Retirement will come for us all. When it comes to finances and what your retirement will look like, there are some important facts you should know about Social Security.
Millions of Americans pay into Social Security, and millions receive benefits. This program is set up to help retirees, disabled persons, families of retirees, and the deceased to live off a monthly income.
It’s important to know how Social Security works and if it will be enough for you to live off of if when the time comes. This social security guide will go over everything you need to know about how the program works and what it means for you.
1. What Is Social Security
For millions of Americans, Social Security is the very foundation of their economic survival and security.
Think of Social Security as a program that is pay-as-you-go. The current workforce, for example, pays Social Security taxes into the program and the revenue generated goes to beneficiaries as monthly income.
The more you understand about Social Security, the better financial shape you and your family will be in when it comes time to collect. This social security guide discusses how you can collect Social Security benefits.
The more you know, the better equipped you will be to make important financial decisions and maximize your benefits.
2. How Social Security Works
In terms of how does Social Security works, you can imagine it like a community pool. Workers contribute mandatory taxes into the large pool, and then the benefits are paid out monthly to those or are eligible.
For retired workers, the Social Security Administration keeps track of everyone’s work records and annual earnings throughout your career, up to the payroll cap for that year.
In 2019, the payroll can is $132,900. This means that this is the maximum amount of earned income that is considered when your retirement benefit is calculated for 2019.
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Every year the Social Security Administration indexes the total earnings for the year for inflation. The earnings adjusted for inflation from your 35 highest-earning years are added up and then divided by 420. This is the number of months in 35 years. This formula produces your indexed monthly earnings.
If you’ve worked less than 35 years, a zero is counted for those years.
For 2019, the Social Security formula Is:
- 90% of the first $926 of your average indexed monthly earnings, in addition to…
- 32% of the amount of your average indexed monthly earnings greater than $926 but less than $5,583, in addition to…
- 15% of the amount of your average indexed monthly earnings greater than $5,583
3. Who Can Collect Social Security?
For American workers, you can claim Social Security benefits when you are over 62 years old. The longer you wait to collect benefits, the bigger your payout will be. Throughout your working years, you accumulate credits that determine how much you can collect in retirement.
If you are determined, disabled, you can also collect Social Security benefits after a disability determination process.
If you are a spouse or child of a Social Security recipient who has passed away, you may also receive Social Security benefits.
You can apply for Social Security benefits on the Social Security Administration website.
4. When You Should Claim Your Benefits
As a retired worker, it’s best to wait until you reach full retirement age to start claiming benefits. This is age 67 if you were born in 1960 or later. This is when you’ll be able to claim the full amount you’re entitled to based on your earnings.
The earlier you claim your benefits, the lower your monthly income payment will be. If you retire at age 67 and claim your benefits at age 62, for example, you’ll only receive 70% of your earned amount.
If you collect your benefits at age 65, you’ll get 86.7% of your monthly benefit amount. Until the age of 70, you’ll potentially receive an 8% bonus for waiting to claim your benefits. This maxes out at 70, however, so there’s no point in waiting longer than this.
Each year there is a new IRS guide that explains this year’s current benefits, qualifications, and maximums.
5. Types of Social Security
It’s important to remember that there are other types of Social Security benefits other than retirement. In addition to retirement benefits, there are also benefits for disabilities, dependents, spouses, and survivors.
As someone with a disability, if you haven’t reached retirement but have met the work requirements and are considered disabled under the determined guidelines, you may be able to receive benefits that are equal to what your retirement benefits would be.
As the spouse of a disabled or retired worker who qualifies for Social Security disability or retirement benefits, you and your children may be able to receive benefits based on the worker’s earnings over their career. This is true, regardless if you have ever worked.
If you are the surviving spouse of someone who qualified for Social Security benefits, you and your children may be able to claim benefits based on your deceased spouse’s earnings.
Can I Live Off of Retirement Benefits?
Many Americans don’t know how Social Security works. Millions don’t have enough money saved for retirement either. From Social Security benefits to 401(k) plans, most people acquire retirement income from a variety of different sources.
You may be able to live off of Social Security benefits alone, but it’s definitely not recommended. One way to help maximize and stretch your benefits longer is to delay claiming them for as long as possible.
Let’s say you’re 62 years old and you’d like to retire from your full-time job. You may be able to get a part-time job doing something you enjoy and utilize a 401(k) or savings to supplement your income and delay claiming your benefits until you’re over 67.
Downsizing, eliminating debt, and simplifying your life, in general, are a few things that can also be really helpful in retirement in terms of saving money.
See more personal finance tips in the finance section for retirement information and everything you need to know about money.