Navigating the Social Security Landscape

How Does Social Security Work?

You probably already know that Social Security is a federal insurance program designed to provide benefits for retirees, but you might have questions concerning how it all works.

First off, to be eligible for benefits, you will need to earn what the Social Security Administration has defined as 40 quarters of earnings. For 2024, you earn one quarter of earnings for every $1,730 of taxable earned wages. You can earn up to four quarters in any given year, so if you earned and paid taxes on at least $6,920 of wages, then you will have earned your four quarters of coverage for the year. Note that the timing of your earnings will not affect quarters earned.

It’s important to note that the number of quarters you earn during your working life do not impact your eventual benefits. However, your benefits are affected by the amount you make and the amount that you have been taxed.

How Much Will I Get Each Month?

Your benefit is based on earnings over your 35 highest-earning years. If you only work for 30 years, for example, you will then have five $0 years that will lower your overall benefit. (Importantly, while earning the maximum benefit might be helpful in generating the income you need in retirement, working until what the Social Security Administration deems to be Full Retirement Age isn’t the right choice for everyone.) A worker who retires at their Full Retirement Age, which varies based on their year of birth, would be eligible to receive the maximum benefit based on their earnings history, which in 2024 is $3,822 per month.

How Soon Can I File?

Unless there are extenuating circumstances such as disability, the earliest you can receive Social Security benefits on your own record is age 62. You will be eligible for the standard retirement benefit at your Full Retirement Age, which is determined by the year you were born:

If you start benefits before your Full Retirement Age, this will reduce the benefit you receive throughout the course of your life:

If you wait to file until after you reach Full Retirement Age, you would earn what the Social Security Administration defines as Delayed Retirement Credits, which is 8% per year pro-rated monthly, plus cost of living adjustments:

What If You Work While Receiving Benefits?

For a variety of reasons, many people continue to work after they have begun receiving benefits. If you choose to keep working, you will be subject to an earnings threshold of $22,320 annually, or $1,860 monthly. Earned income over that will cause a benefit reduction of $1 for every $2 earned over the threshold. However, the benefit that is withheld will be added back to the benefit you receive once you reach Full Retirement Age or your earnings fall below the threshold, whichever comes first. 

Is Social Security Taxed?

It can be. The way to determine if your benefit will be taxed is to take one-half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. If that number, known as your combined income or provisional income, is above $25,000 for single filers or $32,000 for joint filers, up to 50% of your Social Security benefit will be taxed as ordinary income. If your combined income is above $34,000 for single filers and $44,000 for joint filers, then up to 85% of your Social Security benefit will be taxed as ordinary income.

Note that how individual states tax Social Security benefits will vary by state. Currently eight states tax benefits in some form, 31 states do not and 11 states have no income tax at all.

How Do I File?

There are three different ways to apply:

• You can file for an individual benefit at ssa.gov.
• If you have a more complex case, such as filing as a survivor, widow or ex-spouse, you can contact the Social Security office at 800-772-1213.
• You may also choose to meet with a Social Security office representative in person by visiting ssa.gov/locator for office locations and making an appointment.

The Social Security Administration encourages you to file up to four months before your benefits start, and benefits are paid one month in arrears.

Strategies for Maximizing Social Security 

Is it better to file early for a reduced amount or to wait to file for a bigger monthly benefit? There’s a lot that can go into that decision:

• Expected longevity. While waiting to file makes sense for a lot of retirees and pre-retirees, if you have reason to expect a shorter lifespan, you might consider filing early.
• Legacy goals. If you have substantial legacy goals and want to leave assets to your heirs, you might consider taking that benefit early if it fills an income gap and allows the assets to grow.
• Cash flow. The reason most people decide to file early is cash flow. Cash flow fills the gap between working years and retirement income streams and can help you avoid having to dip into other resources and assets to fund expenses.
• Working in retirement. If you plan to continue working, you might delay filing until at least Full Retirement Age, at which point the earnings threshold is no longer applicable.

Spousal Benefits

Social Security also offers what is known as a spousal benefit, which is up to 50% of the benefit of the higher-earning spouse’s FRA benefit. When you file, your own benefit is paid first, and if your spousal benefit is greater than your own benefit, Social Security will add the difference. To qualify for spousal benefits, you must be 62 years of age or older and married to your spouse for at least one continuous year prior to filing for benefits, though that age requirement is waived if you are caring for a child younger than age 16 or have a disability and are entitled to receive benefits on your spouse’s record.

A surviving spouse is eligible for either the benefit based on their own work history or 100% of the benefit based on a deceased spouse’s working history, whichever is larger. An ex-spouse may also claim a benefit, provided the couple was married for 10 years and has been divorced for at least two years, and the ex-spouse has not remarried before age 60. For a surviving ex-spouse, similar rules apply: If the marriage lasted at least 10 years, the surviving ex-spouse can receive survivor benefits as early as age 60, but ex-spouses who remarry before age 60 no longer qualify.

The Outlook for Social Security

Because Social Security benefits are funded primarily by taxes on the generation currently working, large generational swings (such as the retirement of one of the largest generations in history) can put pressure on funding viability. Using intermediate assumptions, the Social Security Trust Fund is expected to cover all benefit amounts in full through 2033 but then be fully depleted in 2034. Importantly, this doesn't mean Social Security benefits go away entirely in 2034, but it does mean that benefits are likely to be reduced unless Congress considers legislation to keep the program solvent.

Get a Personalized Social Security Analysis

There’s a lot that goes into making the right filing decisions for Social Security. The Social Security website offers free benefit calculators to help you determine your own benefit. Your Baird Financial Advisor can also provide you with a personalized analysis to help you navigate the landscape of Social Security and make the best decision possible for you to reach your goals in retirement. 

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.

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