As more and more baby boomers reach retirement and begin applying for Social Security benefits, questions naturally arise regarding the amount of benefits to expect, when to expect them, and whether the system will cut back on certain benefits. Find the answers to these questions and more below.
Q: How does Social Security work?
Social Security is a "pay as you go" insurance plan intended to supplement any other retirement plan you have (i.e., savings, pension). As you work throughout your lifetime, Social Security taxes are taken out of your paycheck. There are various timing considerations when applying for social security benefits, depending on the type and amount of benefit you require.
There are two types of benefits--retirement and disability Social Security. If you are disabled and have paid into the system, you may be eligible for Social Security disability. Click here for more information on Social Security disability insurance.
Q: Who is eligible to collect Social Security?
To qualify for Social Security retirement benefits, you need to earn at least 40 Social Security credits. What this means is that anyone born in 1929 or later needs to have worked at least 10 years. If you were born before 1929, fewer years are required. Disability credits are calculated slightly differently, and for information on Social Security disability benefits, click here. Note that you may only claim one type of Social Security benefit. If you choose to accept the disability Social Security plan, you may not receive Social Security retirement benefits and vice-versa.
Also, for the following types of workers, the Social Security Administration has different rules (if you fall into one of these categories, visit the Social Security website to determine your eligibility):
Q: When can I begin collecting Social Security benefits?
The normal retirement age (NRA) is 65-67, depending on when you were born. For those born before 1938, the age is 65 and for those born in 1938 or later, the NRA gradually increases by monthly increments. If you were born in 1960 or later, your NRA is 67. To determine your retirement age, visit the Social Security website here.
You may claim early benefits starting at age 62, but they will not be the full benefits you would receive by waiting for your full retirement age.
Applying for Social Security benefits (benefits are not paid automatically) involves some work on your part. You must fill out some forms and provide certain documentation such as your birth certificate, Social Security card, etc. You should apply four months before you want to being receiving your benefits. You can apply online here, visit your local Social Security office, or call 1-800-772-1213 to get the ball rolling.
Q: How much will I receive in Social Security benefits?
Because the system is based on how much you put into it, the benefits you receive are dependent on factors such as how long you've been in the workforce, how much you earned and the age at which you decide to begin receiving your benefits.
You can claim your benefit as early as age 62, but your benefits will be reduced by the number of months between the time you claim your early benefits and your NRA. This reduced amount will be your permanent monthly payment (meaning it won't increase when you hit your NRA), and could mean a maximum of a 25% reduction from your full benefit amount.
Spouses and ex-spouses may also collect up to 50% of their spouse's (or ex-spouse's) benefits. See below under maximizing benefits.
Q: How is the benefit amount calculated?
The actual calculations are complicated, but in very basic form, the Social Security office will take your highest earning 35 years and average them, adjusted for inflation. This number is then used to calculate your average indexed monthly earnings, and then a formula is applied to that average to determine your benefit amount. Note that this is the full benefit, based on claiming benefits at the full retirement age. Claiming benefits early will reduce this number.
The Social Security website has a calculator for estimating your benefit amount on its website.
Q: How can I maximize my benefits when planning for Social Security and retirement?
Because the system is based upon the top 35 years of your earning career, an obvious step is to earn as much as you can. Beyond the obvious, there are several strategies to consider in order to maximize your benefits.
The first is to wait until you reach your full retirement age before claiming your benefits. Under the current system, you may claim your benefits starting at age 62, but you will be penalized accordingly. This could result in a maximum 25% reduction in your benefits. If you are able to hold off receiving benefits until after the retirement age (i.e., you have adequate income), you can gain an extra 8% each year you wait. This increase will continue until age 70, when it caps out.
Another suggestion is to consider whether you should collect based on your earnings or the earnings of your spouse. You may collect under the greater of the two, so if one spouse earns significantly more than the other it may make sense to collect benefits under the spouse. If spouses are different ages, it may take some strategizing to manage when benefits are received, but is worth it in order to maximize your benefits.
For divorced people, the spousal benefit still applies as long as you were 1) married for at least 10 years; 2) have been divorced for at least two years; and 3) you aren't currently married to another person. As long as these factors are not met, you can still collect up to half of the ex-spouse's earned benefits.
Q: Can I work after I begin collecting Social Security benefits?
Yes, of course you may work. However, if you begin collecting benefits before your NRA, the amount will be reduced.
If you choose to receive benefits before full retirement age and you earn wages over $14,160, one dollar in benefits will be withheld for every $2 in earnings above $14,160. If you take benefits the year of your full retirement age, but before your birthday, the exempt amount is $37,680 and one dollar in benefits will be withheld for every $3 you earn above at amount. If you wait to receive benefits until your full retirement age, there is no limit on earnings, meaning you will receive full benefits regardless of how much you earn. These exemptions only apply to earned wages, not other income such as savings, pensions, income from rental properties, etc.
Note: these exemption amounts are for the year 2010 and change from year to year, so check the Social Security site for updated numbers.
For example, let's say you earn $40,000 in wages and your NRA is 66 years old. If you begin collecting benefits at age 64, you earn about $26,000 over the $14,160 exemption and so your yearly benefits will be reduced by $13,000 per year ($26,000 2). If you begin collecting benefits in the year of your NRA but before your birthday (let's say 6 months before your birthday), the exemption is $37,680, and you earn about $2,300 over the limit, so your benefits will be reduced by about $766 per year ($2,300 3). If you begin collecting benefits after you turn 66, there will be no reduction in your benefits and if you wait several years after your NRA, the amount increases until age 70.
Q: Can a spouse of an eligible worker also collect benefits, even if the couple is divorced?
Yes, as discussed above, all spouses may collect up to 50% of their spouse's benefits or choose to receive benefits based on their own career earnings. For divorced spouses, they must have been 1) married for at least 10 years; 2) be divorced for at least two years; and 3) not currently married to another person.
Remember that you may only collect benefits based on your career earnings or that of your spouse, not both. Also, you can collect benefits early as well, though they will be reduced according to the formula outlined above. You may also collect with or without informing your spouse or ex-spouse. Their benefits will not be affected by you in any way.
Q: I heard Social Security going bankrupt--is this true and how does this effect my benefits?
The Social Security system is indeed encountering serious financial issues. According to a government report, by 2016, the amount of benefits paid out will exceed the amount of taxes put into the system and the fund could be exhausted by 2037. Once this happens, benefits would still be paid out but almost certainly reduced by a significant amount.
While it is very unlikely that the system will be allowed to fail, these numbers are sobering and should serve as a wake up call to explore all other potential sources of income for retirement in addition to Social Security. The likely result is that retirement ages will be pushed back, benefits reduced, and, while unlikely, even current beneficiaries (that is, those receiving benefits before that date) may have their benefits reduced.
For more information on the future of the Social Security system, see this FindLaw article.
For more information on Social Security, visit FindLaw's Social Security resources page.
