirement benefits after you reach Full Retirement Age.
Again, this overview is simply a collection of what I consider to be important facts about Social Security and retirement. I included them here to answer some frequently asked questions before we get into more detailed information beginning with the next section.