If there’s one lame duck that everyone ignores as part of their retirement planning, it’s Social Security. Over the years, Social Security benefits have been called too small, unfair, a Ponzi Scheme, and worst of all – dead!
Yet for many Americans, their Social Security benefits are all that they have to live off of during retirement. And what’s even more frightening – if people continue to ignore retirement planning by sticking their heads in the sand, then Social Security benefits may be ALL they have to look forward to as well!
So rather than sticking our noses up at it, let’s embrace our government hand-out (after all, we paid our money into it for so many years!). If you understand the basics of Social Security benefits, then you can use them to add approximately 20% to your overall retirement income!
Social Security Benefits Aren’t Dead, but They Do Have a Serious Limp:
Everyone loves to jump on the bandwagon and declare “… why bother even thinking about Social Security benefits – they won’t even be there when I retire!”
There is a small element of truth to this. Social Security’s own website notes that by 2033 the payroll taxes collected will only be enough to pay about 75 cents for each dollar of scheduled benefits. Yes – that means you’re only going to get 75% of what their website tells you to expect. Darn!
While that is both upsetting and depressing, it is fair to say that most of us can expect to at least receive “something” during retirement. It may not be your full Social Secuirty benefits, but 75% is much better than nothing at all.
With the number of elder people who depend on Social Security and the younger people who pay into it each day with their payroll taxes, it would be hard for me to imagine the kind of social uproar and backlash that would come from discontinuing the program entirely. There would have to be a pretty dramatic event or unanimously popular replacement for the program for it to phase out completely.
How Do I Know How Much Social Security Income Can I Expect?
For a number of years now, you used to get a statement from the government that detailed about what you could expect in terms of Social Security benefits. However, in our digital age, the government decided to stop mailing it out, and the information will soon only be available online.
The numbers they forecasted to you were based on a lot of variables. The most significant of them is age. If you were born in 1960 or after, then you don’t qualify for full Social Security benefits until age 67. However, you can start collecting them as early as age 62. It just means they’ll reduce your benefit for starting early. Here’s by how much:
• Age 62 is about 30 percent
• Age 63 is about 25 percent
• Age 64 is about 20 percent
• Age 65 is about 13.3 percent
• Age 66 is about 6.7 percent
How Social Security Benefits Are Calculated – Step 1 – Credits
The first step to even qualifying for Social Security benefits is to accumulate 40 credits. As of 2012, you receive one credit for each $1,130 of earnings, up to the maximum of four credits per year. That means you have to earn $4,520 or more per year to score 4 credits. This number will go up periodically to adjust for inflation.
As you can probably guess, Step 1 is not a major hurdle for most working Americans.
How Social Security Benefits Are Calculated – Step 2 – Income and Age
After getting enough qualifying credits, your Social Security Benefits are estimated based on 3 major factors (there are actually other factors, but these are the most important):
• Your earnings history (as recorded by the Social Security Administration)
• How much money you plan to make in the future (up to the age you stop working)
• The actual age at which you do in fact stop working.
These 3 things can shape a great deal of the Social Security benefits you expect to receive.
For example, if you stop working at age 50, you’re going to get a lot less benefit than if you had worked all the way up to age 62 (because you would have paid in a lot more to the program). Even something like dropping from full-time to part-time can affect how much you’ll expect to receive. Note that your retirement benefit is based on your highest 35 years of earnings.
Good Times on the Social Security Calculator:
It’s pretty easy to hop onto the Social Security website and find out how much retirement income you can expect to receive. Here’s a few random numbers that I crunched on my account using different ages where I stopped working:
Notice how badly your benefits are reduced the earlier you stop working and the sooner you start taking your Social Security benefits?
For fun (or rather a reality check), I also added a column for the expected 75% reduction and 25% income taxes (don’t forget you pay income taxes on your Social Security benefits if your income is greater than $25,000 for an individual and $32,000 for a married couple). This is how much money I would really get!
Hook Me Up Sugar Momma!
If you’re married (or even if you used to be), then you get a bonus – You may be entitled to spousal income!
Basically if you work, you’re entitled to the higher of your own personal benefits or your spousal income; not a combination of them. There are some important rules that accompany this. This most important thing is that the younger you start, the higher percentage your benefits are reduced by.
Interestingly, as I did my research, I came across a strategy where you can use your spousal benefits to really max out how much your Social Security benefits will be! I will cover all of this in an example in a follow-up post. It’s worth knowing!
Readers – Are you still awake? What do you think about your Social Security benefits? Are you going to count on them? How will they play a part in your retirement income planning?
3) Six Easy Steps to Figuring Out Your Retirement
Photo Credit: Wikipedia