Anyone who earns a paycheck has surely noticed the money that is deducted in the name of Social Security. Yes, that would be the mysterious “FICA” tax in action. There is actually no mystery surrounding the disappearance of your money. Simply put, when you work, you pay taxes into Social Security, and these funds are then deposited into a trust account to pay benefits for your fellow citizens. Social Security helps older Americans, workers who become disabled, and families in which a spouse or parent dies. According to the Social Security Administration, about 167 million Americans today work and pay Social Security taxes, and about 59 million people receive monthly Social Security benefits.
If you’re mapping out your retirement plan, Social Security should be one of your considerations. While it was never intended to be the only source of income for workers when they retire, it does replace about 40% of an average wage earner’s income upon retirement. Ideally, you will have savings, investments, and/or other forms of retirement income to make up the remaining 60%, but you’ll want to make sure you understand how Social Security works so you can collect your fair share from the system that you have been contributing to throughout your working years. Here are 7 things you need to know:
- How do I qualify for retirement benefits? If you’ve been working and paying Social Security taxes, you’ve been earning “credits” toward Social Security. In 2017, you are earning one credit for each $1300 in earnings, up to a maximum of four credits a year.1 Anyone born after 1929 will need 40 credits, which is the equivalent of 10 years of work. Without the required number of credits, you cannot receive retirement benefits.
- How much will my retirement benefit be? Your benefit is determined by how much you earned during your career, as well as your age at retirement. Higher lifetime earnings will mean higher benefits. Also, the longer you wait to retire, the more your benefit increases. Full retirement age is determined by your year of birth. For anyone born after 1960, full retirement age is 67. Waiting until that age will ensure you the full benefit you’re entitled to, while retiring early will cause you to receive a lower benefit.
- Is early retirement an option? You can collect Social Security as early as age 62. However, your benefits will be reduced by about ½ of 1% for each month you start receiving benefits before you reach full retirement age. For instance, if your full retirement age is 66 and 2 months, and you sign up for Social Security when you’re 62, you would only receive 74.2% of your full benefit.1
- Can I delay retirement? Working past your full retirement age can increase your future benefits in two ways. Each additional year that you work means another year of earnings on your Social Security record. Again, higher lifetime earnings will mean higher benefits. Likewise, your future benefit will continue to increase from the time you reach full retirement age until you start receiving benefits, or until you reach age 70, whichever comes first.
- Can I work and get benefits at the same time? Yes, you can continue to work and still receive retirement benefits. However, if your earnings exceed certain limits for the months before you reach full retirement age, your benefits will be reduced. This reduction will continue until the month in which you reach full retirement age. After that, you can continue to work and your benefit will not be reduced no matter how much you earn. The SSA publication How Work Affects Your Benefits explains how earnings impact your retirement benefit.
- Will my benefits be taxed? It’s very possible they will be. About 40% of individuals who receive Social Security must pay income taxes on their benefits.2 It’s best to consult with a tax professional to learn how you may be affected. Each year you will receive a Social Security Benefit Statement (Form SSA-1099) which summarizes the amount of benefits you have received. This statement should be included in your annual federal income tax preparation.
- How do I sign up? You can apply for Social Security benefits via toll-free telephone (1-800-772-1213), online at https://www.ssa.gov/benefits/retirement/, or in person at any Social Security office. The SSA website provides a list of the required documentation you will need when applying.
When planning for retirement, you’ll want to make sure your expenses, healthcare considerations, and sources of income are clearly defined so you’ll feel more financially confident as you prepare for this next chapter of your life. Social Security benefits are not meant to be a sole source of income in retirement, but making the right decisions can maximize the amount of benefits you will receive. Your standard of living in retirement may depend on the choices you make. Please be aware that Social Security has very specific provisions that can be somewhat confusing at a glance, many of which are illustrated by Laurence Kotlikoff, contributor to Forbes magazine, in his article 44 Social Security Secrets All Baby Boomers and Millions of Current Recipients Need to Know. There may be negative repercussions on your financial well-being if you take the wrong benefits at the wrong time. Do your homework and be as “Social Security savvy” as you can be, and hopefully you will make the best financial decisions for your situation.
1”Understanding the Benefits”, Social Security Administration. https://www.ssa.gov/pubs/EN-05-10024.pdf
2”Retirement Benefits”, Social Security Administration. https://www.ssa.gov/pubs/EN-05-10035.pdf