Thinking of Claiming Social Security Soon? Answer These 3 Questions First.

Before you claim Social Security, you must ask yourself some questions to ensure you won’t regret your choice. By getting answers, you can decide if you’re truly ready to move forward or if you need to wait a little longer to become a Social Security retiree.

Here are the three big questions you should ask before you even consider moving forward with your benefits claim.

Image source: Getty Images.

1. What is your full retirement age?

Unless you know your full retirement age (FRA), you shouldn’t file for Social Security. If you don’t know your FRA, it’s impossible to know how your decision to claim benefits will affect your finances for the rest of your life. Your full retirement age is based on the year you were born. The table below shows your FRA so you can answer this crucial question.

Data source: Social Security Administration.

Finding out what your FRA is lets you see whether you are currently older, younger, or right on target. If you’re planning on filing for Social Security benefits at exactly your full retirement age, you will receive your primary insurance amount (PIA). Your PIA is based on a portion of the inflation-adjusted average wage you earned in your 35 most lucrative years.

If you’re planning on claiming at a different age, though, this choice could leave you with either higher or lower monthly Social Security checks. For any month you receive a payment before FRA, benefits are reduced by early filing penalties. On the flip side, for any month until age 70 that you wait to get a check after FRA, your benefits increase because of delayed retirement credit.

This can have a huge impact. Let’s say your FRA is 67, and your primary insurance amount is $1,800. Here’s how much you’d get each month if you claimed at different ages:

• 62: $1,260 (Benefits are reduced by 5/9 of 1% per month for the first 36 months before FRA, and 5/12 of 1% for prior months.)
• 67: $1,800 (You receive your primary insurance amount for claiming at your FRA.)
• 70: $2,232 (Benefits are increased by 2/3 of 1% per month until 70.)

Since the difference between the highest and lowest potential benefits is $972, it’s easy to see why knowing FRA is so important before claiming.

2. How much income will benefits provide?

Next, you must answer the question of what exactly Social Security is going to do in terms of helping you achieve financial security. You are likely going to need retirement income equal to or above around 70% to 80% of the money you were making at your last job. If your income drops too much below that, you’ll face some financial trouble and may even need to make lifestyle changes like downsizing to make ends meet.

You must be aware that Social Security will not provide an income anywhere close to the necessary amount. You receive around 40% of your pre-retirement earnings (higher earners get less because the benefits formula is progressive). You’ll have to come up with the rest.

To ensure you aren’t surprised by how unimpressive your benefits are, check your Social Security Account online to see estimates at different claiming ages. It’s also a good idea to confirm that your earnings record is accurate since this is what your benefits will be based on.

Once you’ve seen how much money you’ll get from Social Security, compare it to the projected amount you’ll have to spend to cover the basics and accomplish what you’re hoping to do as a retiree. When you see the shortfall, make sure your savings can cover it.

3. Will you owe taxes on benefits?

The last big question is whether you’re going to have to give the IRS or your state a cut.

On the federal level, provisional income determines if you’ll be taxed on benefits. Your provisional income is half of Social Security, all taxable income, and some non-taxable income including municipal bonds.

Once your provisional income is $25,000 for a single filer, you’ll have to pay tax on up to 50% of your benefits. If your provisional income is above $34,000, you’ll be taxed on up to 85% of benefits. For married couples, the threshold is a little higher, as you’ll owe taxes on up to 50% of benefits with a provisional income of $32,000 and on up to 85% of benefits with a provisional income of $44,000. If you live in one of the minority of states that tax Social Security, you could also owe taxes to local authorities. Check the tax rules if your state is one of them, as many states exempt a portion of your income from taxes just as the federal government does.

If you do owe taxes to the state or federal government, or both, prepare for the fact that you’ll ultimately be bringing home less than expected due to the tax.

By making sure you know the answers to these questions, you can make the right choice about Social Security and are less likely to be left with regrets.