I was reading an article about Social Security on a major news website, and I noticed some questions in the comments that the author of the article didn’t address. These questions made me realize there is a lot that we don’t understand about Social Security, even though it’s something that will affect all of us. Those without a large nest egg will be affected the most. Even if you’re saving for retirement with a 401K or Roth IRA (or better–both), you’re probably going to rely on Social Security for some of your income after retirement. There’s one problem with that: Social Security can be rather confusing. If you’re like many Americans, you’re probably wondering the answers to many of the following questions.
Your benefit is calculated as a percentage of your income during your working years. Just like with taxes, the percentage changes based on how much you earn. According to the Social Security Administration’s website, the average worker can expect to receive about 40% of his or her lifetime earnings. If you’re 25 or over, you should receive your Social Security Statement yearly, which will show you an estimate of your retirement benefits.
With Baby Boomers beginning to retire, and a lower ratio of working Americans paying in versus the number receiving benefits compared to previous decades, many are worried about the future of Social Security. There is cause to be worried, since the already taxed federal government will have a hard time affording the care they have promised. There’s no reason to think that it will implode in the near future, however.
It probably won’t go away completely, but there will be some changes in coming years. The full retirement age has already been pushed back from 65 to 67 for those born after 1960, and will likely be postponed until even later in life for those just starting out their careers, due to the large influx of retirees and longer life expectancies. Benefits may shrink to a smaller percentage of the amount paid in, too, or rules may get stricter. This will cause the need for retirement plans outside of Social Security to grow.
You can start collecting Social Security at the age of 62, but you won’t receive the same benefits as if you wait until your full retirement age. Your full retirement age is from 65-67, depending on your birth year, and can be found in this chart. For those who are currently under 50, that age is 67.
If you start collecting at 62, you won’t receive the full benefit when you reach 67; you still receive the reduced amount. The reduced amount is calculated based on the average life expectancy, so the government ends up paying out about the same over your lifetime whether you start collecting at 62 or 67.
There is a slight benefit to waiting until after your retirement age, since you receive extra “credits.” This benefit ends at age 69, though, and may not be worth it to most people. There is a definite benefit in waiting until 67, though–if you can afford it. What this means is, you will receive more per month if you wait until 67 (or whatever the full retirement age is for you), but waiting until 70 or later is just wasting money. Once you start collecting, the government will pay you up to your last 6 months of benefits, but any benefits before that are lost.
If you start collecting your benefits at 62, yes. Your benefits will be reduced by 1 dollar for every 2 dollars you make. If you make $10,000 working part time that year, then you will receive $5,000 less from Social Security that year. Once you reach 67, however, you can work as much as you want, and you won’t be penalized. This is good news for those retirees that like to stay busy, or those that just didn’t manage to save enough for retirement.
If you worked for fewer than 10 years of your life, you will not qualify for benefits of your own accord. The good news is, you can qualify for benefits based on your spouse’s earnings. If you are married to someone who is receiving benefits, you can receive one half of your spouse’s benefits (provided you wait until your full retirement age, discussed above). If you are a widow or widower, you can receive benefits, too. You will receive the full amount that your spouse would have received when you reach the proper retirement age. Remarriage before age 60 will affect your eligibility, although you may be able to receive benefits based on your new spouse’s Social Security credits.
I hope I addressed some of your biggest Social Security concerns. I know there are a lot more questions out there, but if you’re still young, you shouldn’t worry about it too much yet. There will likely be a lot of changes before you’re old enough to start receiving benefits, and there’s no need to get bogged down with the details now. A better goal right now is to start contributing to your 401K or IRA. On the other hand, if you’re a bit older, this article should just be the beginning. It’s good to start learning about your options. Educate yourself as much as you can, and consult a financial advisor if you’re confused. You can also visit www.ssa.gov for more information.