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Social Security is an important part of most Americans'
retirement planning, so it's important to know certain things
about how it works. For instance, you need to know when you
reach full retirement age, and how filing for Social Security
before or after that time affects your monthly benefit amount.
Here's what you need to know about this, as well as several
other Social Security topics.
How your Social Security benefit is calculated
Unlike many pension plans, which are based on just the top few
years of your earnings, Social Security takes your 35
highest-earning years into account when computing your
benefit. Each year's income, up to the maximum taxable
Social Security wages, is indexed for inflation, and averaged
together. A formula is then applied to arrive at your full
Social Security benefit -- that is, the monthly amount you are
entitled to if you retire at your full retirement age.
Once your average indexed monthly earnings are calculated,
if your first year of eligibility is 2016, your benefit is
- 90% of the first $856 in monthly earnings
- 32% of the amount between $856 and $5,157
- 15% of the amount above $5,157
As an example, let's say that your average indexed monthly
earnings were $4,000. Based on the formula, your benefit would
be 90% of $856, or $770.40, and 32% of the other $3,144, or
$1,006.08. Adding these together produces a monthly benefit of
Are you eligible for Social Security?
In order to be eligible for Social Security, you need to earn
40 "credits" during your working lifetime. Each $1,260 in
earnings you have in 2016 will give you one credit, up to a
maximum of four credits per year. This amount changes each
year, but if you earn enough to get the four-credit maximum in
each of 10 years, you'll be eligible for Social Security
Your eligibility status is reflected on your annual Social
Security statement, which I'll discuss a little later.
What is your full retirement age?
For people born between 1943 and 1954, full retirement age is
66 years old. For those born after that time period, the full
(or normal) retirement age gradually increases to 67 for those
born in 1960 or later.
Here's a chart to help you determine your full retirement
age for Social Security.
If you were born in...
Your full (normal) retirement age
66 years, 2 months
66 years, 4 months
66 years, 6 months
66 years, 8 months
66 years, 10 months
1960 or later
Your full retirement age is useful to know, because your
calculated Social Security benefit amount from the previous
section (also known as the primary insurance amount) assumes
you start collecting benefits at this age
Filing early or late can make a big difference
You don't have to wait until full retirement age to start
collecting benefits. In fact, you can file for Social Security
as early as age 62, or you can choose to delay your benefits
until age 70.
If you file early, your benefit will be reduced. Starting
with your full benefit amount, your benefit is reduced by 6.7%
for each year before full retirement age (up to three years),
and 5% for each year beyond that. Conversely, if you choose to
delay benefits, your monthly checks will increase by 8% for
each year you decide to wait.
To illustrate this, here's how your benefit could be
affected if your full retirement age is 66.
If you start collecting benefits at this
Your benefit will be (% of full retirement
age benefit amount)
How to estimate your benefits before you retire
You can obtain your Social Security statement by creating an
. Your statement contains lots of valuable information, such
- Your estimated benefit amount at full retirement
- Eligibility for benefits.
- A detailed history of how much you've earned each
- Estimates for disability and survivors' benefits, should
you need them.
Keep in mind that the figures in your statement are just
estimates, and your eventual benefit amount could be quite
different, especially if you're relatively young now.
Benefits are protected from inflation
While Social Security isn't designed to be anyone's sole source
of retirement income, it is indexed for inflation - meaning
that, unlike most other retirement assets, your purchasing
power will remain the same over time.
Each year, the Social Security Administration (SSA) applies
a cost-of-living adjustment to Social Security benefits, based
on the consumer price index. The index that the SSA uses
actually fell during its 2015 measuring period compared to the
previous year, so there will be no cost-of-living adjustment in
2016; but there have been some substantial adjustments in the
past. In 1980, inflation was so high that Social Security
recipients received a 14.3% cost-of-living adjustment to keep
The point here is that you don't need to worry about
inflation -- at least when it comes to your Social Security
income. The system is designed so that, if goods and services
eventually cost twice as much as they do today, you'll receive
double the Social Security.
How to file for Social Security
The easiest way to apply for Social Security benefits is online
. The application takes about 15 minutes, according to the SSA,
and there are no additional forms to sign, and usually are no
additional documentation requirements.
If you don't want to apply online, you do have other
options. You can apply by phone from 7 AM to 7 PM, Monday
through Friday, or in person at your local Social Security
office. If you choose to apply in person, the SSA advises that
you should make an appointment. You can look up the SS office
closest to you
Spousal, disability, and survivors' benefits
There's more to Social Security than retirement benefits. In
fact, there are three other types of Social Security benefits
to be aware of:
If you and your spouse both file for Social Security at full
retirement age, each spouse is guaranteed a minimum of half
of the other's benefit. For example, if a retiree is entitled
to a monthly benefit of $2,000, their spouse will receive at
least $1,000, even if his or her own benefit amount would be
If a worker dies, his widow, children, and other dependents
could be eligible for benefits. Survivors benefits are an
entire topic by themselves, so
here's a full discussion
of this feature of Social Security.
If you become disabled and can no longer work, your Social
Security record could entitle you to benefits. You can find
your theoretical disability benefit amount on your Social
Security statement, as you can see in the example above.
Can you work and collect Social Security at the same
time in 2016?
Sort of. There are three different categories of Social
Security recipients, and there is a different "earnings test"
that applies to each.
- For SS recipients who will not yet reach full retirement
age in the 2016 calendar year, the first $15,720 in earnings
is exempt. Beyond that amount, every $2 in earnings will
reduce Social Security benefits by $1.
- For SS recipients who will attain full retirement age
during 2016, the first $41,880 is exempt, and the reduction
is just $1 for every $3 in earnings beyond that. Plus, only
the months before your birthday count toward the total.
- Finally, SS recipients who choose to work past full
retirement age will experience no benefit reduction, no
matter how much they earn.
It's also important to note that any reduction in benefits
isn't lost -- rather, a reduction will increase your future
benefit amount. For a thorough description of the rules about
working and collecting Social Security, check out
Isn't Social Security going bankrupt?
While it's true that, within a few years, money will begin
flowing out of Social Security's trust funds faster than it's
flowing in, it shouldn't be cause for concern. Even without
congressional action, Social Security will be able to cover
100% of benefits until 2033. After that, once the trust funds
are depleted, the taxes coming in will still be enough to cover
more than three-fourths of all benefits.
, I'm confident that
will be done. Similar situations have come up in the past, and
measures were taken to prolong the system's solvency.
It's a popular misconception that once the trust funds run
out, benefits could stop coming altogether. Some retirees are
even claiming benefits earlier than they otherwise would,
fearing that they should get what they can while Social
Security still has money to pay. Don't make this mistake.
A major financial decision
Even if you have substantial assets when you retire, chances
are that Social Security will still make up a large portion of
your retirement income. The decision of when to begin
collecting Social Security is one that can affect you and your
family for decades, and should be taken seriously. If you're
approaching the age of eligibility, make sure to carefully
consider all of the pros and cons before filing.
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Your 2016 Guide to Social Security Benefits
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