Social Security is a major source of income for many older adults, and more than 20% of U.S. adults age 50 and older have no other retirement income outside of their benefits, according to a 2023 survey from the Nationwide Retirement Institute.
But thanks to a few lesser-known rules, there’s a chance you may receive less than you expect. You can check your benefit amount online through your my Social Security account, but that’s not necessarily how much you’ll actually collect when you file.
Before you begin claiming, it’s wise to make sure you’re aware of these three factors that could potentially shrink your monthly payments.
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1. State and federal taxes
Even in retirement, you may still be subject to income taxes — including state and federal taxes on your Social Security benefits.
State taxes will depend on where you live, and fortunately, there are already 38 states that don’t tax benefits. As of Jan. 1, 2024, two more states — Nebraska and Missouri — are now included on that list as well. More states could go the tax-free route in the future, so if you live in one of the handful of places that still taxes benefits, keep an eye on your local laws to see if anything changes.
Federal tax law isn’t quite as forgiving, however, and these taxes will affect all beneficiaries regardless of location. Whether or not you owe federal taxes on your benefits will depend on your provisional income, which is your adjusted gross income plus half of your annual benefit amount and any nontaxable interest.
So, for example, if you’re withdrawing $40,000 per year from your 401(k) and are earning $20,000 per year from Social Security, your provisional income would be $50,000 per year.
| Percentage of Your Benefits Subject to Federal Taxes | Provisional Income for Individual Filers | Provisional Income for Married Couples Filing Jointly |
|---|---|---|
| 0% | Under $25,000 per year | Under $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Data source: Social Security Administration.
The good news is that no matter how much you’re earning, you won’t owe federal taxes on more than 85% of your benefit amount. But because these income limits are so low, most retirees will face federal taxes on at least a portion of their monthly checks.
2. Working after taking benefits
It is possible to continue working after you file for Social Security, but depending on your income, it could reduce your benefit amount substantially.
If you haven’t yet reached your full retirement age (FRA) — which is age 67 for anyone born in 1960 or later — you’ll be subject to the retirement earnings test income limit. There are two different limits depending on whether or not you’ll reach your FRA in 2024, and the more you earn over the limit, the more your benefits will be reduced.
| Income Limit in 2024 | Benefit Reductions | |
|---|---|---|
| If you will reach your FRA in 2024 | $59,520 per year | $1 in benefit reductions for every $3 over the limit |
| If you won’t reach your FRA in 2024 | $22,320 per year | $1 in benefit reductions for every $2 over the limit |
Data source: Social Security Administration.
So, for instance, say you’re 62 years old with an FRA of 67, and you’re earning $30,000 per year from your job. You won’t reach your FRA in 2024, and your income is $7,680 over the $22,320 annual limit. In this case, then, your benefits would be reduced by $3,840 per year, or $320 per month.
Fortunately, these reductions don’t last forever. Once you reach your FRA, you’ll start receiving adjusted checks to make up for the money that was withheld. Also, your income will no longer affect your benefits after you’ve reached your FRA.
3. Claiming before your full retirement age
Many people are aware that if you file for Social Security before your FRA, your payments will be reduced. However, around half of U.S. adults mistakenly believe that their benefit will automatically go up once they finally do reach their FRA, according to a 2023 Nationwide survey.
In reality, your benefit amount is generally locked in for life once you begin claiming (aside from annual cost-of-living adjustments). If you file as early as possible at age 62, your benefit will be permanently reduced by up to 30%.
Claiming early is not necessarily a bad thing, but if you’re going to be relying heavily on your benefits in retirement, it’s important to know just how much your payments will be reduced so you can plan accordingly.
Social Security can make or break retirement for many people, and the program can be complex and confusing. But when you understand how these three rules could affect your benefits, you can ensure you’re heading into your senior years as prepared as possible.
