When people make retirement plans, they almost always count on claiming Social Security benefits. Social Security is a US federal insurance program that gives eligible people a monthly income. In 2024, approximately 68 million Americans received a Social Security benefit for a total annual spending of $1.5 billion.
If you plan to retire in the US and collect Social Security benefits, it’s essential to have a general understanding of the program. Keep reading for a complete overview of Social Security, how it works, the different types, and the best strategy for claiming benefits.
What are Social Benefits?
Social Security is also known as the Old Age, Survivors, and Disability Insurance (OASDI) program. This program provides retirement and disability benefits to qualifying individuals and their spouses, children, and survivors.
President Roosevelt created the program as a way to provide economic Security to seniors. Social Security is meant to help people financially when they enter retirement and stop working.
How Do Social Benefits Work?
OASDI is a tax program; the government collects Social Security taxes from working citizens and distributes that money to qualifying individuals enrolled in the program. You can only collect Social Security if you have paid taxes into the program for at least 10 working years or more.
Social Security is typically automatically taken out with your payroll deductions if you have an employer. And if you’re self-employed, you’ll have to pay Social Security taxes when filing your annual taxes.
The amount you receive will vary for each individual. The government determines the amount by calculating your average indexed monthly earnings (AIME) from your 35 highest-earning years.
What are the Different Types of Social Benefits
There are three core types of Social Security benefits:
- Retirement benefits help seniors who retire by supplementing their income so they don’t have to rely on savings entirely. You have to be at least 62 years old and have earned 40 work credits to quality.
- Disability benefits replace some of the income an individual with disabilities loses out on due to their condition. Individuals must be 18 or older and have a physical or mental disability that prevents them from working and is expected to last at least 12 months.
- Survivors benefits give qualifying family members a monthly check to partially replace the income of a worker who died.
The Best Approach for Claiming Your Social Benefits
According to the Social Security Department, the estimated average monthly Social Security retirement benefit for January 2024 is $1,907.
Of course, how much you receive can differ greatly from one person to the next. Ultimately, your monthly payout will depend on two factors:
- What age you choose to start receiving Social Security benefits
- How much Social Security tax you paid during your 35 highest-earning years
The earliest you can cash in on Social Security is at 62 years old. Some people think they should immediately cash in as soon as they can access this money. After all, why not benefit from the supplemental income?
Well, it turns out there is a strategy to collecting your Social Security. If you understand how the program works and make some calculated decisions, you can end up receiving more money overall.
You may be eligible to collect as early as 62, but you’ll receive less money if you go this route. Specifically, you can lose up to 30% of your entitled monthly benefit!
Instead, the government rewards people who wait until their Full Retirement Age (FRA) to collect their benefits. Your FRA depends on your birth year but ranges from 66 to 67. If you wait until your full retirement age, you’ll receive up to 100% of your monthly Social Security retirement benefit.
Additionally, you can get even more money if you continue working beyond your FRA. The Social Security Administration will increase your benefit for every year you wait to collect up until the age of 70.
In 2024, the maximum monthly benefit for people aged 62 is $2,710. In comparison, the maximum monthly benefit for those who wait to collect until they’re 70 is $4,873. Note that these maximum thresholds change annually to keep up with the pace of inflation.
If you have a spouse who also qualifies for Social Security, that is another factor you’ll want to consider. Generally speaking, it’s recommended that if you both can’t delay claiming, the higher earner should be the one to delay. This is because they’re entitled to more money overall, and each year, they delay, which results in a larger increase in benefits.
Pros and Cons of Delaying Social Security
Financial experts will likely tell you that delaying your Social Security benefits is always the way to go. But the decision is a little more complicated than that. Here are some of the advantages and disadvantages of delaying Social Security:
- Pro: If you can delay until 70, you get the maximum amount of money you’re entitled to. Even if you don’t delay until you’re 70, every additional year earns you more money.
- Pro: You can change your mind. Once you claim your Social Security benefits, there’s no going back. (Although, you might be able to revert the choice if it’s been less than 12 months since you were first entitled to the benefits.) In comparison, if you decide to wait until you’re 70 and things change for you at any point, you can simply claim earlier.
- Con: If delaying your benefits will cause you financial strain and diminish your quality of life during retirement, it might not be worth waiting.
- Con: The life expectancy in the US is 77.5 years for both sexes. When you claim your Social Security benefits can’t solely be based on financial reasoning. It’s also important to consider your overall health and life expectancy.
Have a Strategy for Your Social Security Benefits
Now that you understand more about the Social Security benefits program better, you can plan your retirement more accurately. If possible, try to be strategic with when you claim your benefits to ensure you receive the most money possible.
You might also be interested in: Social Security and Taxes: What You Need to Know
