5 Facts About Social Security Every Retiree Should Know

Maurie Backman, The Motley Fool

Updated Mon, Jan 8, 2018, 5:18 PM

Countless retirees depend on Social Security for a huge chunk of their income, yet many aren't well versed in the program's numerous rules. Here are a few facts about Social Security you absolutely need to be aware of.

1. Social Security isn't designed to cover all of your bills

While many seniors count on Social Security to provide a chunk of their income, the program was never designed to sustain retirees in full. In a best-case scenario, Social Security will replace roughly 40% of the typical recipient's pre-retirement income. Most seniors, however, need a good 80% of their former earnings to truly cover their expenses.

IMAGE SOURCE: GETTY IMAGES.

2. You can collect benefits even if you never worked

Though Social Security benefits are based on earnings, you can still get your share even if you never spent a day in the workforce -- that is, if you're married and your spouse is eligible for benefits. That's because the program offers spousal benefits, which can amount to up to 50% of what your spouse collects. Now if you did work, and therefore have an earnings history of your own, you'll be entitled to collect either your own benefits or spousal benefits based on your partner's earnings -- you can't double dip and collect both. You will, however, get the larger payout of the two.

3. You have an eight-year window to claim benefits

Even though your Social Security benefits themselves are based on how much you earned during your career, the age at which you first claim them can cause that number to go up, go down, or stay the same. If you file at what's known as your full retirement age, you'll collect the full monthly benefit amount you're entitled to based on your earnings history.

Your full retirement age will either be 66, 67, or 66 and a certain number of months, depending on when you were born. That said, you're allowed to file for benefits as early as age 62. Doing so, however, will cause your payments to get slashed. Similarly, you can hold off past full retirement age and collect delayed retirement credits until age 70, which will boost your payments by a cool 8% per year.

There are a number of factors that should go into your decision on when to file for benefits. If you have a healthy savings level, then you might choose to take your benefits early and use the money to enjoy that initial phase of retirement, when you're younger and your health is at its best. But if you're low on savings and are counting on that money to pay the bills, then you're better off waiting until full retirement age or later to file. Also, keep in mind that you technically don't have to claim benefits when you reach 70 -- it's just that there's no real incentive not to file at that point.

4. Social Security is designed to pay you the same lifetime total, regardless of when you file

We just talked about the fact that the age at which you take benefits can impact your monthly payments. But another thing you should know is that Social Security is actually designed to pay you the same total amount in your lifetime whether you file at 62, 70, or somewhere in between. That's because while filing early will result in lower monthly payments, you'll also collect more payments. On the flip side, delaying your benefits will cause them to increase, but you'll collect fewer individual payments.

This formula, however, hinges on one major factor: that you live an average lifespan. If your health is poor and you don't expect to live as long as the average person your age, then it generally pays to start taking benefits as early as possible so that you get the most in your lifetime.

5. Social Security income is taxable

Each year, countless seniors are shocked to learn that their Social Security benefits are indeed taxable. Whether you'll pay taxes on your Social Security income depends on two factors: where you live, and what your total annual income amounts to.

If your non-Social Security income plus half of your yearly benefit payments equal $25,000 to $34,000 and you're a single tax filer, then you could be taxed on up to 50% of your benefits. The same holds true if you're a joint filer and that number falls between $32,000 and $44,000. Furthermore, if your total income under the above formula surpasses the $34,000 mark as a single filer, or $44,000 as a joint filer, you could be taxed on up to 85% of your benefits.

There are also 13 states that tax Social Security income to different degrees: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. If you live in one of these states, you'll need to prepare to lose a portion of your benefits, though you may qualify for an exemption if your income isn't particularly high.

Even if you've yet to start collecting Social Security, it pays to read up on how the program works. This way, you'll be better equipped to make the most of your benefits.

More From The Motley Fool