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3 Social Security Secrets You Need to Know Before You Retire

The Motley Fool logo The Motley Fool 5/16/2022 Katie Brockman

Social Security benefits could have a significant impact on your retirement. In fact, around 37% of men and 42% of women rely on their monthly checks for at least half their retirement income, according to the Social Security Administration.

Before you retire, it's wise to ensure you understand as much as possible about how the program works to maximize your benefit amount. And there are three Social Security secrets that can help you make the most of your payments.

Older person with a serious expression looking out a window. © Getty Images Older person with a serious expression looking out a window.

1. The age you claim will permanently affect your benefit amount

The only way to earn the full amount you're entitled to based on your work record is to wait until your full retirement age (FRA) to file for benefits. If you claim before that (as early as age 62), your benefits will be reduced by up to 30%.

A common misconception, though, is that if you claim early, your benefit amount will go up once you reach your FRA. In reality, your benefit amount is generally locked in for life after your file. So if you claim early, expect to receive smaller checks for the rest of your life.

On the other hand, if you delay benefits past your FRA, you'll receive your full benefit amount plus a bonus each month. And because your benefit amount is permanent, you'll collect these larger payments every month for the remainder of your retirement.

2. It's smart to have a strategy with your spouse

Video: 96% of Retirees Make This Mistake When Claiming Social Security Benefits (Money Talks News)

If you and your spouse are both entitled to Social Security, it's wise to have a strategy for when each of you will begin claiming. There isn't necessarily a right or wrong answer here, as it will depend on your unique situation and personal preferences.

For instance, you could opt for one person to claim early while the other delays benefits. Then you could have some extra income early in retirement while still receiving larger checks down the road. Or if you know money will be tight in retirement, you might both choose to delay benefits to earn as much as possible each month.

Also, if one spouse passes away, the other is sometimes entitled to the deceased person's entire benefit amount in survivors benefits. If you have reason to believe one of you will outlive the other, it may be worthwhile for that person to consider delaying Social Security so the survivor might receive a higher benefit.

3. You could owe taxes on your benefits

Social Security benefits are subject to both state and federal income taxes. Fortunately, the majority of states do not tax Social Security, but there are 12 that still do.

Federal taxes will depend on a figure called your "combined income." This number is your adjusted gross income (such as 401(k) withdrawals), plus half your annual Social Security benefit. If your combined income is higher than $25,000 per year (or $32,000 per year for married couples), you'll owe federal taxes on a portion of your benefits.

While you may not be able to avoid taxes on your benefits, when you're aware of them, it's easier to build them into your budget and prepare.

Social Security can be confusing, but it pays to understand as much as possible about how it works. With these three factors in mind, it will be easier to make the most of your benefits and enjoy a more comfortable retirement.


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