Understanding Social Security Benefits- A Beginner’s Guide

Are you prepared for retirement? Do you know what you need to ensure financial freedom and security following your working years? Social Security benefits account for more than 50 percent of income for more than half of American households. Social Security benefits are based on the income you earned throughout your working career and made available to you upon retirement. It’s important to understand that Social Security is your money; you contributed to it with every paycheck. It is important that you have a complete understanding of Social Security before you retire, or you may not get the most out of it.

Eligibility for Social Security Benefits

You can receive Social Security benefits as early as age 62, but 67 is currently the age at which you are entitled to 100%. Although electing to receive Social Security benefits at age 62 means less money, for some retirees the freedom of no longer having to work is worth the reduced amount. Conversely, people are living longer and many have no desire to leave the workplace. Work history also features into the formula. From your first job to your last, the Social Security Administration keeps track of your earnings, and as you might expect, the more hours worked, the higher the wage, and the longer you wait to retire, the better the benefit. While Social Security retirement benefits were designed to provide income upon retirement, Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) are in place to support people with disabilities.

Calculating Social Security Benefits

Your benefits are based on the highest years of earnings and the age at which you retire, and while 67 is considered full retirement age, understand that there are both advantages and disadvantages to claiming benefits early. If you choose early retirement, you can collect benefits for a longer period of time (depending on how long you live, of course). The disadvantage is the benefit amount is lower. For example, let’s say Susan worked for 30 years and earned an average of $50,000 per year. Based on her work history, Susan is eligible for a Social Security benefit of $1,500 per month if she claims benefits at the full-retirement age of 67; however, with two young grandchildren and another on the way, Susan is considering retiring at age 62. If she does this, her monthly benefit will decrease to $1,050. While a reduction of $450 seems significant, it’s important to consider how this will affect her overall retirement income. If Susan claims her Social Security benefits beginning at age 62 and lives to 82, she will receive a total of $367,000 over those 20 years. If she waits until age 67 (full retirement age) to claim her benefits, she will receive $432,000 over 15 years. While waiting until age 67 results in a higher monthly benefit, Susan would have to live to age 78 before the cumulative benefits surpass the total benefits she would receive if she retired and claimed her benefits at age 62. The decision to claim Social Services benefits early or wait until full retirement age is dependent on a number of circumstances including life expectancy, savings, other sources of retirement income, and personal responsibilities and preferences. The Social Security Administration provides a benefit estimator tool to give you an idea of benefit income. By factoring in your age at retirement, current annual income, expected salary increase (or decrease), and marital status, the tool handily provides an estimate of benefits.

Types of Social Security Benefits

According to the Social Security Administration, benefits are calculated using the average amount earned each month throughout your working career; the years during which you earned the most are used. So, while benefits are based on your lifetime income, fluctuations in work hours and wages figure in the determination of benefit amounts. With regard to spousal benefits, first compare incomes and estimates of you and your spouse. If one of you has a markedly higher estimate, both can collect on those benefits. With regard to survivor’s benefits, the surviving spouse (even divorced spouse) and his or her dependents may be eligible for survivor benefits. To qualify for SSDI, you must be under age 65 and have a medical conditions or impairment that significantly affects or limits your ability to work. It’s important that you apply for SSDI as soon as possible after you become disabled.

Social Security Claiming Strategies

It’s up to the individual whether he or she will retire early or wait until full retirement age (or later, but know that you will receive more in your monthly check if you wait until at least age 67, and still more the longer you work. So, to secure the best benefit, try a few of these strategies: delay claiming benefits for as long as you can, and understand the penalties and advantages that come with early retirement; understand that you can retire and start benefits or you can delay benefits; look into the ways you can manage your finances after you stop work and before you receive your benefits. For married couples, do some research into the best ways to maximize Social Security benefits, whether by combining benefits or choosing to go with the benefit of the one who had higher earnings. If one spouse earned significantly more than the other, the lower earner may be able to claim spousal benefits based on the higher-earning spouse’s work record. By doing this, the couple can maximize their overall retirement income.

Maximizing Social Security Benefits

To maximize your benefits, consider waiting if possible; the longer you wait, the higher your monthly benefit will be. For every year you delay claiming benefits past full retirement age, your benefit will increase by 8 percent. If you can wait until age 70, you could receive up to 32 percent more in monthly benefits than if you claimed them at age 67. Social Security benefits may be subject to federal income tax if your total income exceeds a certain threshold, so it is important to consider the tax implications of your Social Security benefits and how they impact your overall retirement income. Of course, careful planning, which may include talking with a financial advisor, is the best way to ensure optimization of your retirement income. A financial professional can guide you through the process of determining the right time and the right path. He or she will have the knowledge and background to provide peace of mind as you consider life after retirement.

Conclusion

There are many components of retirement income to consider, and everyone’s situation is unique to them, so it’s important to do some research. Learn all you can about Social Security benefits by speaking with your financial advisor or visit the Social Security Administration. Informed decisions will guarantee you a happy and secure future after retirement.