Social Security, which just turned 89, is a program that many Americans depend on when they retire. However, despite being around for almost a century, a lot of people still don’t fully understand how it works. Social Security provides financial support to retirees, but there are many rules and details to know. Whether you’re planning for retirement or already there, understanding how Social Security works can make a big difference in your financial future. Here’s everything you need to know about this important program.
What is Social Security?
Social Security is a government program that helps provide financial support to people who are retired, disabled, or unable to work. It was signed into law by President Franklin D. Roosevelt in 1935 to ensure people would have a steady income after they stopped working. The first payments were made in 1940. The program is funded through taxes that people pay during their working years. The more you earn and pay into the system, the more you’ll receive when you retire.
How Does Social Security Work?
The Social Security benefit you receive when you retire is based on how much you earned during your working years. The Social Security Administration (SSA) uses a formula to calculate your benefit. This formula takes into account your highest 35 years of earnings, adjusting earlier years for inflation.
Your benefits are available to you once you reach a certain age called “full retirement age,” which depends on when you were born. For example:
- If you were born between 1943 and 1954, your full retirement age is 66.
- If you were born in 1960 or later, your full retirement age is 67.
- If you were born between 1955 and 1959, your full retirement age is between 66 and 67.
Knowing your full retirement age is key to understanding how much money you can expect to receive.
When Can You Claim Social Security?
You can begin claiming Social Security benefits at age 62, but starting early comes with a catch. If you claim benefits before reaching your full retirement age, your monthly benefit will be permanently reduced. For example, if your full retirement age is 67 and you start at 62, you will only receive 70% of your full benefit.
Alternatively, you can choose to delay your claim beyond your full retirement age. For every year you delay (up to age 70), your monthly benefit increases by 8%. But after age 70, there is no additional benefit to waiting.
How Much Can You Expect to Receive?
The amount you will receive from Social Security depends on your lifetime earnings. You can set up a “My Social Security” account on the SSA’s website to track your earnings and see how much you might get when you retire. It’s a good idea to check your statement regularly so you know how your earnings are being reported.
How to Make Sure Your Earnings are Correct
To qualify for Social Security, you need 40 work credits, which you can earn through working and paying taxes. Each year, you can earn up to four credits. The amount of money you need to earn to get one credit changes each year. For example, in 2024, you need to earn $1,730 for one credit. If you notice any mistakes in your earnings record, you can contact the SSA to correct them.
Social Security and Other Retirement Income
Social Security is designed to replace about 40% of your income before retirement, but it’s not enough to live on alone for most people. It’s important to have additional sources of retirement income, like a pension, IRA, 401(k), or personal savings.
You might also want to invest in things like rental properties to help supplement your Social Security benefits. Social Security provides a guaranteed income for life, but it’s always a good idea to have a financial plan that includes other forms of income.
How to Coordinate Social Security with a Spouse
If you’re married, both you and your spouse may be eligible for Social Security benefits. You can coordinate your claims in ways that will maximise your total benefits. For example, the lower-earning spouse can claim benefits early while the higher-earning spouse delays their claim to get a bigger monthly benefit.
You may also qualify for spousal benefits. If you are married to someone who is eligible for Social Security, you can receive up to 50% of their benefit, depending on your age and situation. If you are divorced, you may still be able to claim spousal benefits if you were married for at least 10 years.
Can Your Social Security Benefits Be Taxed?
Many people are surprised to learn that Social Security benefits can be taxed. Whether your benefits are taxed depends on your total income. If you are single and have a combined income between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxed. If your combined income is more than $34,000, up to 85% of your benefits may be taxed.
If you’re married and filing jointly, the combined income threshold for taxation is between $32,000 and $44,000, with up to 85% of your benefits taxable if your income exceeds $44,000.
Social Security is a vital program for retirees, but it’s important to understand how it works. The amount you receive will depend on your lifetime earnings, your age when you start claiming, and whether you are married. To make the most of your benefits, it’s essential to plan ahead. Setting up a Social Security account, checking your earnings, and considering additional income sources are all smart steps to ensure your financial security in retirement.
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