How Social Security retirement benefits work

By Jason R. Friday, CFP®, MPAS®, RICP®, CMFC, Head of Financial Planning | Citizens Wealth Management

_{As Head of Financial Planning, Jason is a strategic partner who is responsible for developing the strategy, managing the planner teams, and coordinating personal financial planning activities across Citizens Wealth Management to help clients navigate and grow in changing circumstances.}

Social Security is a federal program that provides monthly income to retirees, people with disabilities, and survivors of deceased workers.

For many, Social Security retirement benefits are at the center of their retirement plan. Understanding eligibility requirements and how your monthly benefit amount is determined can help you make the right Social Security decision for your financial future.

What is Social Security?

The U.S. government originally established Social Security to provide financial support for retired workers aged 65 and older. Over time, the program expanded to include benefits for certain family members of workers, survivors of deceased workers, and those with disabilities.

Although Social Security is often mentioned alongside it, Supplemental Security Income (SSI) is a separate program that provides needs-based assistance to individuals with limited income and resources.

How is Social Security funded?

Social Security is primarily funded through payroll taxes collected under the Federal Insurance Contributions Act (FICA). Workers and their employers each contribute 6.2% of wages. Self-employed individuals pay the full 12.4% themselves.

There's also a limit to how much of your earnings are subject to Social Security taxes each year. This is known as the maximum taxable earnings cap, which is $176,100 in 2025.¹

These taxes go into two main trust funds: the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivor benefits, and the Disability Insurance (DI) Trust Fund, which supports disability benefits.

The money collected through payroll taxes is used to pay current beneficiaries — meaning today's workers are funding the benefits of today's retirees. If the program collects more in taxes than it pays out, the surplus is invested in special U.S. Treasury securities, which earn interest and help fund future benefits.²

How do you qualify for Social Security retirement benefits?

To qualify for Social Security retirement benefits, you must earn "credits" through work that is subject to Social Security taxes. As of 2025, you earn one credit for every $1,810 in earnings, up to a maximum of four credits per year. Most people need 40 credits — the equivalent of 10 years of work — to qualify for retirement benefits. Fewer credits may be required for disability or survivor benefits, depending on your age when you apply.³

Once you qualify, the amount of your monthly benefit is based on your lifetime earnings, adjusted for inflation. The Social Security Administration (SSA) calculates your benefit using your highest 35 years of earnings. If you worked fewer than 35 years, years with no earnings are counted as zero, which can lower your benefit.⁴

Only income up to the maximum taxable earnings cap ($176,100 in 2025) is considered when calculating your benefit.

How early can you claim Social Security retirement benefits?

You can start claiming Social Security retirement benefits as early as age 62 and as late as age 70. However, before deciding when to claim, you'll first need to know your full retirement age (FRA) — the year at which you're eligible to receive your full, unreduced benefit amount.

Your FRA depends on what year you were born. See the table below to determine your FRA.

You can claim Social Security benefits before reaching your FRA, but doing so results in a permanent reduction of your monthly benefit. On the other hand, delaying benefits will increase your monthly payment amount.

When should you claim Social Security retirement benefits?

Deciding when to claim Social Security is a personal decision that depends on a range of factors, such as your financial needs, life expectancy, and when you plan to retire. While there's not a one-size-fits-all answer, one helpful exercise to understand the tradeoffs between claiming early or delaying benefits is to calculate your "break-even age."

The break-even age is the point at which the total dollars received from delaying benefits equals the total you would have received by claiming early. If you live beyond your break-even age, delaying benefits results in more lifetime income.

For example, if your FRA is 67, and your monthly benefit at that age is $2,000, your annual benefit would be $24,000 per year. Claiming at 62 would reduce your benefit by about 30%, to around $1,400 per month, or $16,800 per year. Delaying beyond FRA increases your benefit by approximately 8% per year up to age 70, potentially boosting your monthly benefit to around $2,480.

Look at the table below to compare the cumulative annual benefit of $2,000 per month at an FRA of 67 against taking benefits early at age 62.

The following example is hypothetical and for illustrative purposes only. It does not reflect actual Social Security benefits or include cost of living adjustments.

In this scenario, the break-even age is 78. If you delay benefits to your FRA of 67 and live beyond 78 years, you'll receive more Social Security retirement income over the course of your life.

However, for some, claiming early may make sense, especially if you need income to support yourself or have health concerns. But the longer you wait, the higher your monthly benefit will be, and you could receive more over time depending on how long you live.

What are Social Security survivor benefits?

You may be comforted to know that if you pass away, your family may be eligible for Social Security survivor benefits. This could include a spouse, ex-spouse, child or dependent parent, depending on if they meet eligibility criteria.⁵

The benefit amount they may be able to receive is based on the earnings of the deceased, as well as the survivor's age and relationship to the deceased. For eligible survivors, the amount is typically between 75% to 100% of your basic Social Security benefit amount.⁶

It's important to note that if a spouse is already receiving their own Social Security benefit, the survivor benefit is a potential replacement to their own. They could continue collecting their own benefit or switch to the survivor benefit based on whatever amount is higher.

In addition, there are also maximum family benefits that limit the amount that could be paid to multiple family members each month. The limit is usually between 150% to 180% of the deceased worker's benefit amount.⁷

The survivor benefit is an important consideration when deciding when to claim Social Security benefits. For example, it may make sense for a high-earning spouse to delay claiming Social Security if that benefit amount may also become a survivor benefit for a family member.

How to get your Social Security benefit estimate

To get an estimate of your benefits, you can create a free "my Social Security" account on the Social Security website.

The account provides access to personalized estimates of future benefits, your most recent statement, your earnings history and more. To create an account, you must be 18 or older, have a Social Security number (SSN), and a valid email address.

How Social Security benefits are taxed

You may owe federal income tax, and in some cases state income tax, on your Social Security benefits. Whether you owe federal income tax is based on a combined income formula that takes into consideration adjusted gross income, nontaxable interest, and half of your Social Security benefits. For some retirees, up to 85% of benefits could be taxable if their combined income exceeds certain thresholds.

As part of the "One Big Beautiful Bill Act," a new additional deduction in effect for tax years 2025 through 2028 may help offset taxes owed on Social Security. Individuals who are age 65 and older can claim an additional deduction of $6,000, or $12,000 per married couple where both spouses qualify. The deduction phases out for taxpayers with a modified adjusted gross income above $75,000, or $150,000 for joint filers.⁸

How Social Security fits into your retirement plan

Deciding when and how to claim Social Security benefits is a key part of your overall retirement strategy. Given the complexity of the rules and all the personal factors involved, it's important to consider your full financial picture before making your decision.

A Citizens Wealth Advisor* can help you evaluate your options and develop a strategy that supports your retirement goals within a comprehensive, personalized plan.

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