The maximum Social Security benefit for someone retiring at full retirement age in 2024 is $3,822 per month, which will increase to $4,018 per month, or more than $48,000 a year in 2025. Social Security benefits are a reliable and stable income stream in retirement. While they do not demand the same level of planning as investments like stocks, bonds, or mutual funds, understanding how they work is key to making the most of your benefits. To maximize your checks and use this income effectively, knowing a few key details about Social Security is important.
You can hire a financial advisor to understand how the benefits work and how to use them properly. You can also read this article to learn more about the benefits of Social Security.
Below are 6 things to know about Social Security benefits:
1. You need to apply for Social Security
If you are retired or nearing retirement and plan to start withdrawing your funds, you need to first apply for Social Security. You can apply for Social Security benefits up to four months before you want them to start. Retirees need to be at least 62 when applying for the benefits. However, keep in mind that if you claim benefits before reaching full retirement age, which is 67 for most people, your monthly payments will be reduced. So, you must plan well and understand how the value of the check gets impacted by your age. It is also worth noting that Social Security payments start a month after you apply, and the exact timing of your payment depends on your birthday. Here’s how the schedule works:
- If your birthday is between the 1st and 10th of the month, you will receive your payment on the second Wednesday of the following month.
- If your birthday falls between the 11th and 20th, your payment will arrive on the third Wednesday of the following month.
- For those born between the 21st and 31st, benefits are paid on the fourth Wednesday of the following month.
How do you apply for Social Security? - The application process is quite straightforward. The easiest way is to visit the official Social Security Administration (SSA) website. The website has multiple applications for retirement, family, disability, and survivor benefits. Alternatively, you can call the SSA at 800-772-1213 to apply or schedule an appointment at a local office.
2. Social Security application can be withdrawn
You can still withdraw your application if you have already started claiming benefits. A lot of people start claiming their benefits early. However, they may later understand the benefits of delaying to maximize their payout. If you feel the same, you can withdraw your Social Security application within the first 12 months of claiming. However, if you withdraw your benefits, you will need to repay all the benefits you have received, along with any spousal benefits that were paid out. Once you have repaid the amount, you can restart your benefits at a later time. This can result in a higher amount when you finally decide to claim them again.
It is important to note that if more than 12 months have passed since you first claimed your Social Security check, the option to withdraw your application and start over is no longer available. While this might seem like a setback, you can still use strategies to increase your benefits. For instance, early retirees who continue to work even post-retirement have the option to suspend their benefits once they reach the full retirement age.
While you can withdraw your application, you will need to repay the benefits you have already received, which can strain your finances. Hence, it may be helpful to consult with a Social Security financial advisor first.
3. Social Security benefits are taxed
It is important to understand how taxes apply to Social Security benefits. These benefits are not always tax-free. The portion of your benefits subject to tax depends on your total income, but the good news is that only up to 85% of your Social Security benefits can be taxed, not the full amount. The Social Security tax system applies to both salaried and self-employed individuals, with specific caps on taxable earnings. For 2024, the maximum taxable earnings for Social Security officially called the contribution and benefit base, is $168,600. This limit rises to $176,100 in 2025.
- Employees: For income up to the taxable limit, both employees and employers contribute 6.2% of the income toward Social Security. A worker earning $176,100 in 2025 would contribute $10,918.20, and their employer would match this amount.
- Self-employed individuals: If you are self-employed, you pay the full 12.4% Social Security tax on income up to the cap. However, you can deduct half of this amount when filing your tax return.
On top of Social Security taxes, you also need to pay Medicare tax. The standard Medicare tax rate is 1.45% on all income. However, high earners pay an additional Medicare tax of 0.9% on income exceeding $200,000 for single filers or $250,000 for couples filing jointly. Employers are required to deduct both Social Security and Medicare taxes from paychecks and match their portion of contributions. For each employee, 12.4% is allocated to Social Security, with the amount split equally between the employee and employer, and 2.9% is designated for Medicare, with 1.45% contributed by each. If you are self-employed, you bear the full burden of these taxes, which totals 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare.
You must also know that you may owe federal taxes on your checks when you start receiving Social Security benefits. While the majority of states and the District of Columbia do not tax Social Security benefits, a few do. Currently, nine states tax these benefits, including Montana, Minnesota, New Mexico, Connecticut, Utah, Vermont, Rhode Island, Colorado, and West Virginia.
The federal income tax you pay depends on your income and filing status.
- For individuals with a combined income between $25,000 and $34,000, up to 50% of their Social Security benefits may be taxable. If the combined income exceeds $34,000, up to 85% of the benefits could be subject to tax.
- For married couples filing jointly, a combined income between $32,000 and $44,000 results in up to 50% of benefits being taxable, while income above $44,000 means up to 85% of benefits may be taxed.
- Married individuals who file separately are likely to pay taxes on their benefits, regardless of income level.
The IRS calculates your combined income by adding your Adjusted Gross Income (AGI), any non-taxable interest, and half of your Social Security benefits.
Survivor benefits are also subject to federal taxation under similar rules. If you are the sole recipient and your combined income is below $25,000, you will not owe any federal taxes on your survivor benefits. However, if your income exceeds this threshold, a portion of the benefits becomes taxable. For married couples filing jointly, survivor benefits are taxed when the combined income surpasses $32,000. In both cases, the maximum taxable portion of Social Security benefits, including survivor benefits, is 85%.
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4. Pension affects your Social Security benefits
For most retirees, receiving a pension will not affect the amount of their Social Security benefits. So, if you are wondering, “Can I get both Social Security and pension?” The answer is yes. While you can enjoy both streams of income without interference, certain pensions, particularly those tied to jobs where your employer did not withhold Social Security taxes or Federal Insurance Contributions Act (FICA) taxes, may reduce the amount you receive in Social Security benefits. Some examples include railroad workers, federal government employees hired before 1984, who are covered by the Civil Service Retirement System (CSRS), etc.
If your employer withheld these taxes during your working years, your pension would not impact your Social Security benefits. In contrast, if you earned a pension from jobs where FICA taxes were not withheld, your benefits may be subject to adjustments. The SSA determines your Primary Insurance Amount (PIA) based on your highest-earning 35 years in covered employment. This PIA forms the baseline for your Social Security benefits.
There are two more things you need to understand when collecting a pension with your Social Security benefits:
- Windfall Elimination Provision (WEP): The WEP applies if you earned Social Security benefits based on your own work history and also receive a non-covered pension. Under WEP, the SSA uses a modified formula to calculate your PIA, which can reduce your benefits. WEP can reduce your Social Security benefit by up to half the value of your non-covered pension, but it cannot eliminate your benefits entirely.
- Government Pension Offset (GPO): The GPO comes into play if you are eligible for spousal or survivor Social Security benefits while also receiving a non-covered pension. This reduces your Social Security benefit by two-thirds of the amount of your pension. You may not receive any Social Security income under those categories if the reduction exceeds your spousal or survivor benefit.
Your age when you begin claiming Social Security also significantly affects the amount you receive. While you can start as early as age 62, claiming before your full retirement age can result in permanently reduced benefits. Conversely, delaying benefits until age 70 increases your monthly payout. However, delaying benefits does not offset the impact of WEP or GPO. These provisions are applied regardless of when you claim Social Security. Therefore, getting assistance from a financial advisor can be helpful if you are earning a pension, especially from a job where your employer did not withhold Social Security taxes.
5. Social Security benefits can change with COLA adjustments
Social Security benefits are designed to keep pace with rising living expenses through the Cost-of-Living Adjustment (COLA). Annual COLA updates increase the benefits you receive each year and can help you maintain your purchasing power. COLA hikes are automatic and calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). In 2025, Social Security beneficiaries will receive a 2.5% COLA increase. For retirees, this translates into a rise in the average monthly benefit from $1,927 to $1,976. This can offer you an additional $49 per month or $588 over the year.
The COLA increase applies to all Social Security beneficiaries, not just retirees. This includes:
- Individuals receiving disability benefits (SSDI)
- Survivors of covered workers, such as spouses or dependent children
- Beneficiaries collecting spousal benefits
6. Social Security benefits are impacted by your salary if you continue to work in retirement
If you continue working while receiving Social Security benefits, your salary can impact the amount you receive. The IRS tracks your earnings through your Social Security number. If you are under the full retirement age and earn more than the annual earnings limit, your Social Security benefits will be reduced.
For 2025, the earnings limit is set at $23,400. If you earn more than this amount, your Social Security benefits will be reduced by $1 for every $2 you earn above the limit. If you reach full retirement age, the IRS uses a higher earnings limit of $62,160 for the months before you reach full retirement age. So, for every $3 you earn above this amount, $1 will be deducted from your benefits. However, you are no longer subject to these earnings limits once you reach full retirement age.
When calculating your earnings for the purpose of Social Security benefit reductions, the IRS only considers certain types of income. These include wages, bonuses, commissions from your job and earnings from various sources if you are self-employed. However, several types of incomes do not count toward the earnings limit, such as pensions, investment income and interest, annuities, veterans and other government or military retirement benefits.
To conclude
Understanding how your Social Security benefits work and the various factors that can affect them is crucial for making informed decisions about your retirement financial needs. Knowing how things like taxes, your salary, and the timing of your benefits impact your payments can help you avoid unnecessary reductions and maximize your Social Security income. This way, you can ensure your benefits contribute to your retirement needs and help you secure a financially stable future.
Use the free advisor match tool to get matched with seasoned financial advisors who can guide you on Social Security benefits and the best time to claim them. Answer a few simple questions based on your financial needs and get matched with 2 to 3 financial advisors who may be best suited to help you.
For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.