Claiming Social Security in 2023? Be Ready to Answer These 4 Questions.

Approaching retirement and considering claiming Social Security benefits this year can be both exciting and challenging. To make sure you're equipped to make the best decisions for yourself, here are four questions you should be prepared to answer.

Answering these questions will ensure you're as informed as possible as you embark on your next life phase.

Your full retirement age, which is based on your birth year, is the age you're eligible to receive your full Social Security benefit.

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Data source: Social Security Administration.

Although your full retirement age is when you're eligible for your full Social Security benefits, you can begin receiving benefits as early as age 62. Doing so will reduce your monthly benefit based on how many months away from your full retirement age you are. 

Benefits are reduced by 5/9 of 1% if you're within 36 months of your full retirement age, and 5/12 of 1% monthly for each month over month 36. For example, if your full retirement age is 67 and you take benefits at 62, they'll be reduced by 30%.

You also have the option to delay your benefits past your full retirement age, increasing them by 2/3 of 1% for each month until you reach age 70. You can technically delay benefits past 70, but they won't increase anymore after that, so doing so is pointless.

Unfortunately, there's no one-amount-fits-all answer to how much you'll need in retirement. Someone retiring in the Hamptons in New York or Palm Beach, Florida, will likely need more than someone retiring on a ranch in Montana or beachside in North Carolina.

Guidelines like the 80% rule can help you determine how much you may need. The 80% rule says retirees should plan to have 80% of their last working year's income in retirement to maintain their current lifestyle. For example, if you make $100,000 in your last working year, you'd aim to have $80,000 annually in retirement.

You should adjust the percentage based on whether or not you plan to upgrade or downsize your lifestyle. Either way, 80% is a good starting point.

Once you have an idea of how much you'll need annually in retirement, you need to get an idea of how much you'll be receiving from Social Security. The best way to do this is by visiting the Social Security website, creating an account if you don't have one, and checking your earnings record.

Your earnings record will tell you your projected monthly benefits based on when you decide to claim them (early, on time, or late).

Having an idea of how much you'll need in retirement and how much will be coming from Social Security can help you better plan out how much you may need from other sources, such as a 401(k) or IRA. For example, you may debate claiming benefits early and then realize the gap between the two is too much and delay benefits a bit.

Claiming Social Security benefits doesn't mean you have to stop working entirely. However, you should monitor your earnings because they may impact your monthly benefits. Social Security uses a retirement earnings test (RET) for those who start receiving benefits before reaching their full retirement age and who earn more than a set amount.

If you claim benefits early and won't reach your full retirement age in 2023, your earnings limit is $21,240. Earning over these amounts will reduce your benefits, but the withheld amount will be gradually added back to your monthly benefits once you reach your full retirement age.

For example, imagine your full retirement age is 67, and you claim benefits at 64 while earning over the limit. If the RET reduces your annual benefits by $2,000, Social Security would withhold $6,000 during the three years until you turn 67. Once you turn 67, Social Security would recalculate your benefits to gradually return your $6,000 over time.

Finally, if you reach your full retirement age in 2023, you can earn up to $56,520 in the months leading up to it -- and as much as you want beyond that date.

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Maximum Social Security Benefit: What Is It, How Is It Figured?

The maximum Social Security retirement benefit that you can receive depends on the age when you begin collecting and your earnings history, among other factors. The maximum in 2023 is $3,627 per month for someone who files at full retirement age (FRA) at age 66. But $4,555 is the absolute highest benefit for those who qualify and delay claiming until age 70.

Qualifying for Social Security in the first place requires 40 work credits or approximately ten years of work. To be eligible to receive the maximum benefit, you need to earn Social Security’s maximum taxable income for 35 years. The cap, which is the amount of earnings subject to Social Security tax, is $160,200 in 2023, up from $147,000 in 2022.

Social Security benefits are calculated by combining your 35 highest-paid years (if you worked for more than 35 years). First, all wages are indexed to account for inflation. Wages from previous years are multiplied by a factor based on the years when they were earned. This calculation gives an amount comparable to buying power based on the current value of the dollar. Accounting for this valuation change is important because a salary of $14,000, for example, was far more impressive in 1954 than it is today.

Once all wages have been indexed, your average indexed monthly earnings (AIME) are computed by dividing the sum of all indexed wages by 420 (35 years expressed as months). If you worked fewer than 35 years, a zero is entered for years when you did not work. The benefit amount is then calculated based on factors that include the year when collection begins, whether you have reached FRA, and whether you continue to work while collecting benefits.

If you have 40 work credits, you are eligible to claim Social Security as early as age 62, but waiting until FRA will result in a much higher benefit. The most that you can receive in 2023 if you start collecting at age 62 is $2,572. Your FRA depends on the year of your birth. For example, if you were born in 1960 or later, your FRA is 67, and if you were born in the 1943–1954 years, it is 66. (But not just 66. For example, for those born in 1956, FRA is 66 and 4 months.). You will receive 100% of your benefits if you wait until your FRA to claim them. If you claim at age 70, vs. at FRA, you get an 8% bonus for each year that you delayed claiming.

Once you reach age 70, there is no reason to wait longer to start collecting—your benefit won’t increase further.

Few people receive the maximum Social Security check from the government. You’ll need to be a high earner over many decades and delay receiving benefits to potentially become one of a small handful to bag $4,555 per month.

The checklist is as follows:

Say that someone who turned age 62 in 2021 will reach FRA at 66 years and ten months, with earnings that make them eligible at that point for a monthly benefit of $1,000. Opting to receive benefits at age 62 will reduce their monthly benefit by 29.2%, to $708, to account for the longer time that they could receive benefits, according to the Social Security Administration (SSA). That decrease is usually permanent.

If that same person waits to get benefits until age 70, their monthly benefit increases to $1,253. The larger amount is due to the delayed retirement credits earned for the decision to postpone receiving benefits past FRA. In this example, that higher amount at age 70 is about 77% more than the benefit that they would receive each month if benefits started at age 62—a difference of $545 each month.

Of course, the best time for someone to start taking Social Security benefits depends on a variety of factors, not just the dollar amount of the benefit. Things such as current income and employment status, other available retirement funds, and life expectancy also must be factored into the decision.

The average Social Security retirement benefit is significantly lower than the maximum. It was $1,628.17 per month in September 2022, according to the most recent data available from the SSA.

How much of your preretirement income Social Security is designed to replace.

To ensure that benefits maintain their buying power, the SSA adjusts them every year in accordance with changes in the cost of living. For example, the cost-of-living adjustment (COLA) was increased by 8.7% for 2023, compared with a 5.9% increase in 2022 and a 1.3% increase for 2021.

Marguerita M. Cheng, CFP®, CRPC®, RICP, CDFACEO of Blue Ocean Global Wealth, Gaithersburg, MD

According to the Social Security Administration (SSA), the maximum monthly benefit paid at full retirement age (FRA) in 2022 [was] $3,345. Bear in mind that this is the maximum benefit at FRA, but you can defer your benefits and increase your Social Security benefit. Here are two examples:

Full retirement age (FRA) is the age when you are eligible to collect full Social Security retirement benefits, and it is based on the year when you were born. The FRA is 66 years and two months for those born in 1955 and gradually increases to 67 for those born in 1960 and after.

The average Social Security retirement benefit was $1,628.17 per month in September 2022, according to the Social Security Administration (SSA). The maximum for that year was $3,345 per month for someone who filed at full retirement age (FRA) at age 66 and who was a high earner for 35 years.

If you wait past your FRA to collect Social Security retirement benefits, you’ll receive credits for each month that you delay up to age 70. These credits can increase your monthly payment by 8% a year.

To receive the maximum Social Security benefit, you would need to earn at least the maximum wage taxable by Social Security for 35 years and delay claiming the benefit until you reach 70. The earnings cap adjusts every year based on changes to the national average wage index and is $160,200 in 2023, up from $147,000 in 2022.

No, that’s not true. Social Security benefits are based on your 35 highest-paid inflation-adjusted years and take into consideration the age when you start receiving benefits.

The maximum Social Security benefit for 2023 is $4,555 per month or $54,660 per year. But before you start rubbing your hands together, it’s important to be aware that most people have little to no chance of receiving anywhere near that much.

The average monthly payout in the U.S. in September 2022 was about $1,628 per month. If you hope to get substantially more than that and receive the maximum, you’ll need to wait until you reach 70 to receive Social Security benefits and be a consistently high earner for 35 years.